Property Insurance for Your Small Business

Property insurance can cover your business for damages or loss to your business property due to theft, fire, or other causes. There is a good deal of variation among policies on what property and what risks are covered and what the coverage is. Be sure you're absolutely clear on these terms when you choose a policy.

You'll want to make sure that your property insurance covers the premises themselves as well as the business's assets that are kept there, including:

• fixtures to the property, such as lighting systems or carpeting

• equipment and machinery

• office furniture

• computers, telephones, and other office machines, and

• inventory and supplies.

Most basic property insurance policies will cover these items.

If you rent your business space. Your lease may require you to get a specific amount or type of property coverage. Be sure to check your lease for any insurance requirements before you purchase a policy.

If you purchased your business property. You almost certainly paid for title insurance, which protects you from challenges to your ownership of the property. You may also want to purchase a life insurance policy that is dedicated to paying the mortgage if anything happens to you. You usually get the best deal if you buy this on your own, not from your mortgage lender or broker.

What the Policy Covers

You'll need to understand not only which property is covered by your policy but what types of losses will be covered. Read the policy carefully to determine what causes of damage are insurable. Most general business property insurance policies will provide basic, broad, or special coverage—with special offering the broadest coverage and basic the narrowest.

A basic form policy will normally cover fire, explosions, storms, smoke, riots, vandalism, and sprinkler leaks. A broad form policy typically covers damage from broken windows and other structural glass, falling objects, and water damage. With both basic and broad form policies, certain risks may be listed as excluded—that is, not covered. Note that theft isn't typically covered under either a basic or broad form policy, a fact that surprises many business owners.

Special form coverage offers the widest range of protection, as it typically covers all risks—including theft—except for those risks that are specifically excluded. While premiums for special form policies are more expensive, it may be worth the added expense if your business faces unusual risks—or simply to make sure you're covered against theft.

A basic policy may not cover the other property that you have at your business premises—for instance, if you rent a laptop or other equipment, or if customers leave their goods with you as happens at a jeweler, dry cleaner, or repair shop. If you expect to regularly have property that belongs to others at your business, get a policy that covers it.

If the policy you are considering excludes one or more items that you want covered, find out whether it can be included and at what cost. You may have to purchase what's commonly called a "rider" or an "endorsement" to add special coverage to the policy. For example, accounting records, cash, and deeds are often excluded from standard property insurance policies but can usually be covered with some extra paperwork—and an additional premium.

You may find other ways to bring the property you want covered under the scope of the policy. For example, if you want the policy to cover your personal stereo that you keep at the office, but the policy only covers business property, one option is to transfer title of the stereo to the business.

Be sure that you clearly understand the dollar limits on your policy and any deductibles or co-payments you'll have to make. Also, make sure the policy covers the replacement cost of the property, not merely its depreciated value. Computer equipment, for example, loses value incredibly fast. If you lose your two-year-old computer to theft, you'd definitely want your insurance to pay for a new computer rather than the value of the stolen one, which might be barely enough to cover the shipping costs of a new machine.

Possible Policy Adjustments for Home-Based Businesses

Owners of home-based businesses should figure out whether their homeowner's or renter's policies forbid business use of the home or exclude coverage of business-related claims. Make sure that your policy won't be limited or voided entirely by running a business out of your home. It's better to come clean with your insurance company about your home business and maybe spend some extra premium dollars than to find out after a catastrophe that you had no insurance after all.

Excerpted from The Small Business Start-Up Kit: A Step-by-Step Legal Guide, by Peri Pakroo (Nolo).

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