Business Insurance (Simply) Explained

Posted by Southwest Beverages on 3/25/2015
Early man initiated the first form of insurance by pooling the human resources of their communities together to assist their neighbors in searching for lost herds, reconstructing damaged shelters destroyed by fire, wind or floods or by providing protection from vandals. This form of insurance is referred to by historians as “social” insurance, which remains prevalent in various parts of the world today. 

The first form of “business” insurance dealing with assets of value was practiced by the Chinese in 2000-3000 BC, when merchants traveling across treacherous bodies of land and water would redistribute their merchandise among other merchants to minimize their risk of loss. By 1000 BC the concept of charging money in exchange for insuring a merchant’s goods was created. While merchants continued to minimize their risk of lost by redistributing their goods among merchants, each merchant was now being charge their respective proportion of the insurers cost of insuring the “bundled” goods. This basic form of “business” insurance remained in place until the 14th century when the concept of separate insurance contracts underwritten by wealthy land holders came into being. As the United Kingdom became the crossroads of marine traffic during and following the Renaissance movement in Europe additional forms of “business” insurance were created by sophisticated carriers (e.g. Edward Lloyd-Lloyd’s of London). Many of today’s insurance concepts evolved from these sophisticated carriers. 

Today the mere mention of insurance to the small business owner sends shivers up their spine, not because they don’t understand the concept of insurance, but because of how historically insurance salesman have presented it to them-a confusing, exhaustive number of policies many, if not all, of which they did not need. While there are literally a “non-exhaustive” list of various types of insurance to cover every exposure from every peril possible, for the sake of clarity, this blog groups the various types of insurance into seven (7) broad categories for ease of understanding. 

1. Business Owners Policy 
A Business Owners Policy (BOP) is similar to a homeowner’s policy in that it: (a) insures the small business owners property, (b) protects them against certain liabilities, and (c) permits them to extend coverage to only those additional perils they wish to guard against, which contains varying amounts of limitations and deductibles. In short, it is a “one-stop shopping policy” reflecting, “you get what you pay for” coverage. Specifically, a typical BOP covers the following types of insurance, each subject to certain limitations and restrictions: 

• Property-buildings, machinery & equipment, inventory. 

• Liability or Casualty-covers certain bodily injuries or property damage sustained by other employees, customers or outside third parties who use the company’s products, lawsuits arising from accidents or other offensives such as slander, copyright infringement, etc. 

• Crime-covers employee embezzlement and theft, burglaries resulting in lost money and/or securities. 

• Auto-Covers rented and borrowed vehicles. 

In addition, most small business owners make Business Interruption Insurance a part of their BOP. Business Interruption Insurance covers lost profits and certain continuing expenses of the business (payroll, commissions, overheads-rent, utility bills, etc.) resulting from a event that caused the business to either shut down for a period of time or curtail its operations for a period of time. 

There are four (4) specific criteria for a small to mid-size company (sole proprietorship, partnership, corporation or limited liability company) to qualify for a BOP: 

       a. Size of Premises-Businesses meeting any one of the following criteria: 

            i. Annual revenues of $3.0 million or less, 
           ii. Renting 25,000 square feet or less, 
          iii. Owning a building with less than 100,000 square feet. 

       b. Required Limits of Liability

Generally coverage is low, but can be increased for “a price”. 

       c. Type of Business

Business falling into anyone of the following classes: Contractors, restaurants, retail operations, office operations, service companies, wholesale distributors and apartment complexes. 

       d. Extent of Offsite Activity

Generally speaking BOP cover predominantly “on site” or “on premise” operations and are usually only written to insure incidental operations away from the designated premises. 

Companies which do not qualify to purchase a BOP (i.e.-all public companies, large private companies or small to mid size private companies that are considered high risk) look to customize their insurance needs using one or more of the following types of insurance (non-exhaustive). 

