Insurance: Your livelihood depends on it

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While not all disasters and mishaps can be prevented, business owners can be proactive about protecting their lifelines of revenue if an accident or tragedy occurs.

Woodworkers often have a difficult time finding insurance plans, because of the hazards of working with machinery and finishing materials, for example. But obtaining business insurance doesn’t have to be as agonizing as it may seem and, at the very least, it can’t be worse than dealing with the aftermath of a catastrophe that was improperly covered.

The concept of insuring a business wholly or at least partially may be hard to sell to someone who has not suffered an unexpected loss. Brandon Phillips, owner of SMC Furnishings in Penn Yan, N.Y., is now well aware. He lost his entire shop to a fire last year and his business is only now starting to recover. His story is a blaring wakeup call.

Phillips recalls wrapping up a normal day in July 2007 and then walking to his home, about 300 feet from the shop. That night, at about 9 p.m., someone drove by and called 911 after seeing a fire on the upper level of the barn building. About 15 fire companies worked on putting the fire out well into the morning, and by dawn the only remaining part of the building was the basement.

“The best guess anyone had was it was electrical in basis. They think it was probably from an old refrigerator where the compressor had overheated and, because it was near a wall, it had something to actually catch to,” says Phillips.

The estimated damage was between $600,000 and $700,000. Phillips held several different insurance policies prior to the fire — one on the building itself, and two separate policies covering different groups of machinery.

“The building couldn’t be contested, so that was paid out in full. All of the machinery claims were contested — they took a very long time in giving in, and in the end we ended up with probably a little less than 50 cents on the dollar for what our actual policy, in theory, could have covered.”

Phillips reviewed the policy after the fire and discovered important details and specific clauses he hadn’t taken the time to thoroughly comprehend before — things such as replacement values, actual values and cash values of machinery. Both of his machinery policies were stated on cash values, which is the cost of the replacement value less depreciation. In essence, victims like Phillips are compensated for only a fraction of what they actually lose.

Insurance is a product
Craig Nutt, director of programs for the Craft Emergency Relief Fund, a national organization that offers emergency relief and other resources to craft artists, understands insurance can be both a dull and frightening topic to any small business owner. But he says that by paying close attention to the wording, the terminology can seem less threatening and the policies can be understood. And as for handling the costs of premiums, he says it’s about getting your priorities in order, which sometimes means cutting frivolous spending, such as a daily gourmet latte at the coffee shop.

“I think what you’re doing on insurance is you’re buying a product; you’re entering a contract. And like anything else, it’s up to you to be sure you have the right coverage — that you’re not misrepresenting what your business is like because if you actually have a loss, then you’re going to get stuck. You need to understand what the policy covers and, more importantly, what it does not cover.”

In certain parts of the country, for example, insurance can be particularly expensive for a business owner living in a hurricane-, earthquake- or flood-prone area. Because the normal policy won’t cover these disasters, one would have to buy into a Federal Risk pool that is separate from a rider or business owner’s plan.