Glossary of Policy Types
The following descriptions provide an overview of some typical policies a business owner may consider. Policy terms and conditions vary. It is important to work closely with your insurance provider so that the insurance choices you make minimize any risks and losses that may occur in your business.
Professional Liability Insurance/Errors & Omissions Coverage
If your firm provides a service rather than a product, you probably have a professional liability exposure. Examples of some industries that have this exposure include medical, legal, accounting, real estate, computer software development, and engineering firms. General liability does not provide professional liability coverage. A separate policy is required, although some miscellaneous industries such as pharmacy and optometry are provided coverage under the standard general liability policy. Professional liability policies are usually written on a “claims made” form rather than an “occurrence form” as are most general liability policies. NOTE: A commercial umbrella policy does not provide excess limits over a professional liability policy.
An umbrella policy provides excess limits over any underlying policies that are scheduled on the umbrella policy declarations page. An umbrella policy differs from an excess liability policy in that the umbrella overlays all of your underlying policies. An excess liability policy is designed to provide higher limits for only a specifically identified policy. Most umbrella policies are classified as "following form". This means that the umbrella follows the form of the underlying policies. Therefore, anything that is excluded in an underlying policy will be excluded in the umbrella. For example, most general liability policies exclude professional liability exposures. Therefore, the umbrella would also exclude this coverage. NOTE: Always attempt to maintain concurrent renewal dates with your umbrella and underlying insurance. A gap in coverage could occur, if these renewal dates are not synonymous.
Your firm needs coverage to protect itself from bodily injury and property damage claims. Standardized sets of general liability codes have been developed that most insurance carriers use to rate your general liability premium. These codes give a basic description of your operations. For example, a water and sewer main construction company would have one code while a law firm would have another. Usually, these codes are rated on payroll, sales, or square footage of your of-fice. Keep in mind that some carriers have developed their own set of GL codes to provide them-selves a competitive advantage in specific industries. There are two parts to general liability: premises and operations coverage and products and completed operations coverage. Premises claims occur on your premises (for example, a person slips and falls in your store), while an opera-tions claim refers to an accident that occurs during the course of your work (for example, your salesman knocks an expensive vase off a customer’s desk while he is attempting to setup a product demonstration). Product liability claims refer to alleged injuries that occur because your product is inherently unsafe (silicon breast implants are an example). Complete operations claims refer to accidents that occur after you have completed your work. For example, an electrician makes an error in wiring a panel. A month later, an overload occurs because of the error causing a fire. En-gineering design and build firms will often find that product liability and completed operations are excluded under their general liability policy as it is sometimes difficult to distinguish between a completed operations claim and a professional liability claim.
This policy provides coverage for on-the-job injuries to your employees. Your firm is pro-tected against other litigation related to the injury with this coverage in force. Workers’ compensa-tion is rated similarly to general liability in that each class of employees is identified by a unique code that should correspond with your general liability codes. Each code has a specific rate per $100 of payroll and is subject to audit at expiration.
Your commercial property includes among other things: buildings, office equipment, manu-facturing equipment, inventory, and work in progress. Always try to get the broadest coverage possible. Many carriers no longer use "all risk" terminology as property policies have a number of exclusions such as flood and earthquake. Quite a number of carriers are now offering endorse-ments that offer a broad range of additional coverages. Be sure to request selling price coverage for your finished goods in inventory. In a loss, these goods would then be covered at their sales price as opposed to the manufacturing cost. Property insurance only covers property on your premises. If an employee is taking equipment off site or if you are storing inventory at a job site, these items must be covered on a separate policy.
Business Automobile Policy
Vehicles titled in a company name must be covered under a business auto policy.
Commercial autos are rated on the basis of their use and range of operation. Many policies do not provide automatic coverage for newly acquired vehicles so be certain that you schedule all vehicles as they are acquired. Even if you don't have any company owned vehicles, it is wise to obtain a policy that provides Hired and Nonowned liability coverage. This policy offers protection to your firm in the event an employee is involved in an accident while driving his or her vehicle on com-pany time. For example, a salesperson could be involved in an accident that could ultimately lead to a suit against your firm. The employee's coverage is primary. The business auto policy only protects the firm and does not offer any coverage for the employee's vehicle. NOTE: Schedule all trailers on your business auto policy. Otherwise, there may be no coverage should a trailer come loose from one of your units and cause an accident.
