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Don’t Let the "Gottas" Determine Your Risk

As the owner of a small business, you understand better than anyone the meaning of “risk.” The key is to know understand how much risk you can afford, and when or where is the right place to take risk.

Insurance can be a risk-taker’s best friend. It allows you to use your entrepreneur’s judgment to decide which business risks are worthy and which are not by using your properly designed insurance program as your safety net when things go wrong.

Insurance can handle those unexpected risks that come as “Acts of God” (weather, sickness or other types of claims that are often beyond your control), as well as those risks, which, unfortunately, have become all too expected, such as liability or workers compensation claims against your business.

Although many types of insurance policies and packages available to small businesses today are so extensive that it may seem you can cover just about anything that can go wrong, the most sensible long-term approach is to leverage your premium dollars by focusing coverages in areas most likely to cause your business the most pain. Even though such a focus may seem obvious, it often gets overlooked or ignored by business owners who are mainly looking to insurance to meet requirements set upon them by others— such as banks, lienholders, landlords or government regulators. While these are important considerations, and cannot be ignored, don’t let the “gottas” become your entire insurance program.

After all, it’s YOU taking the risks to bolster your business, not the landlord or the government. You have no choice about meeting such requirements, but consider further options you may need regardless of the demands of others.

Here are just a few examples. If your business is your family’s sole or main source of income, it makes more sense to spend some premium dollars on a life insurance policy that guarantees to provide that income if events conspire to take you out of the picture (euphemism for you’re dead).

In the same manner, if your business survival—at least in the short term—is dependent upon the work of a key employee, then it would be well worth your time to: (1) explore buying a life (or disability) insurance policy for your business on that key person, (2) provide a financial buffer in the event of that person’s death until you can find another equally talented individual, or (3) reorganize your business.

Do you need special computer coverages for all of the technology your business may be so dependent upon? While standard property insurance forms may provide basic coverage by treating these items like any other part of the building or contents, there are many issues unique to high tech equipment that only a specialized form will address. Such issues include: computer viruses; equipment valuations at time of loss (since computers, like new cars, lose a lot of their value within six months of purchase); business income losses due to being down for an extended period of time; electronic forgeries and theft; liability arising from alleged breaches of customer privacy; and many others.

Although your building may be covered for the amount required by the mortgage holder or even what you paid for it, what would it really cost to rebuild it from the ground up following a major loss? Are there special design issues that may raise the building costs? Are there any building ordinances (such as requiring all new buildings of your type to have sprinkler systems) that will significantly increase your rebuilding estimates? If your building was “grandfathered” under your community’s current building restrictions, will you even be allowed to rebuild at your current location? (Have you checked your zoning ordinances lately?)

If your business is unable to operate due to extensive damages, what amount of income will you lose during the time it takes to make sufficient repairs to open the doors again? Or would your choice be to reopen as quickly as possible at another location? The “hurry up” expense of making the move, installing the necessary equipment and notifying your current clients may prove a significant burden.

Are the liability limits required by your landlord or automatically included with your business’ insurance package high enough? Consider this: how often do you read about some new wave of multi-million dollar lawsuits against businesses—big and small—in your newspaper.

All of these are reasons why there is no substitute for sitting down with your Trusted Choice^®insurance professional and spending some quality time going over what are the key risks your particular business faces and what are the possible solutions. Don’t risk it all by living by that old cliché; insurance is one time it always pays to “cross that bridge before you come to it.”

Business interruption insurance

Would you believe that there is an insurance product specifically designed to help insure a solid, sustainable profit? In fact, without this coverage, hitting your profit targets may become impossible.

For example, you own a restaurant. Your location in the heart of the office district is the key to your booming lunchtime trade. But a kitchen fire destroys your building. Your building and personal property insurance coverage is superb. Within nine months you will be reopening in one of the finest constructed buildings in your area, with totally new kitchen equipment and dining room furnishings. In fact, a few of your friends keep telling you how lucky you were to have the fire, since the old place was looking a bit dowdy. (Hopefully the fire department and insurance company don’t agree you came out TOO well, or there may be delays while they complete their arson investigation.)

Only one problem. You go broke after six months.

Why? Because although your building and personal property insurance will do a fine job at replacing your physical assets, they don’t pay a nickel towards your lost profits! And at some point, it’s going to become very clear to you that the real reason you wanted to be in the restaurant business was not to own a building. It was to make a profit. And that you did not insure.

Any business which generates revenues (and name one that doesn’t) risks facing this same situation. What can you do?

Commonly known as “business interruption” or “business income” coverage, insurance is available to pay your profit lost if due to a cause of loss covered by the policy. One type of loss not covered, for example, is lost revenue resulting from bad business decisions. If your lunchtime restaurant trade collapses because you bet the health food and vegetable juice bar was going to be your ticket to the top, but everyone within fifty miles of your location loves steak and ribs, there will be no coverage.

Covered causes of loss for your business income insurance will usually be the same as those covered in your building policy, such as fire, theft, and windstorm.

How does business income coverage work? Let’s use our aforementioned restaurant friend.

