Frequently Asked Questions
GENERAL COMMERCIAL LINES FAQS
Running a business is inherently risky. Many factors outside the control of the business owner can influence the success or failure of the enterprise and a high percentage of new businesses fail within a few months of inception. Even large and successful businesses can succumb to changing conditions. Consider what has happened to some of the largest companies in industries such as automobiles, telecommunications, computers, and railroads. To improve the probability of success, the management of a business should think about potential risks and how to offset them.
The losses to a business caused by increased expenses or decreased revenues could threaten the livelihood of the owner or owners. A realistic analysis of the risks inherent in the business and a plan for dealing with them will protect the business from unanticipated losses and disruptions to its flow of income.
Risk analysis is a process by which you consider all possible risks and determine which are the most significant for your particular business. It may make sense to mitigate some risks by purchasing insurance. Other risks can be eliminated without purchasing insurance. After considering how likely various losses are to occur, how expensive they are to mitigate and how much money you have to spend, you decide the optimum strategy for dealing with the various risks.
The size of the company, type of industry, type of organizational structure, capitalization, geographical area, management team, degree of experience and expertise in the targeted business, capitalization, competitive environment and many other factors can have a bearing on the risk environment for the company. The business owners should address such issues in their business and strategic analyses of the company’s situation. A few of the potential operational risks are as follows:
1. Risk of Property Damage
2. Risk of Inventory Loss or Damage (through spoilage, etc.)
3.Risk of Loss from Employee Theft
4. Risk from Various Liabilities (including injuries to customers or to others)
5.Risk from Errors and Omissions Liabilities
6.Business interruption Risks
Other risks involve the business’s employees and may call for optional or mandatory insurance coverage:
1. Worker’s compensation
3. Employee benefits
Some additional risks relate to the owners and their ability to continue the business in the event of serious losses
1. Risk of death of an owner or key employee
2. Risk of disability of an owner or key employee.
The primary ways of dealing with risk include:
1. Find ways to avoid risks such as eliminating potentially hazardous products or procedures
2. Reduce the frequency or severity of risks that cannot be eliminated
3. Transfer the risk to an insurance company (or perhaps to another party by means of legal agreements that your business will be “held harmless”).
A review should be done periodically. Once a year might be appropriate for many businesses. Many insurance premiums come due or up for reevaluation annually. That would be a good time to consider any changes in your risk analysis. You should also consider a review whenever you business:
1. gets larger or smaller
2. changes its nature as when it diversifies into new businesses or markets or products
4. anytime your business evolves in any way that could change your risk profile.
The type of organization can have a bearing on the degree to which you are personally liable for obligations of the business.
Unincorporated businesses are by far the most common type of business.
The three basic forms of unincorporated business enterprises are
1. Proprietorships (easiest to form and terminate). This is the most common form of business enterprise. Most proprietorships are small. The proprietor faces the greatest risk exposure of any business owner since the business and personal assets of the proprietor are legally indistinguishable – as are business and personal debts. Business misfortune can cause personal financial distress.
2. Partnerships. State laws lay out the legal principles that govern these. Allows for additional input of expertise or capital or time. General partners of businesses also have essentially unlimited exposure.
3. Limited-liability companies. These are the fastest growing form of company. They allow limited liability, flexibility of partnership taxation, and are attractive to people who desire to be limited partners (with limited liability) and supply investment capital, but not become involved in the active management of the company. A variation of this is the registered limited liability partnership which operates as a normal general partnership and offers liability protection for all partners.
The corporation is another form of business organization. A corporation exists as a legal entity separate and apart from its owners. It is created under the laws of the various states. Advantages of the corporate form include limited liability, continuity of life, and various tax advantages. Corporations range from small scale to very large. Very large corporations usually have a department that manages the various aspects of risk planning and business and insurance planning. Corporations are taxed as separate taxpayers with rates different from those applicable to individuals. These tax considerations affect some aspects of insurance planning for corporations.
