Getting Bonded and Insured to Protect Your Business

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1 Getting Bonded and Insured to Protect Your Business

2 Must be bonded and insured. If you operate a business, you re no doubt familiar with this phrase. For many entrepreneurs, it raises a number of questions: What is the difference between the two? Must I be both bonded and insured to operate my business? How much insurance do I need? This guide presents facts about surety bonds and business insurance, plus tips to help you to make the right choice when looking for a provider. What is a Surety Bond? A surety bond is a type of business insurance that guarantees performance and completion of a contract. The Small Business Association (SBA) explains it this way: An obligee (or business) seeks a principal (or contractor) to fulfill a contract. To insure the obligee a successful delivery, the principal buys a surety bond so the surety company becomes responsible for its obligations. If the principal defaults, the surety company can either find another principal to fulfill the contract or compensate the obligee s financial losses. In other words, the surety assures a successful contract because it assumes all financial obligations if the principal does not deliver. There are three types of surety bonds: A bid bond guarantees that a contract bidder, if awarded the contract, will enter the contract and supply the required payment and performance bonds. The payment bond guarantees that subcontractors and suppliers will receive payment for work they perform under the contract. A performance bond guarantees that the contractor will perform the contract in accordance with its terms and conditions. (The term final bond is sometimes applied to payment bond, performance bond or both.)

3 Does My Business Need a Surety Bond? If your business is a contractor on any Federal construction project valued at $100,000 or more, you will be required to have a surety bond. Most state and municipal governments, as well as many private entities, have similar requirements. Having a surety bond can be vital to your business. Whether you are a service provider or a supplier, you may encounter prospective clients who refuse to work with your business unless it is bonded and insured. How Do I Obtain a Surety Bond? You can acquire a surety bond through an independent agent or a surety company. As a small business owner, you can work with the Office of Surety Guarantees to guarantee your surety bond. The SBA recommends the following steps when purchasing a surety bond: Find an agent or surety company. You can work directly with a surety company or with an approved agent. An agent has power of attorney to issue bonds on behalf of a surety. Submit required forms. If you are acquiring a bond through the SBA, you will need to complete a couple of forms about your personal and business financial status, bank information, and business plan, among others. You can file electronically or by paper application. Wait for SBA processing. After you submit your forms, the SBA will conduct a process to decide whether to approve your application. Generally, it takes only three to five days for an SBA Area Office to process a properly completed application for an SBA guarantee. Your ability to fulfill the contract and your performance capacity are important criteria for winning approval.

4 Important Facts about Business Insurance The laws in your state will determine which types of insurance you are required to have. In most states it is mandatory for employers to carry workers' compensation insurance, unemployment insurance, and state disability insurance. Your state may require you to have insurance to cover specific business activities. For example, if you own a vehicle that you use for business purposes, you will likely need to purchase commercial auto insurance. Additionally, your financial lender or your investors may require you to purchase fire, flood, business interruption, life or other types of insurance to protect their investments. Types of Business Insurance Insurance coverage is offered for every possible risk your business may face. The price and the amount of coverage provided with any given policy will vary among insurers. You should talk with your insurance agent or broker about your particular business risks and the types of insurance available. Your agency can advise you regarding the specific types of insurance you should consider. Below is a list of the most common categories of business insurance. General Liability Insurance If your business is an LLC or a corporation, your personal assets are safeguarded from business liabilities. Neither business structure, however, is a replacement for liability insurance, which protects your business from losses by providing coverage for legal entanglements due to accidents, injuries and claims of negligence. This type of policy will also protect your business against the costs incurred when defending lawsuits. It will cover payments resulting from incidents involving property damage, bodily injury,

