COMMON INSURANCE QUESTIONS, ANSWERED.

Business Insurance

What is business insurance?

Business insurance includes a broad range of policy options designed to protect a business from financial loss. Every commercial operation has its own unique set of risks, which means a commercial insurance policy must be tailored to the business. Many factors, from the size of your company, to the number of workers you employ, the materials they handle and whether you have business vehicles, will determine the specific coverage you need to mitigate risk and protect your company’s financials.

Many business owners find that they must turn to a number of different insurance companies to get all of the coverage needed to cover their risks. If you work with an independent agent, you can get all of your business insurance policies from one provider.

What does business insurance cover?

Business insurance coverage for a commercial operation can include the following and more:

  • General liability insurance: Covers third party liability claims for injuries to other people.
  • Professional liability and malpractice insurance: Covers professionals against loss due to negligent professional duty, wrongful acts, and advice and services that lead to another person’s loss or injury.
  • Product liability insurance: Covers against faulty products and damage, illness, injury or death that may occur from using a faulty product.
  • Property insurance: Covers loss and damage to your commercial business property due to fires, storms and other causes.
  • Commercial vehicle insurance: Covers commercial vehicles and drivers for collision, liability, property damage, personal injury and “comprehensive” (now known as “other than collision”).
  • Workers compensation: Covers your employees if they become ill or injured while working on the job.
  • Loss of income: Covers your business expenses such as rent and employee wages if you can’t operate your business.
  • Key person insurance: Covers loss of income that may result from the head of the business or other key personnel becoming incapacitated or passing away (also known as key man insurance).
  • Cyber-crime insurance: Provides protection for risks due to Internet use and online communications.
  • Records retention policies: Covers loss of important data and financial records.
  • Specialty coverage: Insurance that covers various specific business risks, such as those of andlords, farmers, and commercial operations that put on one-day events, such as seminars or concerts.

How much is business insurance?

  • The cost of business insurance varies. A number of factors affect how much business insurance costs, because it depends on the type of business and the types of coverage appropriate for that commercial operation. Cost also depends on the size of the business. A small, home-based business can often be adequately insured for $500 per year, while insurance for a large company with many employees and a wide range of business risks could $500,000 per year.
  • The costs of business insurance can be reduced with effective risk management practices, and by comparing costs from several different insurance carriers. An independent agent in the Trusted Choice network who specializes in commercial insurance can help with this process, and can manage a company’s complete business insurance portfolio through one office.

Is business insurance tax deductible?

Business insurance is tax deductible, as long as the coverage is for the purpose of operating a business, profession, or a trade. Businesses may not deduct their business insurance premiums if the coverage is for the purpose of a self-insurance reserve fund or a loss of earning insurance policy.

What business insurance do I need?

Depending on the nature of your business and any insurance which you are legally obligated to carry, the following types of business insurance should be considered essential:

  • General liability insurance: Coverage against accidents, injuries and negligence claims
  • Product liability insurance: Coverage against product defects
  • Professional liability insurance: Covers professionals against malpractice, negligence or errors
  • Commercial property insurance: Covers against damage to your business property, such as from fire or a severe storm
  • Business interruption insurance: Protects your business if you are no longer able to conduct your business because of a loss
  • Home-based business insurance: Covers against general or professional liability.

Because commercial insurance needs to be tailored to each business based on risks, it is critical to work with an agent who will get to know your company and ensure that your coverage adequately protects your business investment.

What is a Business Owner’s Policy?

A business owner’s policy or “BOP” is insurance coverage designed specifically for small or medium-sized businesses. Depending upon the insurance company, the size of business that qualifies for a business owner’s policy may be based on revenues or number of employees. A BOP combines several types of insurance coverage in a packaged format, and can be customized to suit a particular business. Generally, this type of policy includes both property and liability coverage.

Policies may also provide coverage to include the following:

  • Property claims
  • Breakdown of equipment
  • Loss of income/business interruption
  • Professional liability
  • Copyright infringement
  • Libel
  • Products and completed operations
  • Premises liability

What is the difference between general liability and professional liability?

At a 10,000 foot view general liability is slips, trips and falls meaning bodily injury and/or property damage to a 3rd party. Professional liability is protecting your business against bad advice or guidance. Any time you give professional opinion, advice or guidance you are opening yourself up to a professional liability claim.