Corporations can be one of two general types (C corporation – the ordinary type, or S Corporation – which has a different type of taxation)
A closely held corporation has a small number of shareholders, no public market for the corporate stock and the ownership and management overlap. Many small closely held corporations are functionally not greatly different from small unincorporated businesses in such matters as how they operate, make decisions and raise capital. Despite the difference in liability exposure, some lenders have been known to require managements of small corporations to pledge personal assets to secure business loans.
The term “Business Insurance” refers to a wide variety of insurance coverages that can reduce or mitigate or compensate for exposure to risk for the business or its employees. It also includes coverages mandated by law such as unemployment insurance, workers’ compensation social security, and (in some states) state disability.
In today’s business world, your computer data constitutes a key asset – perhaps more valuable than many of your tangible items such as buildings or vehicles. So safeguarding data and data processing assets are crucial success factors.
Many data related risks can be greatly reduced by non-insurance steps. For example a carefully designed program of backing up data frequently and dispersing data processing and records in widely separated locations can avoid many of disruptions caused by natural disasters (hurricanes, tornadoes, floods, earthquakes, etc.) or by area-wide disruptions of communication or electric power and even terrorist attacks. If such events do occur, the redundancy and dispersion should make it possible to recover your operations quickly in most situations.
Archived data should also be maintained in secure locations. If you do not have the capability of securing such records, you might want to consider using the services of outside companies that store your valuable records in secure, carefully controlled, remote locations such as special warehouses or underground mines.
And security of customers’ private information is increasingly important to give customers the confidence to use your products and/or services. So you need to consider what information security risks you have and how to eliminate them.
These are areas where you might find preventive actions to be preferable to insurance and remediation.
The risk assessment process is the basis for determining what insurance you need. Many insurance companies provide a wide variety of business property and casualty coverages. These can be underwritten individually and tailored to your specific business.
Property and casualty insurance provides a tool for reducing the individual business’s risk by spreading the risks faced by many businesses. Many business owners contribute their premiums to the insurance company that provides the policy, but not all of the insured businesses experience losses so the insurance company is able to use some of the premium dollars to compensate those who actually sustain losses. In effect, the relatively small amount of money contributed by the many companies that are insured is used to reduce the losses suffered by the companies that actually have losses.
As with other potentially risky aspects of life, insurance can help by taking risks faced by many policy owners and pooling them so as to compensate the ones who sustain substantial losses. Pooling of risks works because what is unpredictable for an individual business is much more predictable for a large group of businesses. If your building burns down or is burglarized, the money the insurance company collects from its policy holders plus what it earns from its investments is used to offset your losses. People who do not suffer losses but have paid their premiums have the assurance that if they suffer insured.
Yes. For example, you cannot insure against many business eventualities such as loss of business to competitors or rising prices of supplies.
Once you have analyzed the risks, you need to consider the cost of the various coverages and what your most significant exposures to risk are. Then you should consider your available insurance budget and decide which risks you should insure against.
Many factors influence the cost of business insurance, but some important ones include the type of business, the location, the size (both physically and in terms of volume of business). Competition for the business is also a factor. If there are many companies wishing to provide insurance for your type of business, you will be in a better position to shop around for a good price.
A business owner’s policy (BOP) is the best choice for many small to medium size businesses if they can qualify and if the limitations and types of coverages fit their needs. Some specific additional policies may be purchased to supplement the BOP coverages if needed.
You have had your personal coverage with the same company for many years. Will it help you to get a better price on your business insurance? Usually, it will only be a “tie breaker.” When you are comparing prices you may get a slight break on price if everything else is about even. But don’t expect a lot of points for loyalty to your insurer.
Many forms of business insurance (other than property coverage, life insurance or disability insurance) fall under the general category of Casualty Insurance. This includes such risks as workers’ compensation, automobile coverage (for business vehicles) and liability coverages. Since there are various types of potential liability for a business (involving actions of employees, product defects, etc.), it is important to consider all the liability exposures and make sure that you have adequate insurance against any that may be significant for your business. Your insurance advisor or insurance company should be able to advise you whether individual liability policies or a package of liability coverages will be needed.
