Managing and growing a successful startup takes vision, passionand the right type and amount of business insurance, according to the Insurance Information Institute (I.I.I.).
“Starting and maintaining a new business can be costly, but the last place business owners should cut corners is insurance,” said Loretta Worters, a vice president with the I.I.I. “Proper business insurance coverage can be critical toand is often a requirement fora startup’s success.”
Understanding the factors used by insurance companies to price a business insurance policy is key to making the best choices when it comes to finding the right coverage for your needs. If you’re planning to start your own business, consider the following factors that can affect the price of your business insurance:
1. Type of business How is the business legally structured? As a sole proprietor you are personally liable for all business losses and debts so you may need to get more liability coverage, but you won’t need workers compensation. An incorporated or limited liability company (LLC) poses fewer risks to individual owners.
2. Location, location, location Choosing a business location is perhaps the most important decision a startup will makeboth from a business perspective and from an insurance perspective. Businesses located in high-crime areas, or in areas that are susceptible to severe weather, such as flooding or tornadoes, will pay higher rates.
How to save money: Find the right location. If you have a choice as to where to locate your business, ask your agent for several quotes for the different locations you’re considering. You may find insurance in some areas to be significantly less costly than others.
3. Facility size and characteristics A large office or factory building will likely cost more to insure than a smaller space. Insurers also take into account construction materials, so a frame building will generally have higher rates than a brick building. And they may apply a surcharge for an older building that has not had updates to major systems such as electrical, plumbing, heating and roof.
How to save money: One way to ensure more favorable rates is to set up your business in a building with state-of-the-art fire alarms, sprinkler systems and proper exits.
4. The value of the business The value of your business lies not just in office furniture and equipment but also in its revenue and expenses. When applying for Business Interruption Insurance (BI), which covers lost net profits and continuing expenses after a catastrophe, the amount of coverage and, therefore, the premium costs will be based on your estimate of the company’s future revenues and expenses. An insurer will take into account everything when pricing a policy so make sure to keep accurate records and provide a full inventory of your stock if applicable.
5. Business owner’s experience An insurer will want to know how much experience the owner has in the same, or a similar, business before selling them a policy. If you’re new to the business, the insurer may apply a surcharge or simply decide not to insure you.
How to save money: Bring on board a partner or senior executive with related experience.
6. Number and training of employees Depending on the state and the number of employees, most businesses are required to have workers compensation insuranceso the more workers, the higher your workers comp premiums. However, providing proper job training can help reduce the insurance costsin many cases, a well-trained worker is less likely to have an accident.As a rule, insurers will evaluate a company for possible workplace liabilities before issuing a policy so previous harassment or prejudice suits against the company will impact the price of business liability insurance.
How to save money: Have safety procedures in place. Ask your insurance professional about any risk reduction measures that can help reduce property loss, liability, security breaches and workplace injuries. Also work with your insurer or human resources manager to set up a healthy atmosphere in the workplace and protect your company against lawsuits.
7. Claims history An insurer looks at two things: the frequency and severity of previous claims. So if a business has had several small claims or one very expensive claim, chances are you will see higher premiums.
How to save money: Maintain a good loss ratio. Don’t report claims that are small; rather self-insure those that are under or close to your deductible. This will keep claims off of your record.
8. Credit-based insurance score A poor credit history is an indication to the insurer that the business owner may be more likely to file a claim. This can negatively affect your business insurance premiums. How to save money: Check your credit. Knowing where you stand financially will help you take steps to improve your business credit and ultimately to keep your insurance rates lower.
Worters advised business owners to keep their insurance professional informed about any changes in their business. “This includes major purchases as well as changes to your building, the nature of your operation and the number of employees. While companies can’t expect to eliminate all risks, they can try to recognize what they are and take the necessary steps to reduce them.”