Types of Business Insurance Policy Coverage
Most businesses must obtain at least one of the four types of insurance listed below:
Insurance for Property
Business Insurance Policy Coverage for Property compensates a business if its property is lost or damaged as a result of various common perils, such as fire or theft. Property insurance covers not only a building or structure, but also its contents, such as office furnishings, inventory, raw materials, machinery, computers, and other items critical to the operation of a business. Property insurance may include coverage for equipment breakdown, removal of debris after a fire or other destructive event, some types of water damage, and other losses, depending on the type of policy.
Insurance for Business Interruption
Business interruption insurance, also known as business income insurance, is a type of property insurance. A company that has suffered a direct physical loss, such as fire damage or a damaged roof as a result of a tree falling on it during a windstorm, and has to close down completely while the premises are being repaired, may lose out to competitors. It is critical that business operations resume as soon as possible after a disaster. That is why having business interruption insurance is essential.
There are three kinds of business interruption insurance. A company can buy any of these or a combination of them.
Business Income Coverage
Provides compensation for lost income if a company is forced to vacate its premises due to disaster-related damage covered by the property insurance policy. Business income insurance compensates the company for the profits it would have made had the disaster not occurred, based on financial records. The policy also covers operating expenses, such as electricity, that continue even if business operations are temporarily halted.
Extra Income Coverage
Reimburses the company for a reasonable amount of money spent above and beyond normal operating expenses to avoid shutting down during the restoration period.
Contingent Business Interruption Insurance
Protects a business owner’s earnings in the event of physical loss or damage to the insured’s suppliers’ or customers’ property, as opposed to the insured’s own property.
Floods, earthquakes, and terrorist acts are generally not covered by standard business property insurance, but can be purchased through a variety of markets.
Flood Protection
Flood damage is typically excluded from property insurance policies.
Businesses should check with their local government office or commercial bank to see if their location is in a flood zone and if it has previously flooded. Flood insurance is available through the federal government’s National Flood Insurance Program, which is serviced by private carriers and a few specialty insurers (www.FloodSmart.gov).
Earthquake Protection
Most property insurance policies, including business owners package policies, exclude coverage for earthquake damage. Businesses in earthquake-prone areas will require a commercial property earthquake endorsement or a special earthquake insurance policy.
Protection Against Losses Due to Terrorist Attacks
Only businesses that purchase optional terrorism coverage are covered for losses resulting from terrorist acts under the Terrorism Risk Insurance Act of 2002 and its extensions. Workers compensation is an exception, as it covers work-related injuries and deaths, including those caused by terrorist acts.
Insurance for General Liability
Any business can be sued. Customers may file a claim claiming that the company harmed them as a result of, say, a defective product, an error in a service, or disregard for another person’s property. Alternatively, a claimant may allege that the company created a hazardous environment. Liability insurance pays up to the policy limits for damages for which the company is found liable, as well as attorneys’ fees and other legal defence expenses. It also pays the medical bills of anyone injured by the business or on its premises.
The first line of defence against many common claims is a Commercial General Liability (CGL) insurance policy. CGL policies provide coverage for claims in four broad categories of business liability:
• Physical harm
• Physical harm
• Personal harm (including slander or libel)
• Advertising injury (damage from slander or false advertising)
CGL policies cover the costs of defending or settling claims in addition to the claims listed above. The maximum amount that the insurer will pay during the policy period is always stated in general liability insurance
A business can choose between two types of liability insurance policies: occurrence and claims made. Both kinds of policies have advantages.
Occurrence Policy: An occurrence policy protects a company against harm to others caused by incidents that occurred while the policy was in effect, regardless of when the claim is filed. For example, a person may sue a company in 2010 for an injury sustained in 1999 as a result of a fall. Even if the company now has a policy with higher limits, the policy in place when the incident occurred (i.e. 1999) will apply. Occurrence coverage may be unavailable in some states, as well as in certain industries or professions.
Claims Made Policy: A claims made policy covers the company based on the policy in effect at the time the claim is filed, regardless of when the incident occurred. In the preceding example, the policy limits in effect in 2010 would apply. Businesses with claims-made policies have the option to purchase “tail coverage.” Tail coverage allows a company to report claims for alleged injuries that occurred while the policy was in effect after the policy has expired.
Commercial Auto Insurance
A commercial auto policy covers vehicles primarily used in connection with commercial establishments or business activities. The insurance covers any costs incurred by third parties as a result of bodily injury or property damage for which the company is legally liable, up to the policy limits. While the major coverages are similar, commercial auto policies differ from personal auto policies in a few technical ways. They may have higher limits and/or provisions that cover rented and other non-owned vehicles, including employees’ personal vehicles used for company business. Several insurers provide business auto policies tailored to small business owners or specific types of businesses.
Insurance for Workers’ Compensation
Employers are required by law to provide a safe working environment for their employees. Workers compensation insurance is required by law in almost every state to protect employers from lawsuits resulting from workplace accidents and to provide medical care and compensation for lost income to employees injured in workplace accidents. Workers compensation insurance protects employees who are injured on the job, whether they are injured on the job site or elsewhere, or in car accidents while on business. It also covers occupational illnesses. Workers compensation compensates injured workers for time lost at work as well as medical and rehabilitation services, regardless of who was at fault in the accident. Insurance for workers’ compensation must be purchased separately.
Also Read: Significant Factors Affecting the Cost of Homeowner Insurance in 2022
Other Types of Business Insurance Policy Coverage
The first four coverages discussed below are various types of liability insurance policies that businesses can obtain. The fifth type of insurance is life insurance. Specialized liability policies are also available for specific types of businesses.
Professional Liability/Errors and Omissions Insurance
Customers, clients, or patients may sue some businesses if they believe their failure to perform a job properly has caused them harm. These situations are covered by errors and omissions or professional liability insurance, which will pay any judgement for which the insured is legally liable, up to the policy limit. It also covers legal defence costs, even if there is no wrongdoing.
Liability Insurance for Employment Practices
Employment practises liability insurance covers damages for which an employer is legally liable, such as violating an employee’s civil or other legal rights, up to the policy limits. In addition to paying a judgement for which the insured is liable, it also covers legal defence costs, which can be significant even when no wrongdoing has occurred.
Liability Insurance for Directors and Officers
Directors and officers liability insurance protects directors and officers of corporations or nonprofit organisations in the event of a lawsuit alleging that they ran the business or organisation without regard for the rights of others. Up to the policy limit, the policy will pay any judgement for which the insured is legally liable. It also covers legal defence costs even if there is no wrongdoing.
Umbrella or excess insurance policies
An umbrella liability policy adds coverage to a company’s existing liability coverages. It is intended to protect against unusually high losses by stepping in when the policy limits of one of the underlying policies have been exhausted. An umbrella policy would protect a typical business in addition to its general liability and auto liability policies.
Life Insurance for Key Personnel
When a key employee dies, the company receives a death benefit from key employee life insurance. Typically, the policy is owned by the company that pays the premiums and is the beneficiary. Such policies protect the company from significant losses caused by the person’s death or disability. A key person’s death can be devastating to a small business, especially if that person is the founder.
Ref: Insurance Information Institute