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Safeguarding your business: expert advice on protecting your company from fire, theft and other disasters.

The very act of forming your own business entails risk. The rewards of prosperity and self-fulfillment must be balanced against the risks of financial loss and personal dissatisfaction. There are no sure things in business. Still, such factors as planning, experience, adequate financing, managerial expertise, creativity, and a willingness to work hard can swing the odds in your favor. For these to be effective, though, you need an ongoing program of risk management.

Suppose any of the following should happen:

* Your building is damaged by fire.

* A customer is hurt in your store.

* An employee steals merchandise.

* A car drives through your store window.

* Your accountant embezzles a large sum of money.

* An employee is injured on the job.

* Your store is burglarized.

* Your business is suffering because of shoplifting.

* A partner dies.

What would you do? A likely answer is, "call my insurance agent." But relying on insurance is only one of the ways to deal with these hazards.

Risk Management

An effective program of risk management enables you to cope with risks by eliminating them, reducing them, accepting them, or transferring them. These methods can be used singly or in combination, depending on the risk as well as on your own circumstances.

Eliminating the risk. Certain risks can be entirely eliminated. Among these are the risk of employee injury because of substandard materials or unsafe equipment, the risk of customer injury because of a hazardous store layout and the risk of fire because of faulty wiring. There's no excuse for allowing risks that are solely the result of negligence or indifference. One who persists in doing so could wind up not only financially liable but criminally liable as well. And it's not enough merely to carry insurance. Gross negligence, or the flagrant violation of health and safety standards, is sufficient ground for an insurance carrier to void your policy.

Reducing the risks. It would be impossible for you to eliminate every business risk, even if you were aware of every one. Your best bet, then, is to reduce the risks. Close evaluation of your workplace, workers, and customers will enable you to take procautionary actions so as to reduce most of your business risks.

The risk of falling off a ladder can't be eliminated; but the use of safety ladders, with guard rails on either side, can reduce the risk. Keeping all merchandise boxes, cleaning supplies, tools, and electrical cords clear of customer walkways reduces the risk of having customers trip and injure themselves. The risks of breakage and theft can be reduced by displaying merchandise in locked cases. Electronic tags on morchandise, alert salespeople, closed circuit cameras, burglar alarms and security guards can also help you to combat theft.

Accepting the risk. Self-insurance, a method whereby you create your own contingency fund to pay for whatever business losses might arise, is another way of coping with risk. This enables a business to protect itself while at the same time avoiding payment of insurance premiums. Unfortunately, the protection this method provides is usually inadequate. Given current high replacement costs for buildings, equipment, furniture, and fixtures, as well as the staggering amounts of some judgment claims in liability cases, a small business that relies solely on self-insurance could easily be wiped out.

A policy of accepting the risk might be applied, however, when the risk cannot be eliminated and buying outside insurance is not profitable. For instance, if your losses from shoplifting are less than the insurance premiums to protect yourself against it, accepting the losses makes more sense. Furthermore, even when you do carry insurance against a particular type of risk, part of the risk usually must be accepted because of the policy's deductible provision.

Transferring the risk. The purchase of coverage from an insurance company enables businesses to transfer their risks. In exchange for a fee, the insurance company accepts the risks that the business wishes to be protected against. In effect, when you buy insurance, you arrange to absorb small periodic losses (premiums) rather than a large uncertain loss. If your property is to be adequately protected and large damage claims that result from public liability or employee injury suits are to be avoided, insurance is a necessity.

Types of Insurance Coverage

Fire insurance. In a standard fire insurance policy your building, the property contained within it, and property temporarily removed from it because of fire are protected against damage inflicted by fire or lightning. This coverage does not extend to accounting records, bills, deeds, money, securities, or manuscripts. Nor are you protected against such hazards as windstorms, hail, smoke, explosions, vandalism, automatic sprinkler leakage, and malicious mischief. To guard excluded valuables and protect yourself against loss from these hazards, you must obtain additional coverage. Neither fire resulting from war nor actions taken under the orders of a civil authority are covered by insurance.

Depending on the terms of your policy, compensation may be made in any of three ways: (1) the insurance carrier may pay you the current cash value of the damaged property, (2) the property may be repaired or replaced, or (3) the property may be taken over by the insurer, who then reimburses you at its appraised value.

