P Fudge & Associates Blog

The Business Capital Advisor Property & Casualty Insurance Series

By Thomas E. Vass, Business Capital Advice at 
www.businesscapitaladvice.com 
Blog: www.tvassontechnology.com

The recent evidence on job creation published by the Small Business Administration documents the national trend in business startups by solo practitioners. The variety and types of businesses started by entrepreneurs is staggering, as are the numbers of new businesses being created.

A review of the business interests of the 2000 small business owners in the Inside919 Business network shows every type of conceivable money-making scheme, from aroma therapy (A) to zinc therapy (Z). In between are hundreds of life coaches, counselors, and the all-time new business startup favorite, social media marketing consulting.

The SBA research shows that about 70% of all new jobs are created by very small companies. It also shows that the average length of time spent by the entrepreneur wandering around in the front-end of new business creation is about 2 years. Generally, the number of employees hired by a new business is less than 5 during the first four years following startup.

The reason for the surge in small business startups is that the traditional labor market for most workers in America is not generating jobs anymore. The alternative for many laid-off or unemployed workers is to start their own company.

But, during the start up period, and especially before the startup sells the first product or service, there is an important rule.

Git Your BOP On Before You Go Out In Public

The first year premium for a new business property and casualty insurance, called the Business Owner Policy (BOP), is going to be about $500. That is about what it costs the insurance company to open its window to let the startup in. Below $500, the insurance company cannot justify the costs of selling and maintaining the insurance policy.

All insurance depends on the concept of risk-pooling, which means that the risk associated with the new business is lumped together with other businesses that look similar to the new company. The insurance company takes a look at the entire risk pool, and then sets a policy premium. The premium is adjusted over time based upon the claims and filings. Mostly the premiums go upward.

Because most new companies do not have a claims history to lump them in with other companies, they get lumped into a pool of hard-to-categorize risks, and that pool of risks insures the very basic business risks in a comprehensive package of business insurance, called the BOP.

The time to git yer BOP on is before you get sued or have a claim because after that event, you will have a “pre-existing” claims condition that may make it very expensive for you to obtain property and casualty insurance coverage.

What Does the BOP Cover?v Business owner’s policies basically consist of property coverage, liability coverage and some additional types of coverage that most businesses require. Property insurance covers a loss for fire or other damage to your business property, liability is what happens when someone sues you, and the other coverages are associated with the costs of keeping your http://carolinanewswire.com/news/News.cgi?database=columns%2edb&command=view... 12/21/2009 The maximum limits of coverage available in a BOP are generally low compared to non-packaged insurance products. For example, the usual maximum is $250,000 for employee dishonesty or $10,000 for money and securities that is stolen from the business.

An additional rider for computer coverage can also be written on a BOP, but the form is often limited and doesn't address the exposures unique to electronic equipment. The computer form also provides very limited insurance for the loss of business income or extra expense incurred due to damage to the computers, data or media.

The basic categories of coverage for a BOP are:

1. Property insurance (covering buildings, equipment and inventory).
2. Business interruption insurance (covering losses that cause you to shut operations or reduce production for a time). Business interruption insurance can provide money to offset lost profits or to pay continuing expenses (typically for up to a year for insured losses).
3. Casualty or liability protection (covering harm done by the employees or products to other people or their property). Crime insurance (covering loss of money or securities resulting from burglaries or robberies or destruction) as well as losses from employee theft or embezzlement.
4. Liability insurance covering lawsuits arising from accidents (as when someone trips and falls on your business’s property) or when you sell a product that damages the customer’s property or you are accused of offenses such as slander, copyright or invasion of privacy.
5. Vehicle coverage for rented or borrowed vehicles.

Why BOP? In most commercial transactions, the vendor or supplier on other side of the exchange will want the business to have some form of insurance to limit the liability during and after the exchange. For example, a landlord for the business office will require insurance to limit the landlord’s legal liability if something bad happens in the tenant’s office.

A business could easily go out and buy a separate, stand-along liability policy (GLC). General liability coverage is the most basic type of commercial insurance and one of the most important. When the business gets bigger and more profitable, buying the stand alone GLC would make sense. But, in the very early days of the new business, the BOP will cost less and do more.

For example, for about the same $500 cost for a GLC, the same premium for the BOP would cover:

• Computer equipment - $10,000 with option to increase
• Laptops and cell phones on a worldwide basis
• Valuable papers/media - $100,000 with property extension
• Accounts receivable - $100,000 on premises with property extension, $25,000 off premises
• Business property off premises
• Back-up of sewers or drains (happens a lot more than you think).