2. Property Insurance 

a. Fire Insurance

    There are four (4) areas of coverage standard to 99 % of all fire policies. 

          i. Dwelling

The primary property insured. 

         ii. Other Structures

Dwellings on the property, but not directly attached to the primary dwelling. i.e. Shed, detachable garage, etc. 

        iii. Personal Property

Personal property in the dwelling or Other Structure at the time of the fire. It is a good idea to video ones property, dwellings and contents and store the video offsite. 

        iv. Loss of Use or Additional Living Expenses

Covers expenses necessary for the insured to move out and live elsewhere while the property is being repaired or reconstructed. 

NOTE: Additional coverage may be obtained though endorsements, one of which should be code upgrade coverage. This coverage is designed to protect the insured against additional construction costs to the original dwelling that might be required as a result of new building codes or changes/modifications to existing building codes from the time the original building was constructed. 

b. Flood Insurance

Protects property against damage caused by flooding. Flood insurance covers the premises and its contents caused by water seeping into the bottom of the premises (water entering the premises through other entry points of the premises is usually covered under the insured property policy. The type of insurance coverage obtained is a function of where or not your property is located in a “flood risk zone”. 

          i. National Flood Insurance Program (NFIP)

Small business owners and home owners living in a flood risk zone that obtained federally backed mortgages are required to obtain flood insurance. Flood insurance zones are determined by the Federal Emergency Management Agency (FEMA). Businesses and home owners located within a flood insurance zone are eligible to participate in the National Flood Insurance Program, which required them to purchase flood insurance at a low cost; coverage is up to $250,000 for the structure and up to $100,000 for damage caused to the structures contents. Coverage does not cover basement finishes (wallpaper, carpets, etc.) or personal belongings kept in the basement. All insurance companies offering flood insurance in a flood risk zone must do so at the same premium rate. 

       ii. Excess Flood Coverage

For those businesses operating in a flood risk zone and participating in the NFIP, or for business operating in a low to moderate flood risk zone, they may purchase excess flood coverage that is coverage in excess of the maximum $250,000 structure/$100,000 personal belongings amounts covered under the NFIP. 

      iii. Primary Flood Insurance Coverage

Of course any business operating outside a low to moderate to high flood risk zone may purchase their own private primary flood insurance. According to Allstate, in recent years approximately 25 % of all flood insurance claims came from area not considered high risk. Example: A restaurant operates it business at the foot of a hill. A rain storm one evening flooded the restaurant. Upon investigation it was determined the city paved over the sewer drains in anticipation of a bike race the following day. Because the restaurant owner did not have flood coverage he could not make a direct claim under his policy. He was however able to recover (be it-a few years later) the full cost of all damage sustained to his restaurant from the city. 

c. Earthquake Insurance

Can only be purchased as an endorsement to a property policy. This form of insurance coverage offers protection to a buildings structure and its contents damaged as a result of direct damage caused by either an earthquake or a volcanic eruption. Earthquakes or volcanic eruptions occurring 72 hours apart are treated as separate events and are subject to separate claims. Earthquake insurance always has a high deductible and excludes losses resulting from tidal waves, flood, fire and explosions. 

d. Windstorm Insurance

Can be purchased as an endorsement to most standard property insurance policies. It covers damage to dwellings and property contained in the building resulting from damage caused by hurricanes. 

e. Marine Insurance

Covers damage to vehicles of air, land and waterways transport and their respective goods in transit. Marine insurance is subdivided into two broad areas. 

 i. Ocean Marine Insurance

Covers the loss and/or damage to a ship, it’s in transit cargo and passengers resulting from events of the sea or waterways. 

ii. Inland Marine Insurance

Covers the loss and/or damage to vehicles of transport and their cargo over land. 

f. Boiler Insurance

Sometimes referred to as “Boiler & Machinery”, “Steam Boiler” or “Equipment Breakdown” insurance, this form of coverage insures against losses and/or damages sustained resulting from accidents caused by explosions relating to on or off site boilers, pressure containers, pipes, etc. Coverage usually includes, among others, the cost of repair or replacement, loss of perishable goods, legal fees, inspections, etc. 

