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Finding the Right Insurance for Your Business

By Mark E. Battersby

It’s a simple concept: Businesses need insurance. So many things can happen on or to your property or with your products that you need to be protected against losses and lawsuits.

For those who can’t afford or don’t want insurance protection, federal tax laws play an important role. First, most business losses are tax deductible. Obviously, an income tax deduction, especially for losses, is not much help if the amount of the loss exceeds your business’s annual income. However, if that loss is merely part of the operation’s overall loss, called a net operating loss (NOL), that NOL may be carried back to an earlier, more profitable year, resulting in a refund of previously paid taxes.

Tax law changes in 2002 extended the basic two-year period over which NOL losses could be carried back to five years — but only for NOLs occurring in 2001 and 2002. If the carryback year wasn’t a profitable one or wasn’t sufficient to absorb the NOL carryback, that NOL may be carried forward to offset future income.

Similarly, you shouldn’t overlook the fact that the cost of insurance is also a legitimate tax deduction of the business. In essence, the government, in the form of a tax deduction, is picking up a portion of the tab for the high cost of needed insurance. There are also a number of other strategies for making insurance more affordable and, in some cases, even more available.

What You Need

General liability insurance provides coverage for the retailer or facility operator when negligent acts and/or omissions result in bodily injury and/or property damages on the premises of the business — or when someone is injured as a result of using the product manufactured or distributed by the business. In other words, general liability insurance provides protection if someone is injured in the general operation of the business.

Because of the complexity of insurance, many tennis businesses would be well advised to obtain “all-risk” insurance, which covers each and every loss except for those specifically excluded. If the insurance company does not specifically exclude a particular loss, it is automatically covered. This is the broadest — and most expensive — type of policy.

Whenever possible, purchase replacement-cost insurance, which will replace business property at today’s prices, regardless of the cost when initially purchased. It offers protection from inflation and almost guarantees that any business property suffering a loss will be replaced or made whole again with no further expense for the retailer or facility operator.

How Much Is Enough?

The real trick in reducing general liability insurance costs lies in determining how much coverage is actually needed. The old rule was that a tennis business should buy general liability insurance equal to the business’s net worth. Unfortunately, that doesn’t work anymore because people now sue for the amount of the insurance policy — and the business’s net worth.

Today, there are two extremes that any shop owner or facility operator might want to consider. The first could be called the “empty pocket” approach. That strategy involves buying little or no insurance so the business will not become a target of lawsuits. If people know that the business — or its owner — has a big insurance policy, they are more likely to go after the big damage amounts.

The other approach is to buy $2 million to $3 million of liability insurance — generally the most that you will ever need. An even sounder approach, according to many experts, is to estimate what the tennis operation could be sued for. Those “big” numbers many retailers and operators worry about may not actually be that big. Despite many well-publicized court cases, it is rare to actually see an award in excess of $1 million.

Don’t forget umbrella insurance, which is a policy that provides additional liability coverage over the basic policy. When basic liability insurance isn’t enough, the umbrella policy kicks in.

With “self-insurance,” a tennis retailer or facility operator simply sets aside money — some choose to set aside an amount equal to the premiums they would pay for insurance coverage — and use that money when an unfortunate event occurs. For many businesses, however, the best place to think about self-insuring is not with liablity insurance, but with property insurance, since the risks are more manageable.

With self-insurance there is also the danger that you could have an unfortunate incident before you have enough money in your self-insurance fund. And self-insurance might not be a viable option for some where insurance coverage is tied into licensing, bonding, or lending agreements. However, even if you can’t totally self-insure, you may be able to self-insure to a certain extent by purchasing policies with higher deductibles.

Reducing Risk and Premiums

All insurance premiums are based on the risks involved. Insurance companies evaluate the situation to determine the risk of potential loss that they will have to assume and base their rates on the results. Therefore, any steps that a retail shop owner or facility operator can take to lower their risks not only helps safeguard the business, but also may make the tennis operation eligible for lower insurance rates. Consider these steps:

• Maintain adequate lighting throughout the premises.
• Keep electrical wiring, stairways, carpeting, flooring, elevators, and escalators in good repair.
• Install a sprinkler system, smoke and fire alarms, and adequate security devices.
• Keep only a small amount of cash in the cash register.
• Keep good records to help determine any loss — and the amount. In fact, consider keeping a second set of records off-site, such as with your accountant, insurance agent, or at home.
• Make sure your employees know how to lift properly and use all necessary safety equipment, such as goggles, gloves, and respirators.
• Consider using the services of a risk manager, who can advise your business about safety or environmental regulations that may have been overlooked, as well as talk to employees about safety practices.
• Many tennis-related businesses may want to raise their deductible. How high should anyone raise the deductible is a question that is generally governed by how much the tennis operation can afford to pay out of pocket.

Slashing insurance costs usually begins with shopping for competitive rates for the insurance coverages your business needs — and can afford. Taking the next step by actively managing your facility’s or shop’s exposure to risk will further slash those costs. The alternative is no insurance — and possible ruin when disaster strikes.

Finally, keeping loss claims reasonable and implementing loss-control programs are two steps that can help even the smallest retail shop or tennis facility keep their insurance premiums down, year-after-year. Choosing an insurance carrier that has a positive history in the business, sound financials, and services in loss control and claims can also help make necessary insurance coverage affordable.

But the time to think about that insurance protection is now — not when it may be needed.

Terrorism and Your Business

Many retail shop owners and tennis facility operators don’t understand why the possibility of terrorism-related losses should affect them or their businesses. After all, there is little likelihood that terrorists would target them or their neighbors. So, who really needs protection from terrorism losses? The answer, in today’s society, is almost everyone.

Nowadays, insurance against losses due to terrorism attacks is a necessity for a number of reasons. For instance, banks may demand an “all-risks” policy as a condition of lending money, or legal contracts may have a provision that requires a business to be “fully insured,” or protection against losses due to terrorism may be required to assuage, or attract, investors.

See all articles by Mark E. Battersby

About the Author

Mark E. Battersby is a tax advisor and author in Ardmore, Pa.

From the January 2006 issue
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