Chapter 2: Understanding Construction & Contracting Insurance Policies
Part 1: What Is Small Business Insurance?
Your small construction or contracting business is more than just your livelihood — it's the sum of your talent, time, and investment. For example, Entrepreneur.com's article "Business Idea Center: Carpentry" estimates that starting a carpentry business costs anywhere from $10,000 to $50,000. For many people, that could be the entirety of their life's savings.
And you don't want your hard-earned profits spent on fending off a lawsuit or replacing stolen or damaged equipment. You need a safety net that can protect your finances so you have room to grow your business. And that's where small business insurance comes in.
Business insurance helps your construction outfit survive an unexpected and costly hit. In order to understand how, familiarize yourself with the following terms:
- Policy. Your insurance policy is a legal contract between you and your insurance provider. It explains how much you'll pay for coverage, the type of coverage you are purchasing, and the terms of your and your insurer's arrangement.
- Premium. Your insurance premium is the amount of money you pay for the benefits outlined in your policy. You pay this fee on a regular basis, usually monthly, annually, or bi-annually. As long as you pay your premium on time, your insurance company can help pay for losses.
- Deductible. In the event of a claim (i.e., an event that causes you to draw on your coverage), you must pay a certain amount of money before you can receive your benefits. This is your deductible. Generally, you get few deductible choices when you purchase a new insurance policy.
- Coverage limit. This is the maximum amount of money your insurer can pay toward a claim. Sometimes, your policy outlines two coverage limits: one for an individual claim and one for the term of your insurance policy. For example, a policy might have a $1,000,000 per-claim limit and a $2,000,000 per-term limit.
As a business owner, you'll pay a premium to an insurance company in exchange for its financial help, should you incur a loss that your business can't cover on its own. Different policies cover different types of losses. When you understand your business's risks, you'll be better able to choose the insurance policies that are right for you.
It's important to note that policies will vary based on their inclusions, exclusions, and deductible amounts, but these variables and options depend on your carrier. However, every policy specifies the events it can and can't cover.
How Are Insurance Premiums Calculated?
When you buy insurance, your provider assesses the amount of risk it can accept. This risk is directly related to the cost of your insurance premium.
For example, when you buy Personal Auto Insurance, your carrier may ask you which car you drive (make, model, and year), your age, sex, and marital status. All these details indicate the kind of driver you are (statistically speaking) and the amount of risk you may pose. Drivers who own sports cars, for instance, have a higher chance of having their cars stolen. Your premium may reflect that risk.
Similarly, your commercial insurance provider uses certain details about your construction business to determine your risk profile and, subsequently, the cost of your coverage. Your premium cost depends on…
- Your profession (e.g, carpenter, mason, electrician, commercial roofer, etc.).
- Where your business is located.
- How many employees you have.
- The risks specific to your field.
- The kinds of policies you choose.
- The coverage limits and deductible you select.
In Chapter 4: Risk Management for Contractors and Small Construction Businesses, we explore how you can reduce your premium costs through effective risk reduction strategies. But for now, you can read more about the most essential insurance policies for small-business owners in the next section.
Next: Part 2: Business Insurance Basics for Small-Business Owners
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