Buying Your First BOP

Many large companies offer the BOP through an independent insurance sales force. In other words, you can buy your first BOP from an agent who works for one company, or buy your BOP from an agent who represents many companies.

The front end of the sales process for buying your BOP needs to be thought out for the back end of what happens when you have a claim. That same friendly face that sold you your BOP is going to. You could also buy your first BOP online, over the internet. (Re-read the above paragraph).

When you apply for your first BOP, you will fill out the generic data intake form for use by many different insurance companies.

The form will require you to fill in many categories, and for a brand new company, most of the data entries for the startup will be wild-ass guesses (WAGs). If you are making WAGs on your first BOP applicaton, be sure you note on the form that the data for some entries are only an “estimates.”

The form will ask you, among other issues, to provide a description of:

• Mercantile occupancies and office space z Sales/Receipts (WAG goes here)
• Electrical system checked by qualified electrician?
• Heating system checked by a qualified contractor?
• Age of the roof?
• Is the plumbing completely PVC or Copper?
• Any "special" hazards (raised walks, street elevators, etc.)?
• Are there smoke detectors in each unit?
• Any special protective devices, clothing, etc. in use
• Formal training program for new employees?
• Loss History for liability and property
• Deductible $1,000 $2,500 $5,000
• Liability $300,000 $500,000 $1,000,000 $2,000,000
• Actual Cash Value Replacement Cost
• Building Limit $
• Business Income Limit $

Optional Coverages

• Employee Dishonesty Limit $
• Number of Employees
• Burglary & Robbery $
• Money & Securities (special form only)
• Do employees regularly drive their cars on company business? Yes No What The BOP Don’t Do Some new companies have market or production characteristics that do not allow coverage under a BOP policy.
• Large Premises Operations
• High risk or highly specialized operations
• Majority of business conducted off-premise
• Requires liability limits higher than offered with a BOP

The BOP Policy does not provide coverage to items such as Workers' Compensation, Professional Liability Exposures or Commercial Auto Insurance.

The other important item not covered by the BOP that must be taken care of by the new business is the purchase of unemployment insurance, which is handled by opening an account with the state UIC when the company has more than 3 employees.

Two common types of important business insurance, liability insurance – Comprehensive General Liability and Professional Liability- protect the business from different types of legal claims and civil suits that may be brought against you.

As a new company grows in revenue and employees, generally the BOP will be replaced by stand­alone GCL policies. The comprehensive general liability insurance is usually limited to claims of bodily injury or other physical injury or damage to property.

Often, the same general liability insurance policy will be placed in the same coverage package with Property coverage to protect against accidents on your premises or at other locations where you normally conduct business.

The other important stand-alone policy to buy when the company gets biffer is workers' compensation insurance, which provides medical and disability coverage for employees who suffer job-related injuries or illnesses.

Workers’ comp is a mandatory coverage. The premiums are based on the company's products, services and payroll. In many states, owners, officers and partners of a company can exclude themselves from workers' compensation insurance, thereby saving on premiums.

Develop a Disaster Recovery Plan To Go Along With Yer BOP Application

The BOP is insurance, not a replacement for management strategy. Filling in your first BOP is a very useful exercise for also filling in your business disaster recovery plan.

Most insurance companies and financing companies are now asking to see your business recovery plans, and some types of business are mandated by government to have a written plan. So, part of the process of starting up your business includes the plan for what happens if your business endures a catastrophe.

Your plan should describe how you keep duplicate records. The plan describes how you will be paid if your accounts receivable or other business records are damaged.

The plan will describe where you keep copies of important records and documents and the list of business equipment the company owns or leases, by type, model and serial number.

The plan also describes the next best location to conduct business, in the event that your business premises are destroyed. In that case, having your BOP in place will be indescribably delicious.

About Our Guest Columnist:  Thomas Vass is a Regional Economist who specializes in advising business owners and individuals about how to take advantage of future technology innovation and emerging markets in order to maximize the value of their business capital. He is currently creating web-based tools to help small manufacturing firms and unemployed scientists, professional managers and engineers discover new business ideas that would work well in their home communities. He can be reached at 919 975 4856 or tvass@businesscapitaladvice.com . For more background information and links to related websites, check out Thomas' Archives as well as all our other guest columns