When buying business insurance, look before you leap


THE PURCHASE of business insurance is a critical decision. Don't rush it, because a wise choice can save you hundreds of dollars and prevent many headaches.

What kind: You'll probably need coverage for both property and liability. Often the lease for the business site will specify what type of insurance is required.

Many insurance companies offer a package called a business owner's policy -- BOP for short. Here, for example, is what the package probably would include for a 1,000-square-foot store in a shopping center: $1 million in liability coverage for death or personal injury, and $500,000 coverage for property damage. In addition, the policy would include some coverage for the lack of profits due to a non-planned interruption of business, plus $5,000 to $20,000 coverage for possible theft by employees or non-employees.

The cost: A BOP for a small retailer could cost from $900 to $1,500 for essentially the same coverage. Competition among insurance companies accounts for the price differential, so be sure to comparison shop.

When you compare price quotes from different insurance companies, be sure they are offering exactly the same coverage. And you may want to look for a price in the middle range.

The cheapest policy might be tempting, but be wary of it. An insurance company with extremely low prices could have a very tight cash flow, which could delay payment when you file a claim. Moreover, a company that gives you a bargain rate at the outset might have to raise the rate when the policy is renewed.

Underwriting: Once you decide on an insurance company, known as a carrier, the underwriting process starts.

The agent will complete an application form about your business. You must submit your business plan with projected financial information and a copy of your lease. If your business plan is not available, the agent will submit notes taken during an extended conversation on the subject.

An underwriter at the insurance company then reviews the application to determine if your business qualifies as an acceptable risk and if your company can afford the cost, known as the premium.

When the policy application is accepted, you will receive a document called a binder, which outlines the coverage. Finally, the company issues the full policy. Read it carefully. If you need to change the policy later, the carrier will adjust the premium and issue a document called an endorsement, which describes the amendments.

Occasionally the underwriter decides that the agent has quoted you a price that is too low. But you may be able to negotiate a reduction in this additional premium. Or you may decide to seek a quote from a different insurance carrier. Be sure to have at least two insurance companies give you a final price quote so you will know your negotiating limits.

Last resort: If you are unable to obtain property insurance, you might be eligible for the Maryland Fair Plan, an insurer of last resort that is managed by the Joint Insurance Association in Baltimore (301-539-6808). The association represents over 500 property insurance companies that do business in the state.

The purpose of Fair Plan is to offer temporary insurance on property until it can qualify for a regular policy from a commercial carrier. For example, a building that is being rehabilitated needs coverage; without it, bank financing would be impossible. So Fair Plan provides the insurance until the structure ceases to be a high risk.

However, Fair Plan generally does not offer liability coverage.

Workers' compensation: When an employee is mentally or physically injured at work, the company could be responsible for the partial or full payment of the employee's regular wage. Maryland is one of many states requiring employers to maintain this type of insurance.

If an employer cannot obtain it from a commercial carrier, the place to go is the Maryland Injured Workers Insurance Fund -- (301) 832-1998 -- which offers coverage at rates that are competitive with regular policies. The only apparent drawback is that a fund policy may require more paperwork than a regular policy.

Payment of premiums: Insurance companies generally require the premium for a small to mid-size firm to be paid annually, at the beginning of the policy period. To attract business, insurance companies sometimes offer other options. A common one is to defer payment of 30 to 40 percent of the premium for up to 120 days. And large companies that pay big premiums can sometimes negotiate discounts.

Insurance audits: At renewal time, your policy will be audited, meaning a review of claims activity and whether risk factors have changed. If claims were lower than anticipated, a percentage of the premium may be returned to you. But if you had more claims than expected or your risk has increased, the carrier could decide that an additional premium is required.

The bottom line: As grueling as it may be, take the time to understand any insurance proposal before you buy. Insurance should mean peace of mind, not battles with a a claims adjuster over misunderstood clauses.

Patrick Rossello, president of the Business Consulting Group in Towson, is a member of a number of local advisory boards vTC including Baltimore's Technology Development Center. Send questions or suggested topics to him c/o Money At Work, The Evening Sun, 501 N. Calvert St., Baltimore, Md. 21278.

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