Insurance Blues

INSURANCE BLUES

Do you get the blues when you think about all the insurance policies you have or need just to own a home, go to the doctor or drive a car? Are you thinking about starting a business? You are really going to sing the blues now. Let’s take a look at some of the things you need to know before you take the plunge.

Types of Insurance and Brief Descriptions
1. General Liability- probably the first one to start with. It is as it says- ‘general’. I think every business, no matter what you do, should have this one. One of your workers knocks down a telephone line? The pole falls on someone? Oh yes, you need it.

2. Workers Compensation- most states require it if you have a certain number of employees. Even if it is not required I highly recommend it, especially in the construction industry. When your employees get hurt (and they eventually will) this will not only help them to get the proper medical attention they need but it will protect your pocketbook.

3. Automobile Liability – we are not talking about your personal car. You already have that covered. This is for work vehicles, tractor trailers, dump trailer or whatever you use in your particular industry.

4. Equipment Floater- this protects your equipment in case of damage or loss. My favorite feature is the “leased/rented equipment”. There is nothing like renting equipment and the rental company wants to charge the overpriced “loss waiver damage”. Just whip out that certificate of insurance and save yourself some money.

5. Umbrella, Professional liability, Owner’s Protective Liability- these are great I’m sure. Do you need them? Its up to you but be prepared to shell out major dollars. If you are just starting out you may want to hold out on these for a while.

Finding an Agent
It may not be as crucial as finding the right doctor but you need to do some research. Anybody with a license can sell you insurance. There are tons of agents that sell automobile insurance but not every agent can or should sell commercial insurance. In the construction industry you may learn that a project will require more insurance than you currently carry. You may even need a bond. Can your agent provide you that service in a timely manner? If not, you may lose the contract. Remember that agents don’t actually write the policy they just contact the adjusters, so it may take longer if that agent doesn’t regularly deal with this type of insurance. They also may not get you the right price. Contract signing day is not the best time to go shopping for a new agent who can get you the additionally required insurance.
Build a relationship with your agent just like you want to with your banker, lawyer and accountant. You will need insurance for the life of your company. You want someone who will work with you to get the best value for you and to answer questions. Do some research online and ask people already in business, especially in your industry, for recommendations. If your chosen agent is not giving you the service you think you deserve, do not be afraid to make a change.

Beware the Audit
Yes, insurance companies conduct audits. Unlike the IRS who may never audit you, the insurance companies do it annually at the end of your policy year. Now some may say why “beware” if you have nothing to hide? Do you like to gather mounds of information from over a period of a year and have someone come pour over your books and perhaps inform you that you owe them money? I don’t either, but it is part of the deal when you purchase insurance.
So, here is how it works. When you agree to purchase a workers comp policy, for instance, you estimate what the payroll will be for the term year. The insurance company calculates your premium using that estimate and the classification rate. Class rates are based on the job description of the employee and are assigned according to the risk of the job. Clerical work has a very low risk and as a result has a very low rate. Compare that to a timber logger who has a very high risk and a very high rate.
The policy term ends and the insurance company sends you a letter informing you that it is time for the audit. What they want to know is whether your actual exposure (payroll amount) was above or below the estimate. They will include in the letter all the records they would like for you to provide. Some of the required records are monthly tax forms (federal and state) and payroll records.
Let us say that you actually paid out less payroll that you estimated. Guess what? It’s your lucky day and you get a refund! However, let us then imagine that next year you had more work than you anticipated and had to hire some extra people. You also hired a couple of workers in a more expensive classification. Be prepared to write the insurance company a big check.
You can mitigate the “audit shock”. This is why it is so important to have a good relationship with your agent who can advise you. Consider adding the new classification to your policy or maybe increasing your estimate if allowed. You would not want to wait until your policy term ends but rather do it as soon as possible. This will increase your premium of course but at least you can pay a little more now to prevent an exorbitant audit later.

Uninsured Subcontractors
This is really to the attention of construction business owners. Be aware that you may have all the insurance that one can imagine. You did it right. You can bid any job and you are prepared. If you hire a subcontractor who does not have general liability or worker’s compensation then you are on the hook if something goes wrong. That means if they knock down a telephone pole or their worker gets injured it is filed on your insurance. Furthermore, at audit time a percentage of what you paid them will be charged to your exposure. Even if nothing went wrong. Isn’t that nice? Make insurance a requirement and get a certificate of insurance from the sub before they go to work for you.

Insurance is one of those unavoidable costs of doing business. If you prepare properly and are willing to adjust as your business needs change you won’t be singing the blues. At least not all the time.

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