Some industries have an especially high risk of losses to various types of crime. These can include such acts as burglary, armed robbery and theft by customers or employees. It is reported that some retail organizations employ under cover shoppers to check on the practices of employees as one of the tools to try to try to minimize employee theft. Many stores also employ a variety of security personnel, alarms, tags and other devices intended to thwart theft.
Despite some highly publicized cases of accusations of misdeeds against officers and directors of major companies, for many small businesses it may not be necessary to have Directors and Officers DNO coverage. Each business needs to assess the need for DNO in its particular situation. For many companies the answer may be no, however.
Basic liability coverages such as provided in business owners’ policies may be adequate in many cases, But if you are in a business or profession where there is an especially high risk of lawsuits (some branches of medicine for example) you may need extra protection.
It depends on your situation. If your business is new you may want to wait until you have been in business a while and have achieved a degree of success. Once you have achieved that you may need to consider providing some benefits in order to attract and retain excellent workers. The size and composition of your work force will probably be a factor to consider. If you have mostly part time or workers or workers who have other coverage (such as through a spouse), it might not be as important to provide benefits. They might consider the pay or vacation to be more important.
The basic problem is that the business may have to be liquidated shortly after the owner’s death if there is no plan for business continuation. The problems are somewhat different for incorporated or unincorporated businesses, but both are likely to need a buy-sell agreement. Life insurance is commonly used as a way to fund such agreements.
A properly prepared buy-sell agreement will require the estate of the deceased owner to sell the business and the purchaser to buy it for a prearranged price. This guarantees a market for the business, liquidity for taxes and administrative costs and improves the probability of the business being able to continue and carry on normal functions such as borrowing money.
A shareholder may wish to receive cash for his or her stock in a closely held corporation in order to retire or for other reasons. Also, an extended period of disability could trigger an agreement to redeem the stock of the affected stockholder. Plans for contingencies such as this can be established with funding coming from disability insurance or life insurance policies.
Many business owners have no intention of disposing of their business as long as they are alive. But some others become ill, or wish to retire, or decide for some other reason that they wish to withdraw their assets through some sort of disposition of the business. Several disposition methods are possible including outright sale, installment sale, exchange of stock or assets, liquidation. These could have complicated business and tax consequences that need careful analysis with the appropriate professional advisors.
Since execution of a buy sell agreement or other possible transactions require an estimation of the value of the business. It is essential that a valid method for determining an accurate value be available. The agreement may have been draw up long before the time that the value needs to be determined. An accurate method that can be used when needed is essential. The calculation techniques aim at determining the “fair market value” of the business. The two primary techniques focus on the earning power or the assets of the business. Adjustments and judgements can also come into play as well as IRS advisory rulings relating to the valuation techniques.
Planning for business owners generally impinges as well on personal financial issues. For most business owners, the business constitutes a significant part of the owner’s personal assets. Furthermore, personal financial problems can jeopardize the healthy continuance of the business through creating difficulties in raising capital, getting loans, etc. The analysis and planning issues often involve concepts that relate to business organization, laws, taxes, compensation for the owners and employees and insurance planning.
Since few business owners are likely to have competence in entrepreneurial skills as well as the wide variety of specialized disciplines required, it is almost inevitable that some resort to advisors will be required unless the company has grown to the point of having many employees and departments staffed by the professional specialists that handle these many areas.
Most businesses with employees will need to purchase worker’s compensation coverage. While details vary from state to state, there are generally requirements mandated by state law and the coverage is purchased through an insurance broker.
The person or vendor who provides your payroll services will make the proper payments to the state and federal unemployment organizations as part of the payroll services function.
There are as many Insurance Carriers as variables when deciding what Workers Compensation policy is best for you and your business. That said The Harford has compiled a great site to answer many of these questions and concerns.
GENERAL PERSONAL LINES FAQS
When you apply for an insurance policy, you’ll be asked a number of questions. Among other things, the agent might ask you your name, age, gender, and address. You’ll also be asked a number of other questions which will be used to determine how likely you are to make a claim.