Most fire insurance policies are written for a three-year period, and both you and the insurer have the right to cancel. You may cancel your policy at any time. The insurer, however, must give you five days' notice before canceling. In either event, you will be reimbursed for any premiums that have been paid in advance. But if you are the one to cancel, a penalty as set forth in your policy may be assessed against your refund.

In order to keep your fire insurance policy valid, it's your responsibility to use all reasonable means to protect the insured property both before and after a fire. If you knowingly increase the fire hazard - by renting part of your building to a fireworks manufacturer, for example - this could void your policy. Hiding pertinent information from the insurer, or leaving your building unoccupied for more than 60 days, is also cause for voiding your policy.

Should it become necessary for you to file an insurance claim, you will be required to provide the insurance company with a complete inventory list, detailing the types, quantities, and values of the damaged property. Unless an extension is granted, you generally have sixty days in which to do this.

Liability insurance. As the operator of your own business, you are responsible for the safety of your employees and customers. If a customer slips on a wet floor, you may be liable for damages. You're also responsible for the products or services you sell. For instance, the owner of a garage could be held liable for using a car wax that strips the paint off a customer's car, or if a mechanic forgets to set the hand brake on a car and it rolls into the street and causes an accident. In the first case, the garage owner might have to cover the cost of a new paint job. In the second, there's no telling how much the cost might be. Was the car damaged? Were other cars damaged? Was anyone injured in the accident? These are just the physical damages for which the garage owner may be liable. What about the mental anguish of the parties involved in the accident? By the time all the costs have been added in, the entire assets of the garage could be wiped out.

Most liability policies cover losses stemming from bodily injury or property damage claims, expenses for medical services required at the time of the accident, investigation, and court costs.

The actual amount that your policy will pay depends on both the limit per accident and the limit per person provided for in it. For example, if your policy has a per-accident limit of $400,000 and a per-person limit of $100,000, and if one person receives a $300,000 judgment against you, the insurance company will pay only $100,000. This means you are responsible for paying the remaining $200,000 even though it is within your per-accident limit. The guide word here is caution. Make sure you understand and agree with any limitations in your policy. If the limit is $100,000 per person, is that adequate coverage?

If an accident does occur, even if it seems minor, contact your insurance agent immediately. This enables the insurance company to begin its investigation while the relevant information is readily available. Failure to notify the company can void your policy.

Automobile insurance. If you plan to use one or more cars or trucks in your business, automobile insurance is a must. Coverage can be provided to protect you against bodily injury claims, property damage claims, medical payments, uninsured motorist damages, damage to your vehicles, and towing costs.

The amount of coverage you need and the costs of an automobile insurance policy depend on the number of cars or trucks being insured; their value, the kinds of driving that will be done (making deliveries, hauling equipment driving clients around); and your location. When five or more motor vehicles are used in your business, you can generally insure them under a low-cost fleet policy. As far as deductibles go, the higher they are, the lower your premiums.

You may find that automobile insurance is a good buy even if you don't plan to use any motor vehicles in your business. This is because you could be held liable for employees or subcontractors who operate their own vehicles, or those of customers, while on company business.

Workers' compensation insurance. Common law requires that an employer (1) provide employees with a safe place to work, (2) hire competent co-workers, (3) provide safe tools, and (4) warn employees of existing danger. An employer who fails to do so is liable for damages, including claims for the on-the-job injury and occupational diseases. Sometimes payments can be required for the remainder of the disabled worker's life.

Under workers' compensation insurance, the insurer pays all sums you are legally required to pay a claimant. One way to save money on this insurance is to make sure your employees are properly classified. Since rates vary with the degree of hazard associated with each occupational category, improperly classifying an employee in a high-risk occupation raises your rates. Another way to save money is to use safety measures that will lower your accident rate and thereby reduce premiums.

Business interruption insurance. Many business owners fail to purchase business interruption insurance because they don't think they need it. If a building burns down, they think a standard fire insurance policy will suffice. But what about the loss of business income during the months it takes to rebuild? What about the expenses that continue to mount up even though your doors are closed - taxes, interest on loans, salaries, rents, utilities? Yet not until it is too late does many a business owner realize that fire insurance alone isn't enough.

Only business interruption insurance covers your fixed expenses and expected profits during the time your business is closed down. And make sure that the policy is written to provide coverage in the event that your business isn't totally shut down, but is seriously disrupted. Some policies pay off only in the event of a total shutdown. You should also remember that an indirect peril could force you to suspend operations as well. What if an important supplier's or customer's plant burned down, temporarily interrupting your business? What if your power, water, or phone service was disrupted for a spell? Protection against these hazards can be written into your business interruption policy, but you have to ask for it.

