Ask SmallBiz: Insurance coverage for your business

Q. I’ve worked hard to build my business and I don’t want to lose it in a disaster. How do I know if I’ve got the right insurance coverage?

A. Smart. The best time to think about that question is before disaster strikes (tsunami anyone?). Here are three of the most common — and potentially catastrophic — insurance mistakes that business owners make.

Insurance on Auto Pilot

Scenario: Entrepreneur starts business and buys insurance. Ten years later, the business has grown by leaps and bounds. But then, fire! Everything’s destroyed. Not to worry, insurance will pay for it. Just one problem: When the business started, the owner only had $20,000 worth of property. When the fire hit, it was $120,000. How much will the insurance company pay? Yep, $20,000. I call this “Insurance on Auto Pilot.” The bill comes every year, and the business owner faithfully pays but doesn’t ensure coverage keeps up with the business.

Assumption of Coverage

Scenario: A pipe in the ceiling of a fifth-floor law office bursts, spewing sewage everywhere. Insurance will cover that, right? Maybe, but don’t assume. What if there’s a “water damage” exclusion? The only way to know is to go through the policy. I didn’t say “read” the policy (I have yet to meet a business owner who’s read his or her policy), but you do need to scan it, looking for the pages custom made for your business. You’ll see your property and liability limits, and you’ll see how your premium is calculated. And be sure to review the exclusions. They’re listed under the subheading “Exclusions,” in the main part of the policy, but insurance companies also add more exclusions (i.e., take away more coverage) with “endorsements” at the back of the policy. Look for those. It’s just as important to know what’s NOT covered as what is. By the way, if there’s an exclusion that bothers you, ask to get it removed. Sometimes, you can.

Not Telling Your Agent About Changes to Your Business

Scenario: After five years in business, a restaurant owner decides to offer catering. At a party for 100 people, a catering employee spills juicy fried chicken all over the floor. The employee dutifully cleans everything, but the floor is still slippery and later a partygoer slips and falls, permanently injuring himself. The restaurant is sued. Will the liability insurance respond? That depends. Did the restaurant owner tell his agent about the new catering service and did the insurance company agree to cover it? If yes, then yes. If no, then maybe not.

Notice a trend? The insurance company only insures what it’s told to. And it never covers everything (for instance, floods and earthquakes are almost never covered by regular property insurance, but by separate policies.). As a business owner, you need a good dialogue with your agent, so that he or she can tell the insurance company that is should know about your business. Lastly, work with your agent to understand your insurance coverage. You’ll sleep better at night.