When an insurance company is deciding whether or not to offer automobile insurance to a potential customer, they will want to know about the person’s previous driving record, whether they have any recent accidents or tickets, and what type of car is to be insured.
Insurance companies have different programs for different customers. Adults with good driving records will generally pay less for auto insurance than a young driver with traffic tickets will. In order to determine which program you qualify for, an insurance company needs basic information about you.
In addition to your age, gender, and driving experience, they will also need information about the vehicle you drive and how you drive it to determine a fair price. For example, a large luxury car costs more to repair or replace than a sub-compact, and someone who commutes 30 miles each way is more likely to be in an accident than someone who rides the bus to work and drives only on weekends.
By using an agent to purchase insurance, the policy holder receives more personal service. An agent with whom there is direct contact can be vital when purchasing a product and absolutely necessary when filing a claim. A local independent agent is able to deliver quality insurance with competitive pricing and local, personalized service.
AUTO INSURANCE FAQS
Most states have insurance laws that require drivers to have at least some automobile liability insurance. These laws were enacted to ensure that victims of automobile accidents receive compensation when their losses are caused by the actions of another individual who was negligent.
It’s often the case that the cost of repairing the damages to an older car is greater than its value. In these cases, your insurer will usually just “total” the car and give you a check for the car’s market value less the deductible. Many people with older cars decide not to purchase any physical damage coverage.
Collision Physical Damage Coverage is defined as losses you incur when your automobile collides with another car or object. For example, if you hit a car in a parking lot, the damages to your car will be paid under your collision coverage.
Comprehensive Physical Damage Coverage provides coverage for most other direct physical damage losses you could incur, including theft. For example, damage to your car from a hailstorm would be covered under your comprehensive coverage.
A number of factors can affect the cost of your automobile insurance, some of which you can control and some that you can’t.
The type of car you drive, the purpose the car serves, your driving record, and where the car is garaged can all affect how much your automobile insurance will cost.
Even your marital status can affect your cost of insurance. Statistics show that married people tend to have fewer and less costly accidents than single people do.
There are a number of things you can do to lower the cost of your homeowners insurance. The easiest thing to do is get a comprehensive review of your policy and needs from your local agent.
It’s not surprising to find quotes on homeowners insurance that vary by hundreds of dollars for the same coverage on the same home. When you shop, be careful to make sure each insurer is offering the same coverage.
Another way to lower the cost of your homeowners insurance is to look for any discounts that you may qualify for. For example, many insurers will offer a discount when you place both your automobile and homeowners insurance with them. Other times, insurers offer discounts if there are deadbolt exterior locks on all your doors, or if your home has a security system. Be sure to ask us to look into these discounts for you.
Another easy way to lower the cost of your homeowners insurance is to raise your deductible. Increasing your deductible from $250 to $500 will lower your premium, sometimes by as much as five or ten percent.
The typical homeowners policy has two main sections: Section I covers the property of the insured, and Section II provides personal liability coverage for the insured. Almost anyone who owns or leases property has a need for this type of insurance. Usually, homeowners insurance is required by the lender to obtain a mortgage.
Covered losses under a homeowners policy can be paid on either an actual cash value basis or on a replacement cost basis. When “actual cash value” is used, the policy owner is entitled to the depreciated value of the damaged property. Under the “replacement cost” coverage, the policy owner is reimbursed an amount necessary to replace the article with one of similar type and quality at current prices.
Here’s a checklist of things you should consider when you purchase homeowners insurance:
- Determine the amount and type of insurance that you need. The coverage limit of your house should equal 100% of its replacement cost. If your policy limit is less than 80% of the replacement cost of your home, any payment from your insurance company will be less than the full cost to replace your home. You’ll have to pay the rest out of your own pocket. Also, decide if the personal property and personal liability limits are adequate for your needs.
- Determine which, if any, additional endorsements you want to add to your policy. For example, do you want the personal property replacement cost endorsement, an earthquake endorsement, or a jewelry endorsement?
- Once you’ve decided on the coverage you want in your homeowners insurance policy, consult us. We’ll be able to help you determine if there are any gaps in coverage you might not have been aware of and explain the details of the policy’s exclusions and limitations, as well as recommend an insurance company that will live up to your expectations.
