Insurance 101: Understand Insurance for Small Businesses

Here at Coterie, we like to consider ourselves “insurance nerds”. In this blog, we dive into the basic concepts and history of insurance, with a focus on insurance for small businesses. Understanding how insurance works is crucial to making sure you can explain the ins and outs to your clients and prospects.

A Brief History of Insurance

The concept and practice of insurance have been around since ancient times. As far back as 4000-3000 BC, Babylonian and Chinese traders engaged in a form of insurance that involved merchants minimizing risk by dividing their goods among various ships when crossing dangerous waters. Years later, around 600 BC, the Romans, and Greeks created benevolent societies which provided care – including funeral rituals – for families of deceased citizens, a notable precursor of today’s life insurance policy.

Many of the earlier forms of insurance were tied to contracts or loans, or required membership in a society. Standalone insurance policies (those without the aforementioned ties and requirements) were first documented in 14th-century Genoa; standalone maritime insurance was created shortly thereafter.

Modern insurance can be traced back to the mid-17th century and the Great Fire of London. More than 30,000 homes were destroyed in that fire, which prompted Nicholas Barbon to create London’s first fire insurance company. Benjamin Franklin is credited with the creation of the first American insurance company in 1752, called the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.

The Principle of Indemnity in Insurance

One of the defining principles of insurance is the principle of indemnity, which provides that compensation for a loss will not reward nor penalize the insured, rather it will place the insured in the financial position he or she was in prior to the occurrence of the loss.

Three main types of insurance:

• Property and Casualty Insurance (P&C or PC) – auto and homeowners insurance, commercial insurance (including small business insurance)
• Life and Health Insurance – mostly involving traditional life insurance and annuity products
• Health Insurance – both P&C and Life/Health include some aspects of health insurance but this sector encompasses private health insurers’ products and those provided through government programs

Regulation

Each state within the US regulates insurance in its own way, with differing rules and statutes. It is the responsibility of each state to monitor insurer solvency, review carrier market conduct, and pass judgment on carrier requests for increases in rate, changes in coverage, forms, and so on.

Property and Casualty Insurance for Small Businesses

1. Property Insurance – property insurance can cover the buildings or structures a business owns along with its personal property. Personal property can be furniture, inventory, stock, machinery, computer, and telephone systems, and other items used to operate a business. Property insurance can also provide other important coverages such as equipment breakdown, debris removal, loss of income, and ordinance or law coverage.
2. General Liability Insurance – general liability insurance protects you if your business causes injury or harm to another person or their property. This could include situations like the sale of a defective product that causes an injury, a slip-and-fall accident on your premises, or an incorrect repair you make to someone’s property that causes subsequent property damage. General liability insurance will pay damages for which you’re found liable as well as attorney’s fees and other legal expenses, up to the policy limits.
3. Businessowners’ (BOP) Insurance/Commercial Package Insurance – the Businessowners’ policy (BOP) is what is known as a package policy. This simply means it combines multiple lines of coverage into a single policy. The BOP policy combines commercial property and general liability, as well as additional coverages, into a single policy form. Commercial package policies are available to many insureds and can include many different lines of insurance. However, the BOP policy is a package policy that was created specifically for small business owners. Coterie offers BOP coverage in all 50 states across the country!
4. Business Auto Insurance – provides coverage for vehicles owned by a business. Policies can provide both liability coverage for injury or damage to other parties due to business autos and physical damage coverage for damage to the owned autos themselves.
5. Workers Compensation/Employers Liability Insurance – required in all states except Texas, workers comp insurance pays medical expenses and loss of wages for employees who are hurt on the job (regardless of fault). In instances of fatal injury, workers comp pays compensation to the employee’s family. Employers liability insurance is included in most workers comp policies (the exceptions are ND, OH, WA, and WY), and covers expenses if an employer is sued due to an employee injury or illness. In the monopolistic states of ND, OH, WA, and WY, workers comp coverage must be purchased from a state-operated fund. These policies do not include employers’ liability coverage.
6. Professional Liability Insurance (Errors and Omissions) – professional liability coverage, sometimes called “errors and omissions” coverage or simply E&O, provides coverage for professionals – those who are held to a higher standard of care for claims from negligence, misrepresentation, mistakes or malpractice.
7. Umbrella/Excess Liability Insurance – umbrella liability policies are designed to protect a business against high-dollar losses. The umbrella policy drops down and provides coverage when the limits on one of its underlying policies are used up. The typical umbrella policy would sit over the insured’s general liability and auto liability policies, but could also provide coverage over employers’ liability, EPLI, D&O, and other types of liability insurance. In certain situations, an umbrella policy can drop down and provide coverage for losses that are not covered in the underlying policies. Excess policies are slightly different from umbrella policies. They still provide an excess “layer” of coverage over the underlying policies but typically are “following form”, meaning that they only provide coverage for losses that are covered in the underlying policies.

Other types of business insurance coverage:

1. Directors and Officers Liability Insurance (D&O) – D&O liability insurance provides coverage for directors and officers of both non-profit and for-profit businesses in case they’re sued due to improper management of the business. It will pay judgments for which the insured is legally liable, up to the policy limits. Defense expenses are also covered, but unlike general liability policies these expenses are generally part of the policy limit (a policy condition called “defense inside the limits”.)
2. Cyber Liability – insurance designed to help businesses recover from data breaches and other security-type issues related to computers and computer networks. There is no real standardization of forms or coverages so offerings vary widely from carrier to carrier.
3. Terrorism Insurance – prior to the 9/11 attacks on the World Trade Center and the Pentagon, coverage for terrorism acts was typically included in many insurance policies. Today it is excluded under most commercial insurance coverage forms and generally offered as a “buyback” option for an additional premium charge. (Workers’ Compensation is a notable exception; terrorist acts cannot be excluded from Work Comp policies.) Terrorism insurance can potentially provide coverage under commercial property and commercial liability policies for loss, damage, or injury due to “certified acts” of terrorism.
4. Key Employee Insurance – this can be life or disability income type insurance that compensates a business when a key employee (someone who is vital to the success of a business) dies or becomes disabled. It can help soften the financial impact stemming from lost input or participation on the part of the key employee.
5. Inland Marine Insurance – a type of property insurance typically used to cover mobile property, i.e. property coverage that is not location-specific. Commonly used for contractors’ equipment, motor truck cargo, salesmen’s samples, and other types of property used or stored away from the business premises.
6. Crime Insurance – crime insurance protects businesses against financial losses related to crimes. A wide variety of coverages are available, including employee theft, burglary, robbery, forgery, and computer fraud.
7. Employment Practices Liability Insurance – provides coverage for damages related to employment practices such as wrongful termination, discrimination, harassment, and retaliation.
8. Pollution Liability Insurance – (also known as environmental insurance) provides coverage for damage or injuries from pollutants a business works with or produces. Coverage is generally required for businesses like gas stations that have underground fuel storage tanks, but many other business types have significant pollution exposures that may be excluded from their other commercial policies.

Go Deeper with us!

As a trusted insurance professional, it’s important to understand the different types of insurance for small businesses. Business property coverage and general liability insurance are just a few examples of the types of coverage that may be necessary for your small business clients. Coterie is here to help you learn more about small business insurance and determine which types of coverage are recommended for the communities you serve. Get started with us today!