Should my small business have business income insurance?

Business income provides reimbursement for lost revenue after a covered insurance loss. For a company that does not have a physical address that is crucial to its business, such as a contractor, business income is probably not necessary. For store front or main street businesses, like a coffee shop, business income is a must.

Employee Benefits

What determines whether I am a large or small employer?

An employer’s size is based on the number of its employees. Generally, an employer with 50 or more full-time employees, including full-time equivalents (FTEs), is considered a large employer. If you have fewer than 50 full-time employees or equivalents, you are considered a small employer.

Does health-care reform apply to our company?

Effective January 1, 2015, companies that employ 50 or more full-time employees, including full-time equivalent employees, must offer an affordable group health plan to their full-time employees (and dependent children up to age 26) or possibly be liable for a penalty.

Small businesses, those with fewer than 50 full-time employees, are not subject to this provision. In fact, small businesses have the option to purchase plans on state-run or federally run Exchanges and may qualify for tax credits to offset the cost of providing insurance coverage to employees.

Can employees pay for or share in the cost of health care?

Yes. You as the employer may choose how much of the cost you would like to share with your employees. This gives you tremendous flexibility to tailor a benefit package for your company at a price you will feel comfortable with.

Captive Insurance

What is a captive?

A captive is a closely-held insurance company that provides coverage for and is controlled by its owners or members. Captives are different from other insurance companies in that:

  • You keep unused premiums and earn return from the investment of those dollars.
  • You have a say in what the captive does; you control your insurance destiny.
  • Premium is based on your individual loss history, not grouped together with your industry’s poor performers, as the traditional markets do.
  • Stable and predictable costs from year to year as you are distancing yourself from the fluctuating market of traditional insurance companies.

Why are captive costs lower?

  • Net premiums = operating costs (generally 40% or less of pay-in) plus claims which are usually capped.
  • Dividends consistently paid in most programs.
  • Most captive members drive down their premium in future years.
  • Captives are built to handle big losses.
  • NO joint and several liability between members (firewalls in place).
  • After 3 years, most captive members have equity equal to one year’s premium.
  • Group loss ratios are consistently under 50% (leads to future dividends).
  • Partial dividends can be paid earlier than expected.
  • Even though the insurance market is soft, our captives are still adding members.
  • Consistent, proven funding formulas that have been in place since the early 1980s.

Are all members in the same type of business?

There are two types of group captives:

  • Heterogeneous: Comprised of members from different types of businesses.
  • Homogeneous: Comprised of members in the same or related industry.

How many member companies are in a typical group captive?

The largest group captive, which was started by Captive Resources, currently has over 300 members. Smaller captives have less. The advantage of size is that the fixed costs of the program will be spread among a larger group of companies.

How can I be sure that every member admitted to the program has a clean loss record and an ongoing commitment to safety?

There are a number of different safeguards:

  • Each captive member has been trained to identify the characteristics of an eligible business.
  • Captive Resources, with their extensive experience, reviews each account and determines whether or not it is acceptable.
  • Then the account is underwritten by the insurance carrier (fronting company), who will actually issue the policy.
  • Finally, the entire file is reviewed by the reinsurance carrier.
  • As an additional oversight, one of the committees formed by the membership will be an underwriting committee. This committee will never be able to override the decision of the insurance underwriters or allow admission to a company that is unacceptable; however, they can block admission based on whatever subjective criteria they choose (i.e. roofing contractors, bridge contractors, etc.).

How many captives are there?

There are approximately 5,000 captives worldwide. Of those, almost 2,000 are group captives, and the remainder are single-parent captives. Cayman, where most of our captives are domiciled, has approximately 750 captives and over $12 billion in premium. Many new captives are formed each year.

How are captives structured?

Most group captives are built in a pooling arrangement with the primary layer known as a retention amount per accident. Reinsurance will attach excess of the retention. Pay-in premium includes competitively priced operating costs with the remainder of the premium available to fund losses and/or pay dividends. A collateral component (generally a letter of credit or cash) creates a fire wall between members. Captive members or owners earn and retain the investment income that is generated from their loss fund. Since 1994, this type of captive structure has allowed McConkey clients to earn average dividends over a three year period that equal one year’s worth of premium. A three year return on investment!