*Note: this answer is based on the Insurance Services Office’s HO-3 policy.
A: The dwelling and other structures on the premises are protected on an “all risks” basis up to the policy limits. “All risks” means that unless the policy specifically excludes the manner in which your home is damaged or destroyed, there is coverage. The policy limit for the dwelling is set by the policy owner at the time the insurance is purchased. The policy limit for the other structure is usually equal to 10% of the policy limit for the dwelling.
Losses to your personal property are covered on a “named perils” basis. “Named perils” means that you have coverage only when your property is damaged or destroyed in the manner specifically described in the policy. The policy limit on the coverage is equal to 50% of the policy limit on the dwelling. Limits for the coverage for the additional expenses that the policy owner may incur when the residence cannot be used because of an insured loss is equal to 20% of the policy limit on the dwelling.
The coverage limit on personal liability is determined by the policy owner at the time the policy is issued. The coverage limit on medical payments to others is usually set at $1000 per injured person.
Personal property (except property that is specifically excluded) is covered anywhere in the world. For example, suppose that while traveling, you purchased a dresser and you want to ship it home. Your homeowners policy would provide coverage for the named perils while the dresser is in transit, even though the dresser has never been in your home before.
The standard insurance policy does not pay for direct damages caused by earth movement. “Earth movement” is a much broader term than “earthquake”. It includes earthquakes, volcanic activity, and other types of earth movement. This coverage may be available by endorsement for an additional charge. If you live in an area that’s more likely to have an earthquake, you’ll pay more than if you live in an area that is unlikely to have one. We can help you weigh the costs and benefits of this coverage before you decide to purchase.
If you live in an apartment or a rented house, renters insurance provides important coverage for both you and your possessions. A standard renter’s policy protects your personal property in many cases of theft or damage and may pay for temporary living expenses if your rental is damaged. It can also shield you from personal liability. Anyone who leases a house or apartment should consider this type of coverage.
A renters policy provides “named perils coverage”. This means that the policy only pays when your property is damaged or destroyed by any of the ways specifically described in the policy. These usually include:
- Fire or lightning
- Windstorm or hail
- Vandalism or malicious mischief
- Falling objects
- Weight of ice, snow, or sleet
- Accidental discharge or overflow of water or steam
- Sudden and accidental damage from artificially generated electrical current
- Volcanic eruptions (but this doesn’t include earthquake or tremors)
Renters coverage applies to your personal property, no matter where you are in the world. This means you’re covered when you are on vacation as well as at home.
Owners of apartment complexes buy insurance policies for their liability and to cover their buildings and personal property. However, these policies do not cover any of the tenant’s property or liability. By requiring their tenants to have renters insurance, the apartment owner is assured that the tenants will not mistakenly believe the apartment complex owner’s policy will provide coverage for a tenant’s property or personal liability. Although this type of requirement benefits that apartment complex owner, there are benefits to the renter as well. We recommend that you purchase renters insurance regardless of what your landlord requires.
Standard renter’s policies cover only you and relatives that live with you. If your roommate is not a relative, each of you will need your own renter’s policy to cover your own property and to provide you liability coverage for your own actions.
A personal umbrella liability policy is designed to increase your liability protection. This single policy acts as an “umbrella” over all of your other personal liability policies (home, auto, boat, RV, etc.) so that you have a higher personal liability limit than what would otherwise be available. In certain circumstances, an umbrella policy may provide personal liability coverage that is otherwise excluded from your other policies. For example, an umbrella policy provides coverage anywhere in the world, whereas your auto policy usually provides coverage in the U.S. and Canada only.
It used to be that the only people who needed personal umbrella liability policies were wealthy individuals who had sizable amounts of personal assets that would be at risk in a lawsuit. However, in our very litigious society, even individuals with modest incomes and assets are often subjects of large lawsuits. Since they are even less able than a wealthy individual to pay large damage awards, they recognize the need to have coverage limits greater than what can be obtained from their homeowner or auto policies.