Business Insurance...What You Need to Know

Working in conjunction with the Massachusetts Small Business Development Center, the Sylvia Group of Insurance Agencies has compiled this information to help you understand these important issues.

The following insurance information is illustrative only. The decisions as to what type of insurance and how much to purchase are the responsibility of you and your broker.

Click on a link below to jump to corresponding section:

> Business Insurance
> Buy-Sell Agreement
> Commercial Auto Insurance
> Commercial Property Program
> Contract Bonds
> Employers Liability Insurance
> Health Insurance
> Income Replacement Insurance
> Key Man Life Insurance
> Workers Compensation Insurance

BUSINESS INSURANCE

The insurance needs of a business vary dependent upon the day to day operations and exposures of each individual business. An accountant has different needs and exposures than a building contractor, who has different needs and exposures than a computer consultant.

The most important thing to remember is that insurance is a tool to transfer the risk, or chance of loss from one party (the insured) to another party (the insurer). The insurer promises, usually specified in a written contract, to pay the insured or others on the insured's behalf, an amount of money, services, or both, for economic losses sustained from an unexpected (accidental) event, during a period of time for which the insured makes a premium payment to the insurer.

The first insurance issue a business owner must consider is the insurance coverages a company is legally required to have.

Required Coverage:

• Workers' Compensation: Covers an employer's responsibility to compensate employees for injuries, illnesses, disabilities or death, as prescribed by state workers' compensation laws.
  
  The State of Massachusetts explains who need Workers' Compensation insurance as, "All employers in Massachusetts are required by state law to carry workers' compensation insurance covering their employees, including themselves if they are an employee of their company. This requirement applies regardless of the number of hours worked in any given week, except that domestic service employees must work a minimum of 16 hours per week in order to require coverage."
  
  Massachusetts has passed legislation, however, that allows a sole proprietor and/or partners to elect workers' compensation coverage for themselves. Prior to this, the sole proprietor or partner had to buy a policy on all of their full or part time employees, but could not elect to cover themselves.
  
  In addition, an executive officer who has at least 20% ownership of the issued and outstanding stock may elect OUT of the workers' compensation. This waiver must be done in writing on a form instituted by the Commissioner of Industrial Accidents.
   

• Commercial Automobile: Covers vehicles owned and used by a business, government, or nonprofit organization in its operations.
  
  Massachusetts is a no fault state, which means that every driver must carry personal injury protection (PIP) coverage. In the event of an accident this policy provides for some of the holder's expenses, regardless of who was at fault in the accident.
  
  In Massachusetts, the required PIP coverage is $8,000 per person, although some drivers may choose to lower their premium by applying a deductible to the coverage. No fault laws eliminate your right to sue the other driver for damages unless the cost of injuries exceeds your coverage.
  
  Massachusetts auto insurance laws also require standard liability coverage, in the amount of 20/40/5. (That's $20,000 per person for injuries you cause to the other party, up to $40,000 for all, and $5,000 for any damage that you cause to the other driver's car and/or property.)
  
  Finally, Massachusetts auto insurance laws require uninsured motorist bodily injury coverage. The minimums on their coverage are 20/40, ($20,000 per person injured, up to $40,000 total). This policy helps cover the cost of your injuries should you be in an accident with a driver without liability insurance.

Optional Coverages:

• Property: Covers real estate, buildings, objects or articles, intangible assets, or rights with an exchangeable value of which someone may claim legal ownership.

• General Liability: A typical characteristic of General Liability is insurance coverage for bodily injury or property damage to third parties caused by negligent acts or omissions of the insured.

• Excess Liability Insurance: Provides coverage in excess of primary insurance. It is designed to increase the limits of liability, thereby providing catastrophe coverage. Excess liability coverage does not respond to a loss until the amount of the loss exceeds (or exhausts) any existing primary policy limits.

• Key Man Life Insurance: Used to compensate the company for the loss of income due to the death of a key employee.

• Buy-Sell Agreements: An agreement among owners or partners of a closely held business or among partners that the firm or partnership will buy the interest of an owner or partner who withdraws or dies, and the withdrawing individual or surviving heirs will sell to the firm or partnership, at a price fixed by amount or by formula

• Bonds: A bond is a financial tool used to guarantee that one company/person will do what it has agreed to do for another company/party. An example of this would be a contract bond which guarantees the performance of a company/ person awarded a contract.

• Health Insurance: Provides coverage for medical care.

• Income Replacement Insurance: If a business owner is unable to work due to illness or injury, income replacement needs can be covered through a well-designed disability insurance program.

A detailed description of each of these types of insurance policies and others commonly used follows.

