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The basic purpose of insurance is to anticipate catastrophic losses that could financially impair your future. Insurance should not be purchased for small exposures as the cost of premiums is prohibitive and may waste dollars you'll need to cover your major exposures. Three basic procedures for determining your insurance needs are to

  1. eliminate or reduce your risk by properly managing maintenance, repair, training, and safety programs;
  2. assume the risk yourself by paying small losses and buying high deductibles; and
  3. transfer the risk by buying the proper amounts of insurance tailored to your specific needs.

A small business cannot operate without insurance. It allows owners to minimize risk of loss from circumstances beyond their control. The first step is to identify the risks of the business that need to be covered and determine the largest amount of possible loss.

Cause of Loss

The cause-of-loss form insures your property against all risk of direct physical loss, including the following: fire; volcanic action; smoke; sprinkler leakage; sinkhole collapse; explosion; vandalism; riot or civil commotion; lightning; windstorm or hail; aircraft or vehicles; glass breakage; damage from falling objects on the building exterior; damage to building walls or roof from the weight of snow, ice, or sleet; water damage caused by accidental discharge or leakage from a plumbing, heating, or air-conditioning system or domestic appliance; and the collapse of building walls or roof.

The following losses are excluded from the cause-of-loss form: mysterious disappearance of property; damage done to property being worked upon; artificially generated electrical currents; wear, tear, marring, or scratching; insects or vermin; dampness or dryness of the atmosphere; changes in temperature; rust or corrosion; theft from an unattended or unlocked auto; fidelity of an employee or officer of the bank; damage done by rain, snow, or sleet to property in the open; earthquake; flood (surface waters or water that backs up through sewers or drains); water below the surface of the ground, including that which exerts pressure or flows, seeps, or leaks through sidewalks, driveways, foundations, walls, basement floors, or any opening; and the explosion of steam boilers and steam pipes.

Coverage is provided on the basis of full replacement costs without deduction for depreciation on any loss, subject to the terms of the coinsurance clause. Since replacement costs fluctuate, you should constantly check your insurable values to make sure that you have adequate coverage.

Under the terms of the 90 percent coinsurance clause, you should insure your property to the stipulated percentage of value. If you fail to do so, you will not be fully reimbursed for any loss that may occur. How a coinsurance clause would work in the event of a partial loss is illustrated as follows:

Insurable Value


Insurance Carried


Insurance Required 90%


Amount of Loss


Policy Pays


Insured Pays


The insured carried $60,000 worth of insurance but should have carried $90,000. Because the amount carried was only two-thirds of what should have been carried, the insured will receive payment for only two-thirds of the $10,000 partial loss despite the fact that the face amount of the policy was $60,000. If the value of your building or its contents substantially increases, notify your insurance agent immediately to increase your coverage and thus avoid any coinsurance penalties.

Business Income

The purpose of business income insurance is to replace the operating income of your business when damage to your premises or other property prevents you from earning income. If your business suffers a business interruption and has to close for several months or operate at a reduced pace because of fire or other perils covered by this form of insurance, operating income will not be reduced.

Business income insurance covers the actual loss sustained by the insured resulting directly from the necessary interruption of business caused by damage or destruction of real or personal property.

For insurance purposes, business monthly income is defined as follows:

Total net profit


Payroll expense




All other operating expenses

Monthly income


Monthly amount $______months =


Rental Insurance

Rental insurance provides coverage for actual loss of rental income resulting from untenantability of all or a portion of the insured's building from damage or destruction of real or personal property by an insured peril. Insurance may be written subject to a 50 percent, 60 percent, 80 percent, 90 percent, or 100 percent contribution clause.

Boiler and Machinery Insurance

The boiler and machinery policy pays for a loss or damage to or by an insured object resulting from an accident. Your property, as well as the property of others in your care, custody, or control for which you are held legally liable, are covered. An "accident" is a sudden and accidental breakdown of an object (pressure and refrigeration, mechanical, electrical, or turbine), or a part of it, that manifests itself at the time of its occurrence by physical damage to the object that necessitates repair or replacement of the object or part. The company may do periodic inspections in accordance with the terms of the policy.

Workers' Compensation

Workers' compensation coverage pays benefits required under the workers' compensation laws and employers' liability to employees not covered by workers' compensation laws. If you subcontract certain operations, workers' compensation laws provide that the principal contractor is responsible for compensation to the employees of uninsured subcontractors. In determining compensation premiums, you will be charged a premium for coverage in connection with employees of subcontractors unless the subcontractors have insured this obligation and have furnished satisfactory evidence of such insurance. You should always obtain certificates of insurance from all subcontractors working for you.