5 medical expenses, libel and slander as well as judgments or settlement bonds required during an appeal procedure. Umbrella (Supplemental Liability) Businesses may incur various forms of liability in conducting their normal activities. One of the most common types is product liability, which may be incurred when a customer suffers harm from using the business product. There are many other types of liability, which are frequently related to specific industries. Liability law is constantly changing. An analysis of your liability insurance needs by a competent professional is vital in determining an adequate and appropriate level of protection for your business. Product Liability Insurance Businesses involved with the manufacture, wholesaling, distribution and retailing of a product may be liable for its safety. Product liability insurance protects against financial loss resulting from a defective product that causes bodily harm or injury. The amount of insurance you should purchase depends on the products you deal with. A clothing store, for example, would have far less risk than a small appliance store. Professional Liability / Errors Omissions (EO) Companies that provide services should consider purchasing professional liability insurance (also known as errors and omissions insurance). This type of liability coverage protects your business against malpractice, errors and negligence when providing services to your clients. Depending on your profession, you may be required by your state government to carry such a policy. Physicians, for example, are required to purchase malpractice insurance in order to practice in some states.

6 Business Automobile Whether you use your own vehicle for business purposes or your company has a fleet of vehicles, it s important to be properly insured. To ensure that you and your business are protected from risk, you will need to have liability coverage for bodily injury and property damage to others, as well as coverage for any medical costs resulting from personal injury to the driver and passengers. Directors Officers (DO) Insurance This protects a business, its directors and officers from lawsuits by current, prospective and former employees. Any claims on the policy are paid to the directors and officers of a company, or to the organization itself, as indemnifications for losses due to legal action for alleged wrongful acts in their capacity as directors and officers. The policy may advance funds to cover the costs of legal defence in such cases. Business Interruption While property insurance may pay enough to replace damaged or destroyed equipment or buildings, how will you pay costs such as taxes, utilities and other continuing expenses during the period between when the damage occurs and when the property is replaced? Business Interruption (or business income ) insurance can provide sufficient funds to pay your fixed expenses during a period of time when your business is not operational. Key Person Life If you or any other individual are so critical to your business that it could not continue in the event of illness or death, you should consider key person insurance. This type of policy is frequently required by banks or government loan programs. It also can be used to provide continuity in operations during a period of ownership transition caused by the death, incapacitation or absence due to a Title 10 military activation of an owner or other key employee.

7 Commercial Property Insurance Property insurance covers everything pertaining to the damage or loss of company property due to a wide variety of occurrences, including vandalism, fire, smoke, wind and hail storms. The term "property, in this instance, can refer to buildings, computers, company data, money, and lost income. Property insurance policies are available in two basic forms: All-risk policies that cover a wide range of incidents and perils, with the exception of those noted in the policy. All-risk policies cover risks commonly faced by the average small business. Peril-specific policies that protect against losses from only the perils specified in the policy. Examples of peril-specific insurance include fire, flood, crime and business interruption policies. Peril-specific policies are typically obtained when there exists a greater possibility of peril in a certain area. Your insurance agent or broker can help you determine the type of business property insurance best suited for your company. Home Based Business Insurance Your homeowners' insurance most likely does not cover losses associated with a home based business. However, depending on the risks to your business, you may be able to add riders to your homeowners' policy. Riders can cover normal business risks such as property damage. Such coverage may be limited however, so you might need to purchase additional policies to cover risks such as general and professional liability. Insurance Required for Employers Companies with employees are required by law to purchase certain types of insurance. These include workers' compensation insurance, unemployment insurance and, depending on where the business is located, disability insurance.

8 Workers' Compensation Insurance Companies that have employees are required to carry workers' compensation insurance coverage, either on a self-insured basis, through a commercial carrier, or through the state Workers' Compensation Insurance program. Your state's Workers' Compensation Office will be able to give you specific information regarding the requirements in your state. Unemployment Insurance Tax Businesses with employees are also required to pay unemployment insurance taxes under certain conditions. If your business is required to pay these taxes, you must register your business with your state's workforce agency. Disability Insurance Some states require employers to provide partial wage replacement insurance coverage to their eligible employees for non-work related sickness or injury. Currently, if your employees are located in California, Hawaii, New Jersey, New York, Puerto Rico or Rhode Island, you are required to purchase disability insurance. Potential Drawbacks Cost-Protecting your assets always makes good business sense, but insurance is expensive, and fitting adequate coverage into you budget can be challenging. Being under-insured-in an effort to cut your insurance costs, you could end up with inadequate coverage, leaving your business vulnerable. Being over-insured-conversely, you could miscalculate your insurance requirements and end up paying for more insurance than your business really needs, or for a type of insurance your business does not need.