g. Glass Insurance

May be added to your property insurance policy as an added endorsement. This form of coverage obviously covers glass windows, glass signs, glass plates, showcases, neon signs, etc. from damages cased by weather, riots, vehicles or sonic boom. It does not cover loss resulting from fire or nuclear reaction. 

h. Crop Insurance

This form of insurance protects agricultural farmers from the destruction of crops arising from the forces of nature-frost, rain, hail, insect infestation, etc. Most farmers have Catastrophic coverage supplemented by additional insurance, crop revenue insurance, group risk insurance, or a number of other plans: 

i. Catastrophic Coverage

The federal government, through the Federal Crop Insurance Corp, offers protection to a single crop at a level that is equal to 50 percent (50%) of the approved yield indemnified at 55 percent (55%) of the expected market price, provided the farmer grows an insurable crop. 

ii. Additional Insurance

The Federal Crop Insurance Corp. (FCIC) offers additional coverage, which provides coverage on 65 % of a single crops yield based on 100% of the expected crops market yield. 

iii. Crop Revenue Coverage

This form of insurance guarantees the farmer a stated amount of revenue which, covers losses due to low yields or low prices, or a combination of both. 

 iv. Group Risk Plan

Covers framers crops of a specific county based against yield losses based on the “average” yield of all farmers in the county. 

i. Temperature Insurance-covers two types of losses. 

i. Inventory Loss

This special form of endorsement covers lost inventory of a business which requires its inventory to be stored at certain temperatures-i.e. plants in greenhouses, frozen dairy products, etc. 

ii. Revenue Loss

This form of endorsement protects the business owner from loss of revenue on outdoor events resulting from temperature changes being outside a relative range (below or above an agreed upon temperature range). 

j. Landlord Insurance

Whether you are in the commercial leasing business or simply a homeowner who has decided to rent out their home you need landlord insurance (most home owners policies do not cover losses sustained when a third party rents your house). Specifically this form of insurance covers damage and losses to the dwelling and its overall property (patios, greenhouse, fences, gates, etc.) resulting from vandalism, theft, malicious damage and unforeseen catastrophes-storm damage (fallen trees), thunderbolts, fire, explosion, riot, etc. It also covers lost rental revenue. While it usually covers interior contents, which are permanently affixed to the house, if does not cover the tenants property and personal belongings (they must obtain renters insurance to protect their assets). 

k. Terrorism Insurance

Following the September 11, 2001 terrorist attack on the World Trade Center, many insurers no longer accept liability for losses caused by terrorism under what would have been their normal liability and property policies. Accordingly, terrorism insurance is now offered as a form of protection against “acts of terrorism”. The term “act of terrorism” is defined in The Terrorism Risk Insurance Act of 2002 (TRIA) as: any act certified by the Secretary of Treasury, in concurrence with the Secretary of State and Attorney General, to be an act that is dangerous to human life, property, or infrastructure and to have resulted in damage within the U.S. (or outside the U.S. in the case of a U.S.-flagged vessel), or on the premises of a U.S. mission. 

l. Builders Risk Insurance

This form of insurance provides protection to a builder during renovation or construction of a building against loss of equipment, materials and /or fixtures resulting from fire or other named perils. 

m. Surety Bond Insurance

Also known as “performance bonds” this form of insurance protects the small business owner against losses incurred as a result of a third party (usually a construction company) not performing to under the terms of the original contract, be it non-performance, lateness in schedule, quality of service or quantity of product. Conversely, this form of insurance is extremely important for a construction company to offer for two reasons. 

i. Work Performance Guarantee

It gives the client a financially backed written guarantee, 
ii. Competitive Bidding

It enables the contractor to bid on jobs with larger companies since the client knows the contractor must perform under the surety bond. 

