THE MOST MISUNDERSTOOD BUSINESS INSURANCE
10. Why does my agent
to see my lease?
9. If I do have a loss,
need a public adjuster right away
8. All policies are the
7. Named perils vs. open
(formerly called "all risk")
6. I want a policy that
5. Why does the
need to know my payroll or receipts?
2. Replacement Cost
and Actual Cash Value
1. Insurance is a
I don't have a claim, I lose.
Wrong. Not having insurance is the gamble.
of insurance as a manageable fixed business expense which takes the
of the possibility of unpredictable, unmanageable income disruption or
It facilitates reliable business planning and prediction. Without
you'd have to estimate the possibilities of all sorts of negative
and set aside resources to offset their projected consequences, or take
out a loan to recover. The chances of this strategy successfully
a major catastrophe are slim. However, millions of businesses
in such risk management is the basis of insurance. Your premiums are
kept in a shoebox; they are used to compensate other businessowners for
their inevitable losses. And yes, if the insurance companies make
loss predictions and set adequate rates, they make a fair profit for
2. Replacement Cost Coverage and Actual Cash Value.
The cost of replacing or rebuilding as was is replacement
cost coverage. It does not include the cost of improvements or
even if required by building codes or laws passed since the building
built. (That can be covered by ordinance or law coverage.)
Actual Cash Value (ACV) is
today's replacement cost minus depreciation (decrease in value
from use, obsolescence or wear and tear.) It is important to note that
starting point is today's replacement cost, not the original
When insuring for replacement cost, the amount of
must be based on replacement cost.
example: Building replacement cost = $100,000, ACV =
replacement cost policy is based on $100,000
ACV policy is based on $77,000
money saving hint: if
confident of the value you've decided to insure for, asking for a 90%
100% coinsurance clause can often save 5-10%. For example, if you
the above building for $100,000 it would usually be insured at the 80%
clause rate. However, you could also choose a 100% coinsurance clause.
rate is often 10% less (depends on the type of policy).
If you are insuring a $100,000 item, there is not
chance of a total loss (which is why the premium is not $100,000). The
companies calculate the most probable loss by applying a factor (the
of the insurance rate) to the total value. Obviously, the higher the
the more chance of a larger loss. Therefore, the rate factor must be
to the total value. This is the reasoning behind what is commonly
the 80% (or 90% or 100%) rate. To be valid, the rate must be applied to
a specified percentage of the full value. In the event of an
loss, there is a coinsurance penalty.
Here's an example:
value of building: $100,000
coinsurance clause: 80%
insurance required: $80,000
amount of loss: $10,000
case 1: building insured for $83,000 - meets
claim payment: $10,000 less $250 deductible = $9,750
case 2: building insured for $60,000 - coinsurance
formula: amount of insurance/amount required x loss
$60,000/$80,000 = .75
claim payment: $10,000 x .75 less $250 deductible = $7,250
4. Independent Contractors
You do not have the
of calling a worker an employee or an independent contractor. The work
your relation to the worker determine the proper status, not whether
choose to withhold payroll taxes. The IRS has a
of tests to distinguish between employees and independent contractors.
Massachusetts has also recently changed its laws to be even
If the worker is an employee, you must pay payroll
taxes and purchase workers
5. Why does the insurance company need to know my
In general, the
scope of your business is a good indicator of the probability of loss;
larger business has a higher risk, and must pay a higher premium.
receipts, sales, area and units are the standard measures.
Liability policies are usually based on an estimate
the beginning of the policy period and subject to audit at policy
This is a fair way to calculate the premium for a business whose
may change from year to year.
For one person businesses, payroll is usually
$28,600 (some companies use a different amount), regardless of actual
Therefore, it is often not necessary to disclose your actual
6. I want a policy that covers everything.
Sorry, no policy covers
There is no substitute for carefully evaluating areas which require
and being aware of policy limitations. Some risks (for example: war,
and tear) are just not insurable. Others (flood, employment practices
are available but not usually included even in "package" policies.
A trusted insurance agent can be a great help with making informed
but the insured is ultimately responsible for proper amounts and types
coverage. More than ever, policies are readable and understandable.
Don't assume that anything is (or isn't) covered.
all concerns with your agent.
7. Named perils vs. open perils (formerly called "all risk")
A named perils policy
only the causes of loss listed on the policy (for example: fire, wind,
An open perils policy (often called a "special" form) covers anything
that is not specifically excluded in the policy exclusions or
sections. Many policies include both types of coverage. For example, a
package will often insure the building for open perils and business
property for named perils (also usual on homeowners policies).
8. All policies are the same.
Wrong. With the
a few policy forms which Massachusetts insists on writing (e.g. workers
compensation, auto), policy coverages (and prices) vary widely from
to company. The trend is that these differences are increasing. It is
not even possible to get "apples to apples" comparisons. Increasingly,
the businessowner must analyze competing proposals to determine areas
difference. On the other hand, these differences open the possibility
finding a policy uniquely suited to your business.
9. If I do have a loss, I'll need a public
Not necessarily. Many
adjusters (who represent the insured, not the insurance company) are
professionals who perform a valuable service, especially in complex
However, they charge a percentage of the settlement as their fee. If a
is simple and the public adjuster doesn't get a larger settlement, the
can actually end up with less. As a rule, insurance companies want
and fair claim settlements, and happy insureds. Hiring a public
also takes your agent "out of the loop" because negotiations are
between the company and the public adjuster.
10. Why does my agent want to see my lease?
Many leases require
coverages, like plate glass insurance or special language protecting
lessor. Your agent needs the lease to determine any special