Who issues the insurance policies?

One of the service providers is called a “fronting” or policy issuance carrier. They issue insurance policies just as you have always received, with standard forms and endorsements. To the outside world, your insurance program looks no different than when you bought it from the standard insurance market. As an added benefit, the fronting carrier provides the ultimate financial protection. If the entire program were to fall apart (this is highly unlikely), the fronting carrier has to honor all of the coverage obligations in their insurance contracts. In addition, since you have insurance policies issued by an admitted carrier, the state guaranty funds will provide the final source of protection.

How is my premium determined?

In the standard insurance market, rates are applied to the various classifications that describe your business. Credits and debits are applied based on your experience, and your premium is set. The captive pricing program does not use this method. Your premium is determined solely by your historic loss levels.

When you apply for coverage, your broker will collect 5 years of historical loss data. This data will be given to an actuary to perform three different tests. The purpose of these tests is to calculate what the expected level of losses will be for your company for the next 12 months. Any severity or shock losses are discounted, so this is not an average; however, the three different tests are averaged, and the actuary arrives at a “loss pick”. The “loss pick” is the actuarial estimate of what your losses will be during the next 12 months. The “loss pick” is added to the fixed costs of the program to arrive at a final premium.

What, if any, actual losses are less than the “loss pick”?

All of the excess money is returned to you with interest at the end of the policy accounting year.

How long is this excess money held before it is returned as a dividend?

Each policy year stands on its own and is held open for three years from the end of the policy period. In rare occurrences, the accounting year could be held open longer in the event that there are significant unresolved open claims. This decision is made by the members.

Why is the captive located in the Cayman Islands?

Cayman has enacted laws that are favorable to the formation of alternative insurance mechanisms like captive insurance companies. Not only is Cayman the second largest domicile of captives after Bermuda, but it is also home to numerous banks and mutual funds. In addition, taxes are not paid on any of your earnings in the captive until a dividend is paid. Dividends are treated as taxable income as reported on an IRS Form 5471 that is received annually from the captive. Each member’s situation will be different with respect to taxable income due to the timing of any dividends received and their tax year. The IRS Form 5471 becomes part of your business tax return.

Surety

Why is it so important to deal with an agency that has bond expertise?

The agent with bond expertise will have strong relationships with the surety underwriters. In addition to that, the agent will be involved in construction related associations to understand what is most important to you as a contractor. This will enable the agent to secure the best possible terms and conditions for your surety program.

What is the difference between insurance and contract surety?

Insurance is a 2 party contract – the insured and the insurer. A surety bond is a 3 party contract – the Principal (contractor), Obligee (owners of the project) and the surety company.

Surety is an extension of credit – much like a bank line of credit. Bid Bonds are pre-qualifications after an extensive review by the surety underwriter.

The Principal or contractor will sign and Indemnity Agreement which is an agreement to indemnify or “make whole” the bonding company in the event of a loss.

What information is required by the bonding company?

  • Financial Statements
  • Personal financial statements of the owners
  • Contractor Questionnaire
  • Tax returns
  • Bank line of credit
  • Resumes and reference
  • Possibly more information such as work in process reports, business plans, etc.

What are commercial bonds?

There are various types of commercial bonds including fuel use tax bonds, service contractor bonds, license and permit bonds to name a few. The underwriting is greatly based on the company’s financial strength and the personal credit of the owners.

Personal Insurance

Should I have my home and auto insurance with the same company?

Absolutely YES! If you can package your home and auto together with the same insurance company you should do it. There could be significant cost savings involved, in addition to other benefits.

Do claims and tickets affect my insurance premiums?

Yes. Claims for homes and claims and violations for autos do make a difference in the rating of your policy. The impact depends on the severity of the claim and if you were at fault. Tickets and accidents will impact your premiums for a three-year period while major tickets such as DUI’s and careless driving can impact your rates for five years.

Is my credit considered when rating my policies?

Yes. Your credit will be checked when an insurance company is rating a home or automobile policy for you. This is an insurance score, which is slightly different than your credit score. The insurance score does not show as a “hit” on your credit, like other credit inquiries (multiple credit inquiries can actually lower your credit score).