After the fire, his insurance carrier will ask for information documenting the lost profit. There are going to be some estimates involved, because the profit you are documenting never took place. And the profit you are making a claim for is that lost during the nine months the business is closed by the fire. Clearly the better your recordkeeping, and the more stable your business revenues, the better the estimate of your lost earnings.

One frequent misunderstanding arising from this type of insurance is what will actually be paid following a loss. The insurance is designed to cover what you lost, not your total revenue. If you normally would have grossed $50,000 month for the nine months, the insurance will not pay you $450,000!

Why? If before the fire the business was grossing $450,000 and after the fire it is grossing $0, isn’t it obvious the business lost the entire $450,000? Not if you remember much of that $450,000 went to pay for bills that may no longer be coming in, or will be greatly reduced during the rebuilding. For example, a major overhead cost for a restaurant is food. If the place is closed, that food bill will disappear. Along with it will go much, if not all, of the utilities, income taxes, janitorial and similar expenses. Since you no longer have to pay those bills, the insurance will not pay them either. And your revenue loss will be determined accordingly. A good rule of thumb is to think of it this way: the insurance doesn’t look at what your business put in your pocket, but rather what the covered loss took out.

Taking that perspective, what is coming out of our restaurant owner’s pocket during that nine month rebuilding period? Net profits plus any continuing expenses. Not every bill stops arriving. Insurance, advertising, payroll and other types of overhead will still have to be paid, although the expenses will likely be smaller than if the business was in full operation.

Payroll is a special case. Depending on how long the business is going to be shut down, is it reasonable to keep every employee fully compensated during that time? If your restaurant is going to be closed for three weeks, probably. But for nine months or longer? And if the insurance did cover full employee payrolls for an unlimited time, one or more of your employees might decide a good fire now and then is a nice option to create paid vacations!

This article is a broad overview of this valuable yet often overlooked coverage. There are many considerations and options. To customize this valuable coverage to your unique needs requires the advice of a competent, expert Trusted Choice^® insurance professional. Talk to him or her soon about business income coverage.

How much building insurance is enough?

As a small business owner, you know the importance of preserving your assets. For many business owners, the largest single asset they possess is their building. Whether you occupy the building or operate as a landlord (or both), consider key exposures in your risk-management and insurance planning.

Your business may be ill-prepared to afford damages to your building that lead to major repairs and renovations. Your solution? Adequate property insurance written for the full insurable value of the building.

Policies take many shapes and forms, with coverage ranging from basics such as fire, windstorm and vandalism; to the broadest forms, which cover any loss not specifically limited or excluded. Talk with your Trusted Choice^® insurance professional about what policies your business is eligible for and decide what amount of coverage and price best meets your business needs.

While building insurance has become fairly standardized, a key issue often overlooked is the need to establish an adequate limit. Don’t get caught up in accounting terms when determining what is the “full” value of your building. Some businesses, for example, look at price paid. Others look at the cost they are carrying on their books. Neither may have any relationship to reality.

In its simplest terms, “full value” is the total cost to rebuild your building from the ground up at today’s costs. With the increased costs of labor and materials, could you realistically rebuild your current structure for what you have insured it for? And don’t rely on insurance policy provisions, such as “replacement cost,” to automatically provide that much coverage. No matter how broad your policy provisions, you will still not collect more on your claims than the policy limits. Purchase enough insurance coverage to cover the real replacement cost.

While some may argue that insuring to full value is excessive—since the odds of a total loss seem unlikely—you only need consider this: What if you do have a total loss? Can you absorb the loss before you effectively lose the ability to replace your structure? If your goal is to minimize the cost of your premium by taking on some of the risk yourself, have the insurance written to the full value, then choose a higher deductible. You have just limited your risk rather than creating an undetermined risk beyond the bounds of limited coverage.

Or you can agree to pay the nickel and dime claims while maintaining coverage for the big hits. That is the surest path to attractive premium savings. Insurance is best for losses that will risk the survival of your business and finances, not the losses that often amount to only a few hundred dollars.

Once you have the basic safety net in place, you can determine how much you are willing to spend to expand your coverage and add the bells and whistles that represent the difference between “must haves” and “nice additions”.

Once you are satisfied you have determined limits adequate to rebuild your building with its current design and materials, don’t assume your valuation job is finished. While that limit may sound good, is it really what you want or, worse yet, are required to do? For example, what if your building is older, and all new construction in your area must meet new building codes enacted in the past few years. Perhaps all new commercial buildings are required to have sprinkler systems, and yours, having been built long before the requirements was enacted, did not. Now that you have to add a sprinkler system, how much more will it cost to rebuild? Will your current building insurance policy limits cover that additional cost?

The bottom line? Sit down with your Trusted Choice^® insurance professional and make certain you have the extensive coverage to respond to the types of claims you consider the greatest threat to your building. Assure yourself the coverage limits are high enough to actually get your building back in shape, repaired and legal with existing building codes.

Once you have accomplished these goals, you are on your way to letting your insurance do what it does best—minimize your financial risks. Meanwhile, with peace of mind, you can do what you do best—run your business.

If you have any questions regarding insurance for your Business or if you would like a free quote, please contact John Coggins at (850) 457-3299 or email him at jlcoggins@cogginsinsurance.com.