3. Liability Insurance

Generally speaking, liability insurance protects individuals and businesses against third party claims relating to negligence or inappropriate actions, which may result in their bodily injury or damage to their property. It does not offer protection to the policy holders body or personal property (coverage for this exposure can be obtained through property insurance or under self liability limited under their liability policy). The policy covers both legal costs and any legal payouts for which the insured would be responsible if found legally liable. Intentional damage and contractual liabilities are typically not covered in these types of policies. 

a. Public Liability Insurance

Also referred to as “Commercial General Liability” insurance provides protection to the general public against losses sustained from by them for injury or accidents incurred while on the policy holder’s property. This form of insurance is a must for all businesses dealing with a large number of third party customers-i.e. sporting venues, theaters, resorts, shopping centers, restaurants (particularly those serving alcohol, where the risk is elevated). 

b. Professional Liability Insurance

Also known as “Errors and Omissions” or “E & O” insurance this form of policy provides coverage for professionals (those that hold and market themselves to the general public as possessing above average technical services knowledge and training than a member of the general public-Accountants, Doctors, Dentists, Engineers, Lawyers, Optometrists, Notaries, Pharmacists, Physical Therapists, etc.) to cover their negligent acts or omissions. BEWARE: coverage is only provided for work done during the policy period and for claims that are filed during the policy period. Accordingly, if an E&O policy is cancelled, and no provision is made for an extended reporting period, then all coverage stops and it is as if you never had a policy. 

c. Directors & Officers

Often referred to as “D & O” insurance this form of insurance provides coverage to a company’s Directors and Officers (both as individuals and company representatives) resulting from their material omissions, misstatements or negligent acts. 

d. Employment Practices Liability Insurance

This form of insurance is a must for every business owner the moment they first hire their first employee. In today’s “sue happy world” this form of insurance protects the employer from claims brought by past, present and future employees relating to a variety of employment practice violations and allegations-i.e. discrimination: race, age, religion, sex, etc.; wrongful termination, failure to promote, slander, sexual harassment, etc. 

e. Environmental Impairment Liability Insurance

Covers third party damage sustained in the form of bodily injury, property damage or site clean-up directly resulting from the use, disposal and/or release of “unfriendly” environmental pollutants-i.e. asbestos, mold, lead paint, contaminated water/soil, etc. 

f. Prize Indemnity Insurance

This form of insurance protection offers businesses wishing to promote their product, usually to a highly visible audience (All-Star game, Rose Bowl, etc.) indemnification against the odd of the participant actually executing the challenge and thus winning the prize-i.e. golf: hole-in-one; basketball: making half court shot; football: making 40 yard field goal; hockey: making blue line on-goal shot, etc. 

4. Accident, Sickness & Unemployment Insurance 

a. Disability Insurance

This form of insurance provides monthly financial support to cover part or all of an employees lost wages resulting from an illness or injury, which prevents them from working. 
b. Total Permanent Disability Insurance

An extension of disability insurance this form of insurance provides monthly financial support to cover part or all of an employee's wages lost resulting from an illness or injury that is permanent in nature and will prevent the employee from ever returning to work. 

c. Disability Overhead Insurance

This form of insurance covers the small business owners ongoing overhead (operating) expenses incurred resulting from their inability to work-i.e. Doctor, a sole practitioner, suffers heart attack and is unable to work for 2 months. Policy would cover the following expenses: salaries of all staff, rent, malpractice insurance premiums, utility expenses, office cleaning, interest on business debts, etc. 

d. Workers Compensation Insurance

Most often referred to as “Workers Comp”, this form of insurance is required by law in all states and covers loss wages, medical expenses and rehabilitation costs for employees injured on the job or become ill at their workplace due to a workplace exposure. The state in which the small business owner employs its employees is the state under which the small business owner must meet his workers compensation statutory obligations. With the exception of North Dakota, Ohio, Washington, West Virginia and Wyoming and the territories of Puerto Rico and the U.S. Virgin Islands, where the business owner must purchase coverage through a state-operated fund (called monopoly state funds), business owners may purchase private insurance through private insurance carriers. While employers are required to purchase workers compensation insurance in the state in which they conduct business, there are no single cohesive set of rules governing benefits, coverage or premiums. Premiums vary depending on the nature of the employee’s work, but are always based on the employer's total payroll. 

