Businesses Use Insurance For Risk Management

Just as homeowners insurance protects a homeowner from the full cost of repairing unforeseen damage to a house, commercial property insurance protects businesses, farms and ranches against damage to their buildings and contents.

Commercial property owners, both those operating a business on their property and those leasing property to another entity, may purchase policies that protect the building and associated structures. A property owner's policy will not protect tenants from loss. Business owners who lease their property may buy policies that protect the building's contents, such as machinery, furniture and stored or displayed merchandise.

Different types of commercial property insurance policies protect against different dangers, called "risks," "causes of loss," or "perils."

Property insurance will cover the building and contents if destroyed by a covered peril, such as fire.  General liability protects the named insured for acts that the named insured is legally responsible for.  Commercial auto covers if the named insured or any covered employee is involved in an accident while in a company or personal vehicle.  Workers' Compensation pays if a covered employee is injured while performing tasks on the job.  Umbrella insurance fills in the exposure gaps, as long as underlying policy limits and deductibles have been met.  Flood insurance is purchased through the federal government's National Flood Insurance Program and covers claims that result from rising waters.

Commercial property insurance has a fixed value, and generally falls into three categories:

• Basic form -- covers common perils, such as damage caused by fire, lightning, windstorm, vehicles, aircraft, and civil commotion.
• Broad form -- covers basic perils while adding others, such as water damage, collapse, glass breakage, weight of snow, ice or sleet, and sprinkler leakage.
• Special form -- covers any cause of loss except those specifically excluded, such as flood, earth movement, war, nuclear disaster, wear and tear, insects, and vermin.

• Usually the special form is requested, but the carrier will make the final decision on which form to provide, by evaluating the potential policyholder's risk of loss.  Businesses that appear to be high risk will pay higher premiums, and may even find it difficult to obtain coverage.  Businesses that are low risk will pay a lower premium, and will find it easier to obtain coverage.  A fireworks company, for example, will find it more difficult to find coverage, than a Hallmark card shop.

Fire ratings apply to insurance purchased both by building owners and tenants.  When was the building constructed and what material is it made of?  What other businesses use the structure?  Are they high-risk or low-risk?  Is the property located within city limits with good fire protection?  It can be frustrating for a tenant who has no idea, when his agent asks, when was the electric, plumbing and heating last updated in the building.  Insurance carriers want to know what the exposure for fire is, so the chances of them having to pay a claim are low.  And they will not quote a premium without the information.

General liability insurance protects the named insured for incidents that the named insured is legally responsible for. How much general liability insurance a business owner needs is more difficult to determine.  What limits would make the owner feel comfortable if a customer slips and falls, then sues for damages, including pain and suffering?  What if a business sign fell on a vehicle parked under it, and the occupant inside was injured?  Liability coverage is generally very inexpensive to purchase.  To help limit possible loss, the Texas Insurance Code states that the insurance carrier must provide loss control information/services based on the risk, exposure, loss experience, and other considerations of the business.  Most insurance carriers will provide a letter or notice at policy issuance that includes instructions for requesting this free loss control service.

Commercial auto protects the named insured if a covered employee is involved in an accident while in a company vehicle on company business.  There is a misconception that the commercial auto policy is primary in paying damages if the employee has an accident while using a personal vehicle to run a company errand.  If there is an accident, the insurance for the personal vehicle pays first up to the policy limits.  If the company is subsequently sued, the business must have Hired/Non-owned auto coverage before a policy will pay any excess payments, and then it will pay only to the policy limits. 

Workers' Compensation pays for job-related injuries to the covered employee.  Payments are made to the covered employee for as long as is necessary to rehabilitate the employee.  A covered employee is not allowed to sue the employer.  Premiums are based on employee salary and classification.  A clerical person will have a low classification, while a person doing welding will have a higher classification because of the risk of injury.  The girl at the front desk only answering phones will have a lower classification than if she also went into the warehouse to pick up a customer's order, because she may injure her back while picking up that box.  It is very important to properly classify the employees.  The insurance carrier can audit the business at any time.  If they find employees not properly classified, it could result in a Workers' Comp premium increase that is immediately payable for the prior year.

The umbrella policy will pay excess payments.  For example, a customer comes into your business, slips and hits his head, knocking him unconscious and sending him to the hospital.  He sues for $3 million.  Your general liability policy has a limit of $1 million per claim.  You also have a $1 million umbrella.  The general liability policy will pay first and will cover the first $1 million, less any deductible.  The umbrella will pay the next $1 million, less any deductible.  Both policy limits have been exhausted, leaving you with the final $1 million to pay out of your pocket.  If you had a $2 million umbrella, you would not have to come up with any out of pocket expenses, except for the deductible.

The National Flood Insurance Program offers a similar type of flood insurance coverage as you will find for homeowners.  Coverage limits vary and there is also a deductible to be met.  This insurance is for rising waters, not if a pipe breaks.  Pipe breakage is covered under the property policy.

The smart business owner will review coverages annually to update any changes that have occurred during the year.  It is a necessary step to insure that all possible risks are covered so that the business will thrive and the owner will have peace of mind.

Please call or e-mail me for all of your insurance needs.
Sandra L. Berry
Cell: 713.202.8200
sandra@lancesandra.com