Business Insurance

Is your business adequately insured? Image via cancocom on Flickr

According to the Small Business Association (SBA), small home based businesses make up more than half of all businesses in the U.S.  These types of businesses are more likely to have the wrong insurance coverage for their needs.  If you are a home-based entrepreneur, here are 6 mistakes you can’t afford to make with your business insurance.

1.     Not Having Insurance Specific for the Business
One of the most common mistakes home-based business owners make with their insurance is making the assumption that their personal insurance policies cover their business.  This is almost never true.  In fact, most homeowner’s and umbrella policies specifically exclude business activities and business property.  This means that if there is a fire in your home, your homeowner’s policy will not pay to replace the computers, equipment, and supplies belonging to your business.

2.     Not Believing that the Company Can Be Sued
It doesn’t matter if you are just starting out, don’t have any real assets, or whatever other reason you are telling yourself, if you own a business, that business can be sued.  In addition, it may be possible for you to be sued personally as well.  If you have a judgment against you, the court can seize your assets, bank accounts can be frozen, and future earnings can be garnished.

3.     Not Planning for Bad Things to Happen to Them
Another big mistake home-based business owners make is not protecting their business in the event something happens to them.  Many small business owners forego disability insurance for both the short and long term without realizing that their odds of being disabled at some point, even temporarily, are much greater than the odds of them dying.  Most home-based businesses could not withstand the loss of their entire workforce, even for a few weeks.  Most small business owners would find it difficult to pay their bills and take care of their families if a disability made it impossible for them to work in the business.

4.     Not Having the Right Insurance
Small business owners are often strapped for cash and strapped for time.  This can lead to bad decision making in the area of insurance.  Business owners cannot rush through the process of identifying their insurance needs without running the risk of buying the wrong policies and being over insured in some areas and underinsured in others.

5.     Not Verifying that All Insured, Entities, and Locations are Listed on Policy Documents
Regardless of the way you have structured your business, you need to make sure that all entities, companies, LLCs, etc. are listed on your insurance policies.  The same goes for all locations that are covered by business property and commercial general liability policies.  In order to ensure they are covered, they must be listed on the policy.

6.     Not Purchasing an Umbrella Liability Policy
Business owners, just like individuals, need umbrella coverage in order to protect themselves and their business from catastrophic circumstances.  Umbrella coverage kicks in after your standard policies hit their limits and hopefully, you will never need it.  However, this is the kind of coverage that if you need it and don’t have it, it can end your business and impact you financially for the rest of your life.
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Do you need an Umbrella Policy?

If you own a home, you know you need to have homeowner’s insurance.  If you own a car, you know you need to have auto insurance.  But do you know if you need an umbrella policy? 

Many consumers are unfamiliar with this type of coverage and those who do know what it is often think they don’t need it.  However, if you own a house, drive a car, have an investment portfolio, have retirement savings, or want the peace of mind that comes from knowing your financial future is protected, you need an umbrella policy.

Umbrella policies sit atop your homeowners and/or auto policies and provide coverage over and above the limits of those policies.  For example, if you were at fault in an auto accident where your car slid into someone else’s house causing damage that exceeded the $25,000 property damage limit on your auto policy, you would have to pay for every dollar over that limit.  If you had a $1M Umbrella policy, the insurance company would pay for any damages from $25,001 to $1M.  This can be crucial if another person is injured as a result of your negligence.

To provide a clear picture of why you might need the protection of an umbrella policy, here are three reasons investing in the protection of an umbrella policy might be the right decision for you.

1.     If You Drive a Car


The primary reason that every person who drives a car should be covered by an umbrella policy is that serious injuries from a car accident result in huge medical bills and big pain and suffering payouts.  A policy with a $100,000 liability limit may seem like a lot of coverage, but the Arizona Department of Health Services estimates that the average cost of a hospital stay caused by a traumatic injury is $53,000.  When you add that to the cost of future medical care, any rehabilitation, psychiatric treatment, lost wages, and damages awarded for pain and suffering, it is easy to see how even a minor accident could easily result in expenses and damages that exceed $100,000.

2.     If You Own Anything


If you own a home, land, rental property, or a business, an Umbrella policy is an inexpensive way to protect these assets from being seized in a lawsuit.  When people think of their available assets, they don’t often think of investment portfolios or retirement accounts as being in the same category as a home or property.  But these assets are also vulnerable to seizure in a lawsuit and can be protected by umbrella coverage.

3.     If You are a Wage Earner


Many people don’t realize that if you lose a lawsuit and the amount of the settlement exceeds your insurance coverage, the court can seize your assets and attach your future earnings.  This means that one car accident in your twenties could result in a portion of your wages being taken until you retire.  In a Kiplinger article explaining why everyone needs an umbrella policy, they recommend anyone who makes over $100,000 a year have at least $1M in umbrella coverage.

Your insurance carrier may require you have higher limits on other policies like the ones you have for your home or car.  However, in the face of a million dollar lawsuit, small increases in these premiums and the low cost of the umbrella policy may be the best money you spend this year.