Insurance: Your livelihood depends on it

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.

“I think people think of the big companies that you buy homeowner’s and auto insurance from,” Nutt says, “but those aren’t the people you go to for business insurance. For instance, if you pick up the phone book, you want to look for agencies that specialize in business insurance.”

In addition, all business owners should ask about umbrella policies that can provide more coverage at a more affordable price. And there are also some money-saving group plans available. The Wood Products Manufacturers Association, for example, offers a plan where its members can pool premiums to reduce their net insurance costs. The association has endorsed Indiana Lumbermen’s Mutual Insurance Co. as its provider of property and casualty insurance for its membership, but in response to member requests has extended the program to members’ current agents or other agents of their choice, according to WPMA executive director Philip Bibeau.

Nutt, who is also on the board of The Furniture Society, is involved with an ongoing research project focusing on various craft artisans in an attempt to indicate the percentages of those that have business insurance. He initially started surveying the insurance status of Furniture Society members, hoping to initiate a group plan for those lacking it within that organization. Over the last year, he has extended the surveying to members of five other arts organizations, including the National Council for Education in Ceramic Arts, Surface Design Association, Artist Blacksmith Association in North America, Glass Arts Society and the Society of North American Goldsmiths.

While he’s still analyzing the information, Nutt says he’s seeing a lot of artisans who believe they are covered under their homeowner’s insurance, when they might not be. He also notes that the other craft media are in as bad shape or worse shape than furniture makers. He and other CERF members are currently working on educating artisans through print and online publications, and presentations.

“The overall goal is to increase the number of artists who are adequately insured by business insurance plans, whether that is through riders for their homeowner’s [plan], or through a business owner’s plan,” says Nutt.

Mind the legalese
Chris Bednarz, co-owner of the Artful Crafter online informational resource and a retired attorney, says woodworking business owners commonly neglect themselves when it comes to insurance. So along with insuring the business, protecting the owner is first and foremost.

“The premiums look really high until you get sued, and then they look like nothing once you start concurring up the legal fees or bankruptcy or whatever you might face because of a lawsuit.

“The most important asset they have is their health and safety, and they’re dealing with fairly dangerous equipment and dangerous chemicals and things like that. The first thing I would recommend is that these guys look into whether or not they can get themselves covered by workers’ compensation.”

Workers’ compensation is different than health insurance in that it pays 100 percent of the medical costs if the worker is injured on the job. It also provides some kind of income if the worker can no longer work, either permanently or temporarily. The policies available for the owner and for employees vary by state, and Bednarz advises shop owners to discuss options with their lawyer.

Larger shops usually know about this one because it is mandated in order to be in operation. But a custom cabinet shop might not be aware of such issues, says Bednarz.

“He might not have a clue that if he goes into someone’s house and smashes a glass door he’s going to be in big trouble if he doesn’t have the money to pay for it.”

One might also want to consider such things as possible third-party issues, according to Bednarz. These can include damage or injuries on client’s property, which are usually covered by small business homeowner’s endorsement or comprehensive general liability policy.

As for asset protection, he advises looking into a Limited Liability Company (LLC), and making sure to separate your business from your personal affairs.

Strive for the best outcome
In his new building, Phillips has added a sprinkler system and a heat and smoke signal device to automatically notify the fire department. It’s been constructed from concrete, rather than wood. Phillips has made every effort this time around to understand what his insurance does and does not cover. He basically had to start over, since he was dropped by his original provider — quite common after a loss.

“Because we have sprinklers now, there are a lot more companies willing to cover us. Before, we were very limited in the amount of coverage we could get.

“Woodshops are considered a very high-risk category because of the finishes and solvents that are stored, and because of the particulate dust, which is very easy to ignite. Sawdust can very easily catch on fire and there’s also the risk of an explosion hazard within your dust collection system.”

Phillips reiterates the importance of sitting down with an agent and going through every detail, while getting as much coverage as you can afford. He lost things in the fire that weren’t covered, and they’re gone for good.

“Take a decent inventory of what you have; use a video camera. Two weeks after the fire, we were still trying to go back and remember what we had.

“We lost all of our business records: accounting, bank statements, computer records, everything. A lot of those things we had backed up onto disks in case the computer was damaged, but we kept the discs in the same office. We really need the capital to rebuild, but are not able to take a bank loan because there are no business records,” he says. Phillips is now backing up records using an online service and putting hard copies in a fireproof safe.

An ounce of prevention
In theory, a fire can be prevented, but it takes a real commitment, according to Steve Toffolon, vice president of Marsh Risk Consulting in Boston, a certified business continuity planner and fire protection specialist.

“When a fire does occur in a [shop], the majority of time you’re going to have a total loss … you have a potential of flammables being involved; you have combustible dust that wood generates; you have a total square footage that is sometimes very small; and most of these facilities don’t have automatic sprinkler protection.”

He stresses preventative maintenance such as cleaning out dust collection systems on a regular basis and proper disposal of finishing rags.

This article originally appeared in the October 2008 issue.