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UNDERSTANDING WORKERS COMPENSATION AND
EMPLOYERS LIABILITY INSURANCE

The Workers Compensation and Employers Liability Insurance Policy, developed by the National Council on Compensation Insurance (NCCI), provides insurance coverage for your statutory liability under your state's Workers Compensation Law for medical treatment and reimbursement for lost wages from a disability.

The coverages, as provided through their terms and conditions, will respond to mandatory benefits for accidental injury arising out of, and in the course of employment, and for disease or death that may naturally and unavoidably result.

In addition, if the employee injury is not compensable under the Workers Compensation Acts (or Occupational Disease Acts, if separate) the policy (subject to its terms and conditions) will respond to the employee's allegation of negligence by you, the employer.

What is covered?

Part One - Workers Compensation Insurance
The policy applies to accidents or diseases under a workers compensation or occupational disease law. Covered are accidents and occupational diseases (last exposure) that occur during the "policy period."  The entire liability of you, the employer, under the designated law or laws is insured under the policy. The insurance company is obligated to retain and compensate legal counsel when necessary to represent you. A list of provisions is shown in the policy. Only those that are required by your particular state's law apply.

Part Two - Employers' Liability Insurance
The policy applies to bodily injury by accident, as well as by disease, and includes resulting death. Employer's liability insurance is insurance against an alleged wrong or harm other than breach of contract; breach of a non-contractual duty toward another person which causes harm or loss, or other liability for "damages," as opposed to the statutory liability for workers compensation "benefits" under workers compensation law. The obligation of the insurance company under employer's liability is to retain and compensate legal counsel, when necessary, to represent you in a covered suit.

Part Three - Other States Insurance
You are obligated to notify the insurer if you begin any work or operations in another state.

Part Four - Your Duties If Injury Occurs
One of the most important requirements in the policy is that you must notify the insurer immediately when an accident occurs. The remaining provisions are designed to assure cooperation between you and the insurer and are very similar to provisions of other liability insurance policies.

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UNDERSTANDING THE COMMERCIAL AUTO POLICY

"You never choose your victim" in an automobile accident. The person may be a young child, a wage earner, a surgeon or a homeless person. The cost of the accident may be minimal or may be in the millions, depending on the victim and their injuries. The Business Auto policy is designed to help you protect your assets.

What is covered?
The business auto policy protects your assets in several ways.

Liability coverage is available to provide coverage for legal obligations that arise from an accident. Lawsuits and all of the costs associated with those lawsuits are covered (except, usually, punitive damages). While most states require minimums, these are generally well below the asset protection needed by most businesses. Limits should be sufficient to handle serious injuries and loss of earnings by a potential victim.

Uninsured and underinsured motorist coverage is available to protect you and yours when another driver causes an accident and chose either to have no coverage or to have low limits of coverage. Limits should be similar to those you choose on your liability.

Physical damage to vehicles protects your assets directly. Comprehensive, Specific Causes and Collision Coverages are the options available. Deductibles should be as high as possible to maximize your insurance dollar. Medical payments coverage and towing expense costs are additional coverages to consider.

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UNDERSTANDING THE COMMERCIAL PROPERTY PROGRAM

The protection of an insured's real and business personal property is an important aspect of any insurance program. Even a small commercial operation may have a major portion of its assets and resources tied to tangible property.

Commercial property insurance covers direct physical losses of or damage to covered property as long as they are at the premises described in the policy and the cause of the loss is not excluded by the policy.

What is typically covered as part of the building?
When a Limit of Insurance is shown in the Declarations, the structure described, plus any of the following, are considered covered as building:

• Completed additions

• Fixtures

• Permanently installed machinery and equipment

• Personal property owned by the insured and used to service or maintain the building or premises

• Structure additions (including construction materials within 100 ft. of the covered premises)

What is typically covered as business personal property?
As long as it in the building or if outside, it must be in the open or in a vehicle that is within 100 feet of the premises:

• Furniture and fixtures

• Machinery, equipment and stock

•  All other personal property owned by the insured and used for business

• Labor, materials or services furnished or arranged by the insured on the personal property of others

• If the insured is a tenant, the insured's interest in any improvements and betterments made by or acquired by the insured

•  Any leased personal property for which the insured has a contractual responsibility

What is typically covered as personal property of others?
Personal property of others is covered under the following two circumstances, but only for the account of the owner of the property:

What types of coverage are available?
A business can choose three types of coverage: Basic, Broad, and Special.

• Basic Cause of Loss: Fire, lightning, explosion, windstorm, hail, smoke, aircraft or vehicles, riot or civil commotion, sprinkler leakage, vandalism, sinkhole collapse and volcanic action are included in the Basic Cause of Loss Form. Exclusions of Sprinkler Leakage, Vandalism and Windstorm only are available by endorsement.