5. Casualty Insurance 

Is a form of insurance which lies in “no mans land” in that it does not concern itself with insurance issues relating to property, health or life. It does however relate itself to liability insurance in that it provides coverage of loss from sudden and unexpected events, such as crime, accidents, political unrest in a foreign country, etc. 

a. Crime Insurance

This form of insurance covers the business from the loss of cash, securities, merchandise and/or inventory resulting from the perils of theft, robbery, burglary, forgery, alteration, embezzlement, etc. 

b. Political Risk Insurance

This form of insurance is reserved for US businesses operating outside of the United States or its territories. It offers property protection against perils relating to adverse changes in a foreign countries commercial climate such as restrictions on foreign currency remittance, expropriation of assets, asset confiscation or loss of assets due to a revolution or war. 

c. Fidelity Bond

Protects the insured against mostly cash losses (although it includes merchandise) resulting from theft by its employees. 

6. Life Insurance 

Small businesses usually consist of a few partners, members, shareholders or family members. Further, key employees often play a major role. Should one of these individuals die the continuity of the business, its activities and its financial well being may be in jeopardy. To protect the business from these problems it is extremely important to purchase life insurance. 

a. Term Insurance

Term Life is the simplest form of life insurance. Coverage is for a specified period of time (the term) and provides a death benefit if the Insured dies during the specified period. Premiums generally are less expensive than permanent life insurance but rise faster as the policy holder ages. The policy does not build a cash value. 

b. Whole Life Insurance

This form of life insurance guarantees a minimum death benefit (also known as the face amount), no matter how long you live, as long as premiums are paid. Premiums are fixed in amount over the life of the contract. Premiums paid in excess of the insurance company’s cost of the insurance policy are invested in the company’s general account earning only the company’s minimum guaranteed return-thus providing the minimum cash surrender value. You cannot increase or decrease the face amount of your policy. Additional coverage requires the purchase of another policy, additional costs, and evidence of insurability. 

c. Universal Life Insurance

This form of life insurance is permanent insurance that provides protection in case of death, as well as a savings through a cash value component. It offers flexibility in both the amount and timing of premium payments and permits the policy holder to vary the death benefit amount based on their economic circumstances. The cash value of a universal life policy is based on the amount of premiums paid, the declared interest crediting rate of the insurance company and the policy charges of the insurance company. Earnings on investment growth associated with the cash value are tax free provided the earnings remain in the policy. 

i. Using Life Insurance as Financial Security for the Small Business

i-1 Key Man Life Insurance

Term life insurance should be taken out on key employees within the company so that the proceeds from the death benefit may be used to offset any lost revenue incurred while a replacement is being recruited and trained.

i-2 Estate Planning

Term life insurance should be taken out, in sufficient quantity, to ensure that the family member beneficiaries do not have to pay estate taxes or worst, sell the business to pay estate taxes. 

i-3 Financing a Shareholders Agreement

Term life insurance should be taken out on any shareholder to whom you have a right to purchase their shares upon their death. Proceeds paid to you as the policyholder on the death of the insured (shareholder) are tax free provided the proceeds are used to purchase the deceased shares. This form of “financing” prevents you from having to take out a loan or worst, liquidate part or all of the business to satisfy the company debts. 

i-4 Collateral Insurance

Upon the death of your partner/shareholder a bank or financing company might require you, as the surviving partner/shareholder, to provide collateral for a loan or credit line executed by your deceased partner/shareholder. Again, this form of “financing” prevents you from having to take out a loan or worst, liquidate part or all of the business to satisfy the bank/financing company collateral requirements. 