Glass insurance. Although it may seem insignificant, glass insurance is something most businesses should have. The costs of replacing broken plate glass windows, panels, doors, signs, and display cases are so high that you can't afford to be without it. Furthermore, delays in making the replacement can result in vandalism or theft, which in turn results in additional property loss.

A glass insurance policy covers the cost not only of replacing the glass itself, but of redoing any letter or ornamentation on the glass, installing the glass (including temporary glass or boards, if needed), and repairing any frame damage. The only exclusions in the standard all-risk glass insurance policy are for glass damage from fire or war. And, in the case of fire, your fire insurance policy provides coverage.

Fidelity bonds. Most new business owners are unaware that, on the average, thefts by employees far surpass business losses from burglary, robbery, and shoplifting. [See, Small Business News, June 1993.] The accountant who embezzles thousands of dollars and then goes to Acapulco and the salesclerk who dips into the cash drawer come readily to mind. Less obvious examples include putting fictitious employees on the payroll and pocketing their paychecks; ringing up lower prices on merchandise sold to friends or accomplices; stealing merchandise, equipment, or supplies; misappropriating the company property for personal use; lying on expense vouchers; and falsifying time cards.

Unless you or members of your immediate family handle all phases of your business operation, you should obtain fidelity bond protection. This is available in three formats: individual bonds, schedule bonds and blanket bonds. Individual bonds cover theft by a specific named individual. Schedule bonds list every name or position to be covered. Blanket bonds, the most encompassing of the three, cover all employees without reference to individual names or positions.

Before an employee is bonded, the insurance company issuing the bond conducts a character investigation to determine whether anything is known of past acts of dishonesty. Then, if the employee is deemed bondable, coverage is provided. If a prospective employee refuses to be bonded, this could be a tip-off that the applicant has something to hide.

Crime insurance. This type of insurance covers you against business losses resulting from the criminal activities of people who aren't associated with your business. The three categories of crime insurance are burglary insurance, robbery insurance and comprehensive insurance.

1. Burglary insurance protects your safes and inventory against thefts in which there is evidence of forcible entry. This means that, if a thief enters through an unlocked door or window without disturbing the premises, your burglary policy does not cover any losses. Nor does the standard burglary policy protect accounting records, manuscripts, or certain valuables, such as furs, which are kept in display windows. To cover these, additional insurance is necessary. Besides protecting you against losses from stolen property, burglary insurance provides coverage for damage sustained during the burglary.

2. Robbery differs from burglary in that it involves face-to-face confrontation. The robber actually uses force, or the threat of violence, to take property from the person guarding it. A robbery insurance policy covers the money, property, or securities taken, as well as property damage that occurs during the robbery. Another feature of this policy is that it isn't limited to robberies that take place inside your building. Thus if you are robbed while making a delivery, you are covered.

3. Comprehensive insurance is popular because, in addition to protecting you against burglary and robbery, it also protects against a variety of other hazards, including counterfeit money and forged checks. For instance, deception does not constitute robbery. If a con artist tricks you or an employee into parting with property, no force or threat of violence is involved. Therefore, it isn't a robbery, and unless you have a comprehensive policy, you aren't covered. Coverage is also provided against the thief who gains entry to your business without any apparent use of force.

Personal insurance. Just as there's a need to insure your property against loss, there's an equal need to insure both yourself and your employees. Group health and life insurance, a retirement plan, and key personnel insurance all help to do this. The need for these may seem a long way off, but more and more small businesses are offering an employee benefits package that includes health and life insurance as a way of retaining valued personnel. If you decide to incorporate a retirement plan too, there's another advantage. Contributions made to the plan for yourself and employees are deductible from your federal income tax.

Key personnel insurance, long a staple in the insurance portfolio of major corporations, can be just as necessary for the small business owner. Could your business survive the death or disability of a partner or a key employee? If not, key personnel insurance can at least ease the loss. The proceeds from the insurance are exempt from income tax and payable directly to the business. The policy itself has a cash value and may be used as loan collateral.
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:excerpt from book 'How to Start, Run, and Stay in Business'
Author:Kishel, Patricia Gunter
Publication:Black Enterprise
Date:Jul 1, 1993
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