How much is too much?

If insurance agents have a mantra, it is this: There is no formula for being well-insured. That makes it doubly hard for small-business owners seeking to determine what level of insurance they need, and how much risk they can afford.
"How much insurance is enough insurance? There is no cookbook answer," said Chris Richmond, executive vice president of Flood and Peterson Insurance Inc. and chairman of the board of the Fort Collins Area Chamber of Commerce. "Not even a rule of thumb. Perhaps the better question is ÔHow much do you have to lose?˜"
Bruce Farrell, branch manager of Welsh Insurance in Fort Collins, concurs.they have coverage when in fact they don˜t."
However, if the person seeking business insurance will take the time to work with a reputable agent, it is possible to identify risks and to avoid bad surprises.
"Coverage is based on what the insurer has been told," says Charlie Howard of State Farm in Greeley, "and so part of the agent˜s responsibility is to make sure that the insured understands the questions."
As the Colorado handbook makes clear, the relationship between a client and the insurance agent is fiduciary in nature. The agent stands in a special relation of trust, confidence or responsibility in certain obligations to others.Types of insurers and rates
Basically, there are two kinds of insurance companies: direct writers and independent agents. A direct writer represents the products of a single, large company which sells only its own products. Independent agents deal with the products of multiple companies and operate on the assumption that more choices are better choices. The competition between these two types of insurers is lively.
Rates, however, are likely to be similar because they are all based on the tiers. Low risk businesses—sometimes called "mainstreet businesses"—rank at the top, or the "preferred" tier. Below "preferred" are "standard" and "non-standard" types of coverage, each representing higher rates. At the very bottom of the insurability ladder is "excess and surplus," a category reserved for people and businesses who cannot get insurance otherwise.General business concerns
"The things that a business owner might be concerned about are the building, the contents, cost of business interruption, and liability," explains Howard. "If a building is leased, it is important to look carefully at the lease to understand the insurance responsibilities of the owner and those of the lessor."
In particular, a lessor will want to look carefully at who is responsible for insuring "betterments" in a rented facility. "Suppose you build bookshelves in a rented office," says Howard. "Will those bookshelves and other improvements be covered by the owner in case of fire or flood?"
Bruce Farrell adds computers to his list of basic business considerations because of the ramifications of computer loss. "We are also interested in the building itself. How old is it? What neighborhood is it in? What kind of building is it? There are actuarial tables on everything, including the neighborhood where the building is situated."Hidden insurance needs
In discussing small business insurance, Charlie Howard divides coverage into two groups: insurance for those who rent office space, such as accountants, attorneys, doctors and medical technicians; and insurance for those who have service or mercantile businesses, such as florist shops, beauty shops or self-service car washes. The primary insurance concerns for these two types of businesses are different.
"For professionals who rent office space," explains Howard, "we look at the particulars of the professions and then add to the coverage where there is the most vulnerability. One profession might need special protection for accounts receivable, another would want additional coverage for valuable papers and records. It just depends."
Some special coverages are less obvious, such as those for temperature changes (pity the florist whose flowers wilt/freeze in a power failure) and boilers (anything under pressure—like an air compressor—is not typically covered under general insurance).
The home-based business
The home-based business is a well-documented phenomenon that can be enormously profitable. But as "cottage industries" emerge as more than sources for pin money, so do the risks. According to Richard Healy, an independent agent for the Front Range Insurance Group, the basic exposure depends on the nature of the home-based business.
"Some of these businesses have high client exposure, while others deal long distance or indirectly," he explains. "It is important to remember that liability is determined by the courts and not by what an individual thinks might be important."
For home-based businesses that have direct client contact, "slip and fall" coverage is important, as is "professional errors and omission coverage" for business owners who give professional advice: attorneys, accountants and chiropractors among them. In addition, if there are products involved, such as crafts or cosmetics, product liability becomes a risk.
"Liability varies from business to business," says Healy. "Amway sells a concept, but Avon sells a product that goes on your body. If that product causes an allergic reaction, then there is a liability issue."
A variation on the home-based business is the truck-based business. Bruce Farrell points out that sub-contractors often conduct their business from a truck that is insured as a personal vehicle. "Too many subs are pulling around big earth-moving equipment or hauling dry wall materials in trucks that are not insured as commercial or even business vehicles. If there is an accident, the improperly insured sub-contractor may find that he is not covered."Trends and Caveats
In a consumer advocate state like Colorado, liability coverage—and lots of it—is the single most important coverage for a business owner to have. Although insurance companies are becoming more aggressive in fighting law suits that in the past they would have settled, the prevailing attitude still seems to be "when in doubt, sue." Because law suits tend to start at $1 million, insurance agents have come to counsel carrying $2 million in liability.
The second trend in insurance is a lowering of premiums. Chris Richmond argues that this is a buyers market, that there is more to be made off invested premiums than from the premiums themselves. "Typically, insurance rates move in seven-year cycles. But with this big market and no catastrophic events lately, the insurance industry has tremendous loss-paying capacity. Look at the premiums. What else can you name that costs less than it did a year ago?"
Richard Healy, however, suggests that maybe premiums are becoming dangerously low. "The competition here in Colorado is particularly intense right now. The population is growing, and the risks for natural disasters are fairly low. As a result new companies are flowing into this market. But if premiums get too low and there is a catastrophe, some insurers will go broke, leaving their clients completely uninsured."
And on the matter of natural disasters, hail—not flooding—is the culprit.
"In August, we had 500 flood claims for about $2 million and 21,000 hail claims for $37 million," points out Charlie Howard.
Flood insurance is simply not a big seller: in all of Weld County there are under 50 flood policies in force. Apparently, even when people understand that flooding is a risk, they tend to want to take their chances.