7. Auto Insurance 

Every small business owners needs to insure their company cars, vans, trucks, etc. and “related insurable vehicles” to protect themselves from employee and third party liability and property damage lawsuits. Set forth below are some suggestions on how to reduce vehicle insurance costs.

a. Reduce Liability Exposure

Always pay the additional premium cost associated with obtaining additional liability insurance rather than insuring your car for the state minimum statutory amount-i.e.-most states require minimum 25/50/25 coverage (pp bodily injury/total accident/property damage), but for a nominal amount extra the company can purchase significantly most liability insurance. DO NOT expose the business to uncovered insurance losses for the sake of “saving a few bucks”. 

b. Reduce Vehicle Deductibles

To reduce premiums, increase your vehicle deductible, but only if the business can afford to absorb the cost of the deductible.

c. Remove Collision Coverage from Older Vehicles

Once a year a complete review of the company’s vehicles should be made. For vehicles determined to be old, collision coverage should be reduced or eliminated, again, only if the company can afford the added expense of repairing the vehicle.

d. Add Rental Car Endorsement to Existing Auto Policy

For a nominal amount the company can get an endorsement to its auto policy to cover the rental cars collision damage waiver, which could cost as much as $12-$15/day per rental car. 

Extended Forms of Insurance Coverage 

Here are two additional forms of insurance that you might wish to considering taking out to further reduce your exposure. 

a. Commercial Umbrella Insurance

Also known as Excess Liability, Umbrella Liability or simply an “Umbrella” policy, this form of insurance is designed to offer the insured liability protection when the liability limit on their other policies have been met. The term “Umbrella” is derived from the form of protection the policy offers, that is, it provides coverage “atop” liability claims from all the insured policies under it.

Umbrella coverage is most often neglected by the small business owner simply because they do not understand it, they don’t have it or initially they purchased the correct amount but have failed to increase the coverage as their asset based grew. In today’s “sue happy world” it is of paramount importance that everyone have an Umbrella policy. As an aside, State Farm Insurance advises that only 12 % of middle income Americans have an umbrella policy. Specifically, the policy covers protects one from liability claims in excess of their covered limits on their general liability policy, their employers liability policy, car rental policies and on non-hired liability claims. Some policies also cover exclusions from ones primary policies. All policies cover legal fees associated with your defense. The cost of an umbrella policy is inexpensive (+/- $200-$300/year for $1.0 million coverage) relative to the added protection it provides. Policies are sold in increments of $1.0 million. 

b. Consequential Loss Insurance

Consequential loss is a term used in insurance to exclude an insurance carrier’s liability for any loss incurred by the insured that is indirectly caused by the insured event, that is, the loss incurred is an indirect consequence of the event that caused the peril. Conversely, consequential loss insurance covers those indirect losses resulting from a covered peril. For example, a small business owner runs a restaurant in Kansas. Knowing that he is operating his business in a tornado area he purchases wind insurance as an extension to his businesses property policy. One night a tornado strikes nearby causing the wind to force a tree to fall on the power line serving his restaurant. As a result of his restaurant having no electrical power all the food contained in the restaurants two freezers spoils. While his wind policy will cover the physical damage sustained to the restaurants property, unless he had consequential loss insurance his business would not be able to recover the cost of the spoiled food.

dry mix beveragesWritten by Bob Jenkins, Founder & Chief Executive Officer of Southwest Beverages®

Bob has had the privilege of working for some of America’s largest and well run public and private companies, including Philip Morris, Canada Dry, Dr Pepper, Cadbury Schweppes, Snapple Beverage Corporation, Tasker Capital Corp. and The Water Club and River Cafe – two of New York’s finest fine dining restaurants. He has worked in various capacities as Finance Manager, Controller, Director of Finance, Vice President Finance & Administration, Chief Financial Officer, Secretary, and Treasurer.

Bob holds a Masters of Business Administration degree in accounting from the University of Tennessee and a Bachelor of Science degree in accounting from the University of Arizona.

Southwest Beverages® is a manufacturer and marketer of two brands of premium quality dry mix beverages: Sippity® hot cocoa mix and Kemosabe® gourmet flavored coffee. All Southwest Beverages® products are uniquely blended flavors that contain all the ingredients necessary for you to enjoy the ultimate hot beverage experience. Simply add water and stir-then sip, savor and enjoy.

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