Many entrepreneurs are the “big picture” people among us; they have that rare combination of dreamer and doer. As such, most of the calls I get from entrepreneurial clientele is after they have started up their new business and, as it grows, they realize they are going to need some sort of insurance policy. Insurance conversations can become complicated, but they don’t have to be. Understanding a few things about business insurance can help make your experience go more smoothly and get you the policy you need at an affordable price.
Your industry experience will help your agent find you coverage
You might not realize it, but your agent’s ability to find you coverage for your new business hinges on the details of your new venture, and your experience in that kind of work. Your agent needs to put a narrative together for the company’s underwriter, and the more positive information he or she can provide about you and your business, the more options they will typically be able present to you.
If you are starting up a business, the insurance company doesn’t have a historical track record to go off of in order to evaluate what kind of owner or business manager you are. However, if you have numerous years of experience as a worker or manager in the same industry, this is relevant information that can help your agent place your coverage.
Determine workers’ compensation costs prior to hiring employees
When your new venture begins to grow, it is likely you are going to need to hire some employees. Many entrepreneurs and business owners hire an employee or two in order to fill an immediate need, and then look to get workers’ compensation for them after the fact. It is difficult to determine the affordability of an employee without first evaluating the carrying costs associated with a new hire.
Depending on your industry, workers’ compensation premiums can be the most expensive item on your balance sheet aside from your actual payroll expenses. For example, if you are starting a business where your employees will be working at significant heights, such as a roofer, or they are encountering potentially toxic materials, such as certain paint fumes, the classification of your workers may have rates of $20 (or more) per $100 of remuneration. This means that for every $100 you pay your employee, you will pay $20 of workers’ compensation premium. Some worker classifications may be significantly lower, such as the case with clerical employees, which are typically rated under $1 per $100 of remuneration.
These kinds of insurance expenses need to be factored into your business plan and growth goals. As expensive as it may seem to be, workers’ compensation is mandatory in every state, and the penalties, fines and liability you may assume by not carrying this coverage will sink your business if something does go horribly wrong and a worker is injured. Since it is not an optional coverage, the best approach is to first evaluate and understand what the costs will be before you hire any employees.
Additionally, understand that it is likely that, as a startup, you will need to obtain workers’ compensation insurance through a state workers’ insurance fund, instead of through a private insurance company. Once you have a couple years of favorable experience without claims, private companies will be more likely to come and offer a competitive quote for your business.
Establish a separate legal entity to help your agent place coverage
Your accountant might tell you that it is easier, for tax purposes, to run your business as a sole proprietor. However, an insurance company’s preference is to write business insurance for a legal entity rather than an individual sole proprietor. The reason is that, because of the way the liability insurance language reads in your policy, insurance companies have a hard time parsing out specific business activities. This means that the company must be okay with all the products you make and all operations you conduct under your personal name if they are to write your policy.
You may have called for a policy to cover your office cleaning business, but you sell baked goods under your individual name, as well. Since the insurance policy wording states that liability coverage is provided for “your” products and “your” operations, this includes all of the products and operations you produce and conduct as the name insured on the policy declarations page. Instead of finding a company that is comfortable with writing insurance for your cleaning business, your agent now needs to find a company that is comfortable with insuring a “John Smith” who cleans offices and sells baked goods. There are likely fewer options for that wide range of business activities.
Setting up a separate entity for the cleaning business, ABC Cleaning, LLC, for example, allows the company to insure the LLC entity and not the individual sole proprietorship which is selling the baked goods. Some of this is nuance within the contractual language of the insurance policy, but just remember, the more business operations you conduct under the same entity name, and the more diverse they become, the more difficult it can be to find you business insurance at an affordable price.
When you are starting a new business, it’s a good idea to involve an insurance agent in the conversation, even if it is only at a high level. An experienced agent can lay out realistic expectations for you so that you can have a general idea of the potential hurdles you may face from an insurability stand point. Protecting your personal assets and your revenue streams with an insurance policy is important, but the costs and any difficulties in obtaining the proper coverages should be considered when developing a comprehensive business plan.
Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.