• Broad Cause of Loss: An intermediate level Broad Causes of Loss Form adds several additional covered causes of loss over the Basic Form, including Breakage of Glass, Falling Objects, Weight of Snow, Ice, or Sleet and Water Damage.

• Special Cause of Loss: The Special Causes of Loss Form provides coverage on an "all risk" basis which essentially covers anything not otherwise excluded.

Understanding the Commercial General Liability policy
When a person is injured because of your operations, service or product, you don't have any control over the amount the injury may cost. The person may be a young child, a wage-earner, a surgeon or a homeless person. The cost of the accident may be minimal or may be in the millions, depending on the person and their injuries. Do you have the assets to pay for everything? Do you want to use your assets in this way? If not, the Commercial General Liability policy is designed to help you protect your assets.

What is covered?
The Commercial General Liability policy protects your assets in several ways.

Liability coverage for damages due to bodily injury and property damage is available to provide coverage for legal obligations that arise from an occurrence. Lawsuits and all of the costs associated with those lawsuits are covered (except, usually, punitive damages). Limits should be sufficient to handle serious injuries and loss of earnings by a potential victim.

Liability coverage for damages due to personal and advertising injury is available to provide coverage for legal obligations that arise from an offense. Lawsuits and all of the costs associated with those lawsuits are covered (except, usually, punitive damages). Limits should be sufficient to handle serious injuries and loss of earnings by a potential victim.

Medical Expense Payments Coverage is available for Medical expenses for individuals injured on premises or due to your operations without proving fault.

What isn't covered?
Every insurance policy has limitations and exclusions, either because the coverages are only needed for specific businesses or the risk is not considered insurable. Some of the more common exclusions are expected or intended injuries, bodily injury to employees, property damage to items in your care, custody or control, pollution, war, military action, and nuclear hazards, automobile, aircraft or watercraft liability, liquor liability for those whose business it is to sell or manufacture liquor, war, property sold or abandoned, property in your care, custody or control, products recall, certain operations of mobile equipment, damage to your product or your work, and damage to impaired property or property not physically injured.

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UNDERSTANDING KEY MAN LIFE INSURANCE

Overview
An employer may purchase life insurance on a key employee in order to indemnify itself from the potential loss of services. Financial institutions often require they be named as a beneficiary on a policy to protect the financial institutions investment.

Usually the employer owns the contract, is the beneficiary, and pays the premiums. The employer would receive the proceeds free of income taxation in the event of the key employee's death. The proceeds may be used for a variety of needs. It may be used to replace earnings that the deceased employee would have generated, to provide funds for the recruitment and training of a successor, or to satisfy debts or credit lines that depended on the employee's services, among others.

Benefits
The employer pays the premium with after-tax dollars, and is not allowed to deduct them, but the proceeds are received income tax-free. Cash values on these contracts may be used in the event of a business emergency or for the informal funding of a deferred compensation plan (retirement benefit). There are currently many changes being discussed in Congress regarding these plans. While the rules can be complex, the benefits of a properly designed plan can be tremendous.

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UNDERSTANDING A BUY-SELL AGREEMENT

Overview
A buy-sell agreement is an integral part of business continuity planning. A properly drafted agreement typically establishes a price for the business, provides the cash for funding, and sets forth a purchaser for the business interest.

Events which may trigger the sale in a buy-sell agreement include:

• Death

• Disability

• Retirement

• Voluntary or involuntary termination

The following are three types of buy-sell agreements:

• Stock Redemption

• Cross Purchase

• Hybrid/Wait and See

With a Stock Redemption, the business entity acquires the business interest; with a Cross Purchase, the co-owners of the business acquire the business interests without direct involvement of the business entity. Wait and See Buy-Sell and Combination Redemption and Cross Purchase plans are two types of Hybrid arrangements utilizing aspects of both redemption and cross purchase agreements.

Benefits
A properly funded buy-sell agreement sets forth a purchaser for the former owner's business interest, establishes a purchase price, and may establish the value of the business for estate tax purposes. It also provides cash to buy the former owner's interest at a predetermined price, allows ownership to pass to the surviving business owners and permits uninterrupted operation of the business. Depending on the type of business entity (C corporation, S corporation, LLC, etc) the tax impact of these transactions can be significant. It is critical to consult an expert in this area before structuring one of these plans.