Business Income Policy
This coverage acts like a disability income policy for your firm. The three most common forms of this coverage are 1) loss of rents, 2) business interruption, and 3) extra expense. Loss of rents coverage replaces the lost rental income from your damaged or destroyed property. For ex-ample, if three buildings in the apartment complex you own burn, this policy would replace your loss of rental income while the structures are being reconstructed. Business interruption replaces lost income if you are unable to produce goods for sale as your site is being reconstructed. An ex-tended period of indemnity can be obtained to help replace income after operations have resumed as it may be difficult to immediately return to pre-accident revenue levels. Extra expense coverage provides cash to enable a firm to reestablish its operations in a more rapid fashion. For example, if you have a service business that does not require large amounts of fixed equipment to operate, with some extra money you could rent temporary space, computer equipment, and a telephone sys-tem. In a short amount of time, your firm can be up and running.
Building Ordinance Coverage
Building ordinance coverage is overlooked by many insureds and insurance agents. If you own your own building, this is an extremely important coverage. In the event of significant dam-age to your building, local governing authorities may require you to meet all current building ordi-nances prior to receiving a new certificate of occupancy. Simply meeting new fire codes and ADA requirements could be extremely costly.
Employment Practices Liability Insurance
This liability exposure is generally excluded in your general liability policy. EPL policies provide coverage for sexual harassment, wrongful termination, discrimination, violations of parts of the Americans with Disabilities Act, and related issues. Companies with multiple locations and multiple shifts should consider this coverage. Premiums have dropped significantly since the cov-erage first became available a few years ago.
Boiler and Machinery
Not too many companies have boilers, but everyone has heating and air conditioning as well as electric systems. This coverage protects you from failures in these systems. Even if you are only renting a space, you may be responsible for such items in your lease. This is an inexpen-sive coverage that is often overlooked.
This is a generic term for a wide range of miscellaneous policies that cover specific circum-stances. These policies are sometimes called floater policies and generally cover goods that are "floating" between locations. For example, cargo insurance is available to cover goods shipped on a common carrier. Exhibition floaters cover your demonstration equipment set up at a trade show. Salesmen's equipment can cover laptop computers used in the field by your staff.
Directors & Officers Liability
D&O provides coverage for claims against company directors alleging mismanagement of a firm. As a member of a board, directors and officers are personally liable for claims against the board. Firms normally indemnify board members; however, if the company is unable to fulfill its indemnification, the D&O policy will protect the members. D&O policies now offer extremely broad coverages. Employment Practice Liability can be included which protects you from suits alleging discrimination, wrongful termination, and sexual harassment. Coverage for Securities Ex-change Commission (SEC) violations can be included to cover stock offerings and private place-ments. Retroactive coverage to the date of incorporation of the firm is often available. NOTE: D&O covers individual board members, not the actual entity firm. If you have the potential to lose a suit, it is important to discuss the allocation of the settlement beforehand. The insurance company may want to allocate as much as possible against the firm to reduce their expense. Board members will pursue the alternative course of action. There are now policies available that include entity coverage. Additionally, some jurisdictions now limit allocations against an entity.
A bond guarantees the fulfillment of a legal obligation. It’s a three-party agreement or promise where a third party (surety company) guarantees to a second party (obligee or owner) the payment or successful performance of the first party (principal). A bond is not an insurance policy calculated to cover losses. Rather, a bond is an extension of credit with the assumption that there will be no loss. The bond premium paid to the surety covers only the underwriting expenses of the surety company. When losses occur, they have a significant impact on the surety company's financial results. There are two typical types of bonds: surety and fidelity.
If, by becoming self-employed you lose your employer-sponsored health insurance coverage, you have other alternatives. You can buy an individual health plan from a private insurance company. In Pennsylvania, as in most other states, you have limited guaranteed access to individual health insurance. Whether you can buy an individual health plan may depend on your health status, the kind of coverage you want to buy, and other circumstances. Also, there are some alternatives to individual health insurance coverage such as COBRA or conversion policies.
Replacing health insurance for yourself and your family can be expensive and should be calculated into your start-up and operating expenses. If you are self-employed and buy your own health insurance, you are eligible to deduct an increasing percentage of the cost of your premium from your federal income tax. This deduction is 60% for 2000 and 2001, 70% for 2002, and 100% in 2003 and thereafter.