Business Insurance: How Much is Too Much? Or Not Enough?

March 1, 2018
When it comes to insurance for an auto service shop, there are two things you can count on: It's expensive, and it's confusing. The wrong choices can be costly at the least and disastrous at the worst.

When it comes to insurance for an auto service shop, there are two things you can count on: It's expensive, and it's confusing. The wrong choices can be costly at the least and disastrous at the worst.

Too much insurance will mount a permanent assault on your bottom line; too little could mean the end of your business. With all of the selling pressures within some parts of the insurance industry, it can be difficult to avoid the expense of being over-insured. However, being under-insured may pose an even greater risk.

The following checklist covers most types of business insurance that may be needed for an auto service business.

"In a perfect world," said insurance broker Susan Combs, "these are the coverages you would have in place, but due to budgeting constraints some owners may have to self-insure some of these risks."

Property Insurance

Property insurance protects against loss or damage to a building and its contents. In order to determine your best level of coverage, you should prepare a list of all business equipment with costs and identification information. Property insurance will also provide protection against loss or damage to your inventory, so you will want to make sure that coverage is adequate.

"Do not under-insure," cautioned attorney Gregory Boop, a commercial litigation attorney whose practice focuses on the defense of professionals and businesses. "Get flood insurance, if necessary. Wind insurance, storms, hurricanes, quakes - if they are in your area, get the coverage. Make sure the insurance required in your lease, if you rent, is what you actually have."

Shop owners interested in insurance to cover specialized needs such as coverage for valuable equipment or tools should discuss the specifics with their insurance broker.

Casualty Insurance

"Some insurers will lump property and casualty insurance together and refer to the coverage as property and casualty insurance," Boop said. "In fact, packaged policies of property and casualty are often the best purchase a business owner can make."

Liability Insurance

Liability insurance protects against claims imposed upon your business due to the negligence of the business, the owner or its employees.

"Liability insurance is a must," Boop said. "For example, a customer comes in and falls. The customer sues for injuries. Without insurance, the business owner needs to pay an attorney to answer the complaint. Even if the suit proves to be without merit, the claim will cost much more than paying for insurance."

Combs pointed out that claims due to employee actions or negligence can be significant, especially in this litigious age of increasing jury awards.

"Some coverage may be provided through your package policy," she said, "but you should discuss this with your broker."

Health Insurance

"Providing a health insurance program for employees and business owners is a must these days due to the changing requirements of health care laws," Combs said, "but it can be expensive. To contain costs, consider sharing the cost with employees and choosing levels of deductibles, co-pays and co-insurance that result in a lower cost to you the employer."

Business Interruption Insurance

If a catastrophe such as a fire or flood causes your shop to be temporarily unusable, you may have to relocate or even close down for a while. Business interruption insurance is designed to protect you in such a situation.

A proper business interruption insurance policy will cover such things as profits you would have earned, based on your financial records, as well as operating expenses, such as utilities that may continue even if the business has been temporarily shut down.

"Make sure that your policy is purchased through an insurance professional who understands your business," Boop said. "If you don't keep accurate and legitimate books, you will not be able to prove a claim, and the insurance will be of little value to you."

Workers' Compensation and Disability

You must insure your employees against on-the-job injuries. Most states have some form of mandatory workers' compensation system, and those laws vary widely by state.

"Workers' compensation laws prohibit employees from suing employers for on-the-job injuries," Boop explained. "In return, employers must participate in a system that provides nearly automatic payment to the employee in case of injury for medical bills and damages. There are many variations of workers' compensation coverage. Some states allow an employer to opt-out of the system if the employer is self insured, some run the system through private insurers while others use state agencies."

Because of the wide variation in state laws, you will need to depend on your insurance professional to advise you properly.

Life and Disability Insurance

Life and disability insurance protects the business against the death or disability of the owner(s) or key employees. Your need for this insurance would depend on the legal structure of your business and whether you have a partner or a key employee.

If your business is a partnership, this form of insurance is well worth consideration. Normally, each partner would carry life insurance naming the other partner as beneficiary. If one partner dies, and the business has planned properly, the proceeds can be used to buy out the share of the decedent's partnership.

"Certainly, some permanent insurance will be a perfect fit for the post death buy-out," said Ted Kurlowicz, professor of Estate Planning at American University. "However, it's important to consider all contingencies. Other events could be trigger points for a buy-out. Remember, long-term disability is more likely than death, up to about age 67."

Kurlowicz said planning for sale or succession of a business should begin as soon as the business is started or acquired.

"It is critical for estate planning purposes to acquire life insurance on the owner for at least the value of the business," he said. "A succession plan will take years to implement, in many cases, and will be subject to constant fine-tuning. Adequate life insurance is essential to ensure that the heirs get value from the owner's efforts even if a continuation plan is not in place at the time of death."

Commercial Auto Insurance

As a fast lube business owner, you may not need to maintain a commercial vehicle. However, if you do use a car or van for business, a commercial auto insurance policy is necessary for your protection.   Yes, business insurance is both complicated and expensive, but most business planners agree with Boop who said, "My primary thought on business insurance in today's market is that one cannot go into business if one cannot afford insurance. Do a business plan with a realistic insurance estimate. It is irresponsible to serve clients, customers or the public without insurance in place.

"In my practice, we have seen the shocked look on an owner's face when their personal accounts are seized to pay a judgment. People fall in shops or on wet floors all of the time. Customers are robbed. The risks are infinite."

Combs recommended an independent broker rather than an insurance company agent for your insurance needs.

"Find an independent broker you like and trust," she said. "A broker, rather than an agent, works directly for you the client. It is the broker's job to shop the market for you, and then present you with the best options of coverage at the most reasonable prices."