Escalating insurance costs call for coverage evaluation
By Pat Curry • Bankrate.com

If you've felt you've been spending a fortune on business insurance, this isn't your lucky day. The insurance industry says it was overly aggressive during the last decade in courting new business and you've been getting a great deal. Now, insurers are charging more for policies or canceling coverage completely.

Scott Hauge owns CAL Insurance Associates in San Francisco and is on the national advisory council of the Small Business Administration. He says insurance is probably the third greatest cost for most small companies, behind labor and materials. His clients are seeing a 30 percent increase in their insurance costs this year.

"It's a big, big issue," he says. "While small businesses may be holding their own, struggling to keep sales up, they're put in the hole with insurance."

With insurers upping prices and tightening coverage, companies need to examine their policy needs. This is particularly true of small businesses because they either forget about insurance or over insure, says Bob Sullivan, a Virginia-based consultant and author of "The Small Business Start-Up Guide."

Options often limited
Many times, businesses have no choice, says Arthur Pachman, a SCORE counselor in Boca Raton, Fla., with more than 50 years of experience as an insurance broker.

If you have employees, the law says you must have workers compensation insurance. If you lease space or have a mortgage, your landlord or lender will require insurance. The same goes for leasing equipment or taking out a loan to buy it.

Your liability insurance will be based on sales, payroll or location square footage, so there's not much you can do to reduce those costs. The first layer of liability will be what's required by your landlord or customers to be in business. Above that amount, you can lower your costs by taking reducing the amount of coverage you carry.

If you're working from home, don't assume your homeowner's insurance will cover you for liability, Sullivan says. It might, but many homeowners' policies specifically exclude business activities, so check with your agent. If you can't get liability coverage, you're "reduced to other types of protection, such as bonds," Sullivan says.

Can you afford a loss?
Beyond liability, Sullivan says every other kind of insurance purchase will be driven by the same question: can you afford the loss?

If you're a sole proprietor, disability insurance is very important. You also have to consider how long could you pay the bills if the doors were closed due to a fire or a tornado? Depending on your answer, you might consider business interruption or overhead expense insurance.

"Sometimes you need it, sometimes you don't," Sullivan says. "The point is you don't just buy it to buy it."

He recommends that small-business owners develop an insurance plan and review it at least annually. That forces you to sit down with an agent and see what you really need.

Rob Hoyt, an insurance professor in the Terry College of Business at the University of Georgia, agrees. With the lower prices over the past several years, he says many companies neglected basic risk management -- something he doesn't recommend.

Hoyt suggests owners identify risk vulnerabilities and take steps to address the exposure. If you had a big insurance claim from a burglary, for instance, you would want to show that you had changed the locks, installed an alarm system or hired a security guard. The goal, Hoyt says, is to make your company attractive to insurance underwriters.

"You want to make yourself the best risk in that category," he says. "If you don't show you've learned anything, you'll get no favorable attention from the market. If they perceive you as anything but at least average, (your policy) goes to the bottom of the stack, nonrenewed and canceled."

Pat Curry is a contributing editor based in Georgia.

-- Posted: April 24, 2002