9 Solution: Any of the above scenarios can be avoided by doing your research and carefully assessing your true needs. Research is also important when choosing a business insurance provider; the right provider will help you determine exactly the type and amount of insurance your business requires. A trusted and reputable insurance company will not leave you underinsured, nor will they attempt to sell you more insurance than you really need. Top Questions to Ask When Comparing Providers How much experience does this company have? A typical tendency among business owners is to try to obtain business insurance through their individual insurance provider. However, your personal insurance company may not have the expertise required to adequately care for your business liability insurance needs. Does the company offer adequate liability insurance coverage? Make sure the agent you choose has experience providing insurance for your type of business. Such a provider will be familiar with the needs of businesses like yours and can help you accurately assess your needs to ensure your business is not left vulnerable to any unnecessary risk. Can the provider adequately insure your assets? You have likely invested in property, goods and equipment for your business. Without adequate coverage of your assets, your investment could be vulnerable to a wide variety of risks, including theft, damage and other threats. Your liability policy will not protect you from this type of loss. A good insurance provider will help you accurately determine the value of your assets and advise you regarding the amount of coverage you will need. How does the company measure up in terms of scalability? Be sure to find a provider that will be able to adapt to the needs of your company as it grows. Consider your expectations for growth during the first five years of your business. For example, will you need additional insurance to cover new products or services you may offer in the future?

10 Is the provider both reliable and reputable? Will the business insurance company operate with your best interests in mind? Check with the Better Business Bureau, and talk to owners and managers of businesses similar to yours to get their recommendations. Making Your Final Selection The SBA.gov website offers the following advice: When looking for a good insurance company, ensure that you choose one that will provide an instant commercial insurance policy that is tailor-made for your business. A good insurance company will guide you into a policy that is affordable and effective. In addition, research and ensure that they cover small businesses and have your best interests at heart. InsideUp can help you find the right insurance provider for your business, with free highly competitive quotes from top providers. Glossary of Key Terms Actual Cash Value (ACV) Coverage for the dollar amount needed to repair or replace damaged property minus depreciation. Blanket Insurance Coverage for more than one type of property at a single location or similar types of properties at multiple locations. Business Income (also called "Business Interruption") Insurance Coverage for lost net income and continuing expenses for a specified period of time, as a result of a cessation in normal business activities due to a covered loss.

11 Business Owner's Policy (BOP) A package policy that combines property, general liability, business income and other types of coverages into a single policy. Coinsurance (for property insurance) A clause in the property policy requiring the policyholder to carry an amount of insurance equal to a specified percentage of the value of the property. Compliance will result in full payment on a covered loss minus the deductible. Failure to comply will result in a penalty for underinsurance. Deductible A dollar amount, usually a predetermined figure (i.e., $1,000) or a percentage (i.e., 2% of the value of the property) for which the policyholder must pay before the insurance company will pay for a covered loss. Endorsement A provision attached to an insurance policy that amends the policy's original terms. Exclusion A provision in a policy that eliminates coverage for certain losses, people, locations or conditions. Liability Insurance Coverage for covered claims of bodily injury or property damage for which the policyholder is legally liable. Medical Payments The specified amount for which the insurance company agrees to reimburse the policyholder for the medical expenses for bodily injury of a third-party. Medical expenses usually are paid regardless of fault. Named-Peril Policy An insurance policy that only covers losses resulting from perils specifically named in the policy.

12 Peril An event or condition that causes a loss (e.g., fire, windstorm, theft, etc.). Professional Liability Insurance Coverage for professionals as determined by their respective industry's expected standard of care for claims of negligence, errors or omissions causing damages to a client. Replacement Cost Coverage for the dollar amount needed to repair or replace damaged property without deducting for depreciation. Special (or "Open") Peril policy An insurance policy that covers losses resulting from any peril not specifically excluded in the policy. Umbrella Coverage for losses above the limit of the underlying policy. Umbrella policies may also broaden coverage for losses not normally covered in the underlying policy.

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