If a minor employed by you is injured, you may be assessed additional punitive damages equal to or greater than the basic award. These punitive damages are not covered by your compensation policy.

Coverage can be provided for employees who occasionally work in other states by adding an all-states endorsement.

The policy is written subject to audit, and payroll records should be kept so that they show any overtime you have paid.

Comprehensive General Liability

Comprehensive general liability is a single contract policy that provides insurance needed to cover liability for injuries or property damage sustained by the public. It covers accidents occurring on your premises or away from your premises as a result of business operations. It automatically covers certain hazards that do not now exist but that may develop during the life of the policy, and it contains fewer exclusions than individual policies.

The two basic forms of comprehensive general liability insurance are (1) owners', landlords', and tenants' (OL&T), and (2) manufacturers' and contractors' (M&C). OL&T is intended for those risks whose primary exposure is confined to a specific location. Coverage is provided for any occurrence arising from the ownership, maintenance, or use of the specified premises and any operations that are necessary or incidental to these premises.

Coverage is also automatically afforded for some types of incidental written agreements. However, it is best that any agreement containing a hold-harmless clause be submitted to the company for review in order to avoid any misunderstanding as to coverage.

Coverage is provided for the payment of all sums that the insured may become legally obligated to pay as damages because of bodily injury or property damage caused by an occurrence that arises out of the ownership and maintenance or use of the business's premises and the operations or business activities of the insured.

The M&C form is used for risks primarily associated with manufacturing or contracting operations and is rated primarily on payroll.

Personal Injury Liability

Personal injury liability extends general liability to cover alleged injury resulting from

Completed Operations

Completed operations insurance coverage is needed by all firms that do construction or installation and servicing work. This type of coverage is necessary because basic liability coverage provides protection only while the work is in progress and not after the work is completed or abandoned. The completed operations coverage applies only after the operations have been completed or abandoned and the occurrence happens away from the premises owned by or rented to the insured.

Contractual Liability (Assumed)

All forms of liability insurance exclude liability assumed by the insured under any contract. Coverage for a warranty of the fitness or quality of the insured's products is available, as is insurance to back up a warranty that work will be performed in a workmanlike manner.

Products Liability

All manufacturers, wholesalers, retailers, restaurants, bottlers, and packaging firms, or any firm that has anything to do with a product that reaches the public, should have products liability insurance. This coverage is provided by the comprehensive general liability policy unless excluded. Products coverage provides protection for bodily injury and property damage claims arising out of the insured's products or reliance upon a representation of warranty made by the insured. The bodily injury or property damage must occur away from the premises owned by or rented to the named insured and after physical possession of the product has been relinquished.

Excluded from coverage are

In most states, a local store is liable for products claims merely because it sells the article even if it is impossible for the store's owner to determine whether the article is defective or contains foreign matter. Many store classifications (e.g., drugstores, bakeries, cigar stores, confectioneries, ice cream shops) in the OL&T Manual are not protected by products liability coverage either on or away from the premises.

Business Auto Coverage

Business auto policies cover the following:

Umbrella Excess Liability

Umbrella excess liability insurance provides

Umbrella liability insurance can also be provided as personal protection for executive officers of a corporation and partners of a partnership.

Employment Practices Coverage

Employment practices liability insurance provides defense and indemnity protection against claims arising from the employer- employee relationship. It covers damages arising from a wrongful employment act, including actual or alleged action, error, or omission triggered by wrongful termination, sexual harassment, or discrimination. Coverage is provided for the business entity, directors, officers, employees, and former employees. Liability limits can be several million dollars and deductibles range from $2,500 to $25,000.

Commercial Crime

Commercial crime policies provide coverage for the following:

Fidelity Bonds

Fidelity bonds fall into two categories:
  1. Commercial blanket bonds cover all officers and employees of a firm collectively. The amount of the bond is available for losses caused by employee dishonesty or for any dishonesty in which an employee is implicated.
  2. Blanket position bonds cover money, securities, or property belonging to the insured or for which the insured is legally liable. The burden of proof rests with the insured. The policy does not cover inventory losses based on an inventory computation or a profit and loss computation unless the insured can prove, through evidence wholly apart from the computation, that the loss was sustained through dishonest acts of employees. Each employee is bonded in the same amount.

Reprinted with permission from the Upstart Small Business Legal Guide by Robert Friedman

Copyright © 1998 © 1993 by Dearborn Financial Publishing, Inc.® All Rights Reserved.

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