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When it comes to insurance for your coffeehouse, there are two things you can count on: It’s expensive and it’s confusing. The wrong choices can be costly at the least and disastrous at the worst.
Too much insurance will mount a permanent assault on your bottom line; too little could mean the end of the business. While it can be difficult to avoid the expense of being over-insured, being under-insured may pose an even greater risk.
The following covers most types of business insurance. “In a perfect world,” says insurance broker Susan L. Combs, New York, N.Y., “these are the coverages a small retailer would have in place, but due to budgeting constraints some store owners may have to self-insure some of these risks.”
Property Insurance
Property insurance protects against loss or damage to the building and its contents. In order to determine the proper level of coverage, you should prepare a list describing all business equipment in detail with costs. Property insurance also protects against loss or damage to your inventory, so you will want to make sure that coverage is adequate.
"Do not under-insure,” cautions attorney Gregory Boop, Cleveland, Ohio. “Get flood insurance, if necessary. Wind insurance, storms, hurricanes, quakes ‑ get the coverage. Make sure the insurance required in your lease is what you actually have.” Boop is a commercial litigation attorney. His practice focuses on the defense of professionals and businesses.
Liability Insurance
Liability insurance protects against claims imposed upon your business due to the negligence of the business or its employees.
“Liability insurance is a must,” says Boop. “For example, a customer comes in and falls. The customer sues for injuries. Without insurance the business owner needs to pay an attorney to answer the complaint. Even if the suit proves to be without merit, the claim will cost much more than paying for insurance.”
Combs points out that claims due to employee actions or negligence can be significant, especially in this litigious age of increasing jury awards. “Some coverage may be provided through your package policy,” she says, “but you should discuss this with your broker.”
Health Insurance
“Providing a health insurance program can be very attractive for employees and business owners,” says Combs, “but it can be expensive. To contain costs, consider sharing the cost with employees and choosing levels of deductibles, co-pays and co-insurance that result in a lower cost to you the employer.”
Boop suggests that you avoid the largest insurance firms, which he says are often over-priced. “Instead, consider a strict HMO such as Kaiser. You may also want to consider online quotes from firms such as eHealth (<i>www.ehealthinsurance.com<i>).
Business Interruption Insurance
If a catastrophe such as a fire or flood causes your store to be temporarily unusable, you may have to relocate or even close down for awhile. Business interruption insurance is designed to protect you in such a situation.
A proper business interruption insurance policy will cover such things as profits you would have earned, based on your financial records, as well as operating expenses, such as utilities that may continue even if the business has been temporarily shut down.
Fewer than 26 percent of New Orleans businesses opened in the in the first four months after Hurricane Katrina struck in August 2005. The re-opening rate increased to 39 percent around 10 months later but was only 66 percent two years after Katrina, according to researchers at the Department of Environmental Sciences, Louisiana State University, Baton Rouge.
“Make sure that your policy is purchased through an insurance professional who understands your business,” says Boop. “If you don’t keep accurate and legitimate books, you will not be able to prove a claim and the insurance will be of little value to you.
Workers Compensation and Disability
As an employer, you must insure your employees against on-the-job injuries. Most states have some form of mandatory workers' compensation system and those laws vary widely by state.
“Workers' compensation laws prohibit employees from suing employers for on-the-job injuries,” explains Boop. “In return, employers must participate in a system that provides nearly automatic payment to the employee in case of injury for medical bills and damages. There are many variations of workers' compensation coverage. Some states allow an employer to opt-out of the system if the employer is self insured, some run the system through private insurers while others use state agencies.”
Because of the wide variation in state laws you will need to depend on your insurance professional to advise you properly.
Life and Disability Insurance
Life and disability insurance protects the business against the death or disability of the owner(s) or key employees. Your need for this insurance would depend on the legal structure of your business and whether you have a partner or a key employee.
If your business is a partnership, this form of insurance is well worth consideration. Normally, each partner would carry life insurance naming the other partner as beneficiary. If one partner dies, and the business has planned properly, the proceeds can be used to buy out the share of the decedent's partnership.
“Certainly, some permanent insurance will be a perfect fit for the post death buy-out,” says Ted Kurlowicz, professor of estate planning, American University. “However, it’s important to consider all contingencies. Other events could be trigger points for a buy-out. Remember, long-term disability is more likely than death, up to about age 67.”
Kurlowicz feels that planning for sale or succession of a business should begin as soon as the business is started or acquired. “It is critical for estate planning purposes to acquire life insurance on the owner for at least the value of the business. A succession plan will take years to implement in many cases and will be subject to constant fine-tuning. Adequate life insurance is essential to ensure that the heirs get value from the owner's efforts even if a continuation plan is not in place at the time of death.”
Commercial Auto Insurance
As a coffeehouse owner, you probably won’t need to maintain a commercial vehicle. However, if you do use a car for occasional business, even a personal one, a commercial auto insurance policy may be necessary for your protection.
Where Do You Stand?
The cost of business insurance is a significant expense for coffeehouse owners. That’s why it’s important for you to know how your costs compare to others. The editors at Specialty Coffee Retailer have gathered these averages to help with your comparisons:
If you assume a shop doing about $750,000 in sales, paying $25,000 a year for insurance is likely too high, $2,500 way too low.
For a 1,000-square-foot shop doing $750,000 in annual sales, liability insurance based on a percentage of sales will usually come in around .75 percent, for a monthly cost of $468.
Workman’s Comp insurance based on payroll typically will come in at 1 to 1.5 percent of payroll. Using an average of 1.25 percent and payroll of about $225,000, monthly cost would be about $234.
Adding these two essentials together, we get an average monthly cost of about $702, or about $8,424 per year.
If the building is owned by the operator, property insurance will be needed. Total cost will be based mainly on the value of contents, the building construction and the location. Monthly cost for a typical 1,000-square-foot store may average around $62.50.
Of course, for operations that are larger or smaller than our example, or for owners who choose more than the minimal insurance used in our calculations, costs would have to be adjusted accordingly.
Yes, business insurance is both complicated and expensive, but most business planners agree with Boop who says, “My primary thought on business insurance in today’s market is that one cannot go into business if one cannot afford insurance. Do a business plan with a realistic insurance estimate. It is irresponsible to serve clients, customers or the public without insurance in place.
“In my practice, we have seen the shocked look on an owner’s face when their personal accounts are seized to pay a judgment. People fall in stores on wet floors all the time. Employees are robbed. The risks are infinite.”
Combs recommends an independent broker rather than an insurance agent for your insurance needs. “Find a broker that you like and trust,” she says. “A broker, rather than an agent, works directly for you the client. It is the broker’s job to shop the market for you and then present you with the best options of coverage at the most reasonable prices.”
William J. Lynott is a veteran freelance writer who specializes in business management as well as personal and business finance. His work appears regularly in leading trade publications and newspapers as well as consumer magazines including Reader's Digest and Family Circle. You can reach Bill at lynott@verizon.net or through his web site: www.blynott.com | 
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