Insurance is the wrong place for a small business to skimp

By Pat Sisneros and Juergen Kneifel Herald Columnists

Business insurance is one of those expense items that small business owners often look to trim in an effort to save money.

Our advice — look elsewhere.

In today’s sue-happy world, you need to protect your business with the proper levels of insurance coverage. Risk is an inherent part of operating any business — a customer falls, someone is injured using your product or a fire destroys your retail location. As the old saying goes, “You don’t need insurance, until something happens and you need it.”

We spoke with Steve Smith, an agent with Thomas &Associates Insurance Broker Inc. in Stanwood about what entrepreneurs should consider when selecting insurance. Here are the highlights of our conversation:

Question: What is your best piece of advice on how much and what kinds of insurance a new entrepreneur should carry?

Answer: This will depend on what type of business you start. If you are a franchisee, the franchise will have minimum insurance coverage requirements for your business. An entrepreneur in any other marketplace needs liability and property type coverages, as well as coverage to insure the loss of business income. Medical insurance might be needed for the entrepreneur and family, as well as a useful tool to attract good employees. If the entrepreneur has borrowed large sums of money for the business venture, life insurance is a good idea for family security.

Q. What are some tips about the amount of liability insurance to purchase?

A. I would recommend purchasing the highest limits of liability available. This will better protect their assets, plus the difference in premium is minimal. For example, you can buy a $1 million dollar liability policy for many types of small businesses for under $300 per year. Many commercial insurance companies have a minimum premium, including policy fees, for commercial policies of $500. You might as well buy the additional liability coverage of $2 million to $3 million and use that premium. Damage awards in a lawsuit can total over $1 million dollars pretty quickly.

Q. What are some common mistakes that entrepreneurs make when it comes to insurance?

A. A common mistake is purchasing coverage based solely on the lowest premium. Many times, coverage is different from company to company. The premium might be a little bit more expensive, but you could be receiving many other types of coverage that would apply and be necessary to the business.

Q. How would you recommend an entrepreneur select an insurance agent?

A. An entrepreneur should look for an agency that has experience placing coverages in their industry, with the appropriate insurance companies. The agency should also provide knowledgeable and prompt service.

Q. What kinds of insurance must a business owner purchase to operate legally in this state?

A. The only legal requirements are for auto liability, contractor bonds and contractor liability. If you start a business and rent commercial space from a landlord, the landlord may require you to have a policy. For wholesalers, resellers or distributors, their suppliers may require at least a $1 million dollar liability policy. If you have employees, you need to pay workers compensation insurance and unemployment to the state.

Q. What is your philosophy around how much of a deductible to have on your insurance policies?

A. That depends on the business itself. Large businesses can take a higher deductible and pay for small losses out of pocket. This will lead to more stable premiums. Small businesses may want to use a smaller deductible if a loss of a few thousand dollars will be detrimental. One precaution is to avoid submitting a lot of small claims that will cost more to adjust than you will receive in compensation. This can lead to higher premiums.

Pat Sisneros is the vice president of College Services at Everett Community College. Juergen Kneifel is an associate faculty member in the EvCC Entrepreneurship program. Please send your comments to entrepreneurship@everettcc.edu.