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UNDERSTANDING CONTRACT BONDS

There are several types of bonds which may be needed by companies in the normal course of business. The language of bonds is new to most of us, so the following terms need to be understood before describing the types of bonds. A bond or a 'surety' bond is a written agreement where one party, the surety, obligates itself to a second party, the obligee, to answer for the default of a third party, the principal. The principal is the company applying for the bond, the obligee is the company or government agency that is requiring the bond and the surety is the separate company which does the paperwork and actually provides the guarantee (material adapted from The Surety Information Office, Washington, DC).

There are two categories of surety bonds:

Contract Surety Bonds provide financial security and construction assurance on building and construction projects by assuring the project owner (obligee) that the contractor (principal) will perform the work and pay certain subcontractors, laborers, and material suppliers.

The primary types of Contract Surety Bonds are listed below.

• Bid Bonds provide financial assurance that the contractor submitting a bid has been qualified by the surety to perform the work and that the contractor will enter into a contract at the bid price and provide the required performance and payment bonds, should the contractor become the successful bidder.

• Performance Bonds protect the owner from potential financial losses resulting from the contractor's failure to perform his work in accordance with the contract specifications. Failure to perform may result from any number of reasons, including cash flow limitations, bankruptcy, etc.

• Payment Bonds or Labor & Material Bonds guarantee the payment of suppliers, subcontractors, and laborers who provide goods and services to the project.

• Maintenance Bonds guarantee a contract of maintenance, service or warranty for a defined period.

• Supply Bonds guarantee the supply of goods and services.

Commercial Surety Bonds guarantee performance by the principal of the obligation or undertaking described in the bond.

The primary types of Commercial Surety Bonds are listed below.

• License and Permit Bonds are required by state law or local regulations in order to obtain a license or permit to engage in a particular business, e.g. contractors, motor vehicle dealers, securities dealers Blue Sky bonds, employment agencies, health spas, grain warehouses, liquor, and sales tax.

• Judicial and Probate Bonds, also referred to as fiduciary bonds, secure the performance on fiduciaries' duties and compliance with court order, e.g. administrators, executors, guardians, trustees of a will, liquidators, receivers, and masters. Judicial proceedings court bonds include injunction, appeal, indemnity to sheriff, mechanic's lien, attachment, replevin, and admiralty.

• Public Official Bonds guarantee the performance of duty by a public official, e.g. treasurers, tax collectors, sheriffs, judges, court clerks, and notaries; Federal (non-contract) bonds are those required by the federal government, e.g. Medicare and Medicaid providers, customs, immigrants, excise, and alcoholic beverage.

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UNDERSTANDING HEALTH INSURANCE

Massachusetts law allows employer-based health insurance policies to be available to employers with 1-50 full-time employees (defined as working 30 or more hours per week on a permanent basis), on a community-rated basis and without medical underwriting, referred to as 'guarantee issue'. Whether you are a sole-proprietor or a corporation with several employees, you can obtain a group health insurance policy in Massachusetts.

Most group health plans offered in Massachusetts require that the employer offer the coverage to all eligible employees, that the employer pay at least 50% of the single cost of insurance, and that if there are five or fewer eligible employees, 100% of those employees are covered under the employer's health plan or another qualified health plan (such as a spouse's plan). For employers with more than five full-time employees, at least 75% must be enrolled in a qualified health plan.

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UNDERSTANDING INCOME REPLACEMENT INSURANCE

When a business owner is unable to work due to illness or injury, there are many concerns. Not only must the business owner continue to generate income to pay his or her personal living expenses, there is also the concern for all the business overhead expenses Ð rent, utilities, business loans, lease payments, insurance, and payroll. These income replacement needs can be covered through a well-designed disability insurance program.

The primary types of Income Replacement Insurance are listed below:

• Personal Disability Insurance is designed to provide income to replace a portion of the insured's pre-disability salary (or income after expenses in the case of a sole proprietor).

• Business Overhead Expense is designed to provide income to the business to 'keep the doors open' during the owner's disability absence and can even include income to pay the owner's replacement salary if someone is hired to work temporarily in place of the owner.

• Reducing Term Disability Insurance is designed to cover the term of a business loan in the event of the owner's disability. Personal Disability Insurance can also be used to protect owners in the event of a partner's disability (commonly referred to as 'disability buy-out'), to provide income to the business in the event of an owner or key person's disability ('key person' insurance), or on an employer paid or voluntary basis to all full-time eligible employees of a business.

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For more information on how to protect your business and your assets, contact the professionals at Sylvia & Company Insurance at (508) 995-4553.
 

The MSBDC Network makes no warranties either expressed or implied nor accept any legal responsibility for the correctness or completeness of this material or its application to specific factual situations or for its conformity with any applicable laws or regulations. This information should not be construed as business, risk management, legal advice or legal opinion.

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