Business Owners Policy

Legally, there is no requirement to have a BOP. The only requirement is contractually. A landlord may require a tenant to have General Liability (found on the BOP). So in order to lease the space, contractually, the business tenant must get GL. On the property side, a lender may require the buyer to insure its property, which is covered on the BOP.

The main reason a business might need a BOP, however, is to protect itself from catastrophic damage! The General Liability portion pays for claims against the insured business for Bodily Injury and Property Damage to others. The Property portion protects your buildings and business personal property from physical damage. Without insurance, a catastrophic claim in either of these two categories can be devastating enough to permanently shut a business down. So whether contractually required or not, we think a BOP is an important part of a business’s risk management strategy.

Virtually all businesses would be sufficiently insured on a BOP, but BOPs tend to be used for small to medium sized, mainstream businesses that are operated at a fixed location (whether single location or multiple locations) and have a significant amount of property to insure.

Common types of businesses that fit well on BOPs are restaurants, retail, wholesale, apartments, lessors’ risks, and personal services like beauty salons and laundromats. The types of businesses that tend to not fit on a BOP are contractors, handyman, manufacturers, farms, garages, and most mobile or home-based businesses. This is, of course, a generalization – sometimes those businesses that normally fit on a BOP don’t, and sometimes those that don’t normally fit on a BOP do.

Business Personal Property, or BPP, are the tangible items used in and for your business or building that aren’t part of the building itself. BPP is everything from furniture and fixtures, machinery and equipment, stock and materials, personal property of others in your care custody and/or control, leased equipment that you’re contractually obligated to insured, and even the tenants improvements and betterments you installed in the space you rent.

Most of it! There are some limitations on the items you can insure. For example, most BOP policies limit the amount of physical cash it will pay out in a loss. There are limitations on other items such as, but not limited to, valuable papers, electronic data, property in transit, property off premise, outdoor property, and tenant glass.

There are also some categories of business personal property that cannot be insured such as, but not limited to, automobiles held for sale, growing crops, live animals, and personal property while airborne or waterborne.

Underground property is another commonly excluded class of property. Underground pipes, flues and foundations are a few examples of items that a BOP may exclude.

The good news is that usually, there is a way to insure these items if you need the coverage. 

No, fortunately, business personal property is covered on a blanket basis, that is one big pot of money for all your BPP. The policy will have a limit, and it includes all the insurable items. The way to properly insure yourself is to estimate the replacement cost of all your BPP items, add it up, and insure it as one lump sum. Typically, each location will have its own BPP limit. It is, however, possible to create a blanket limit for all locations combined.

This is what we call tenants improvements and betterments or TIB. Some examples of TIB would be interior office walls, restaurant booths, counters, and cabinets. These are items that become a fixed part of the building once the installation is complete. Insuring TIB is actually easy to do. It can be insured either as Building or BPP. Our recommendation: try to insure it as building, if you can, because that is a better rate.

This is an important question and the answer is NO. There are lots of bad things that can happen that aren’t covered. For example: neither flood nor earthquake are covered on a standard BOP.  Also, government action is not covered. This is where your municipality tells you that you need to knock down the rest of your building after the first half of it burns in a fire. The demolition, rebuild, and code upgrades that you would have to do are not covered. There are other significant exclusions and limitations on a standard BOP. Theft of property by an employee, that is, an inside job, is not covered. War and nuclear hazard: not covered (terrorism may be covered). Fungus and rot: not covered. Wear and tear, rust, corrosion, and a few other variants of decay and dilapidation are also not covered. There are some other lesser-known exclusions that may surprise you such as damage caused by animals (whether your pets or not), explosion of steam boilers, and artificially generated currents. The good news is that many of these exclusions can be bought back. Flood and earthquake are two such notable available policies that can be purchased. Please not that this is not an all-inclusive list – there are more exclusions than mentioned along with more ways to add coverage back. The main thing is that it is important to know what your property is covered for in order to avoid insurance surprises.

Sometimes, to save money, a business may want to decrease its amount of property coverage. Is this a good idea? No. Because of the co-insurance penalty. Co-insurance makes it so that being underinsured reduces claims payment on partial losses, even if the loss is lower than the amount of coverage. An easy semi-accurate way to think about it is like this: if I am 25% underinsured, every loss I experience will be paid with a 25% deduction. If my building or BPP should have been insured at $100,000 (full replacement cost) but was only insured at $75,000 (25% underinsured), even a $10,000 loss (a partial loss) will be paid essentially at $7,500 (a 25% penalty).

Business Income pays the income that you would have earned during the time your business was shut down because of a covered loss. Once your lost or damaged property is rebuilt or replaced, the policy stops paying.

There are of course, some limits to this coverage. Two such limitations are dollars and time. The policy will stop paying either after a dollar threshold or a time threshold has been met. For example, a policy with a dollar limit of $100,000 limit means the policy will pay lost business income until the $100,000 is paid out, without regard to how long it takes. A policy with a time limit of 24 months means the policy will pay lost business income at any amount up to 24 months, without regard to how much it costs. For most businesses, I recommend the time limit type called an “Actual Loss Sustained” policy. And I recommend making the time period as long as possible. Most insurance companies cap the time limit at 24 months.

A little known fact about Business Income coverage is that it can come with a deductible, which is based in time, not money. For example, a policy may come with a 72 hour deductible. What that means is that the first three days of lost business income during the period of restoration is on you, the business owner. Only after 72 hours has passed will the policy start paying.

Lastly, there is another part of the coverage often included called Extra Expense. This is where the business has suffered a covered loss, but rather than pay lost business income, the policy pays the extra expenses required to keep the business running at full capacity. An example of an extra expense would be if a business had to temporarily relocate following a loss and the insurance company paid the rent costs.

As a postscript, it is important to note that Business Income is a contingent coverage. That means the business must sustain a covered property loss in order for Business Income coverage to kick in. If there is no covered property loss, there is no Business Income coverage available to use.

The main thing that general liability pays for is losses due to bodily injury and property damage sustained by others that the insured business is deemed responsible for. The policy also pays defense costs if the business is accused of causing bodily injury or property damage to others. The important thing is that the bodily injury or property damage must arise out of the business’s operations, products, or the location. The most common example of a loss is if a customer slips and falls on the insured business’s premise. If the injured party sued the insured business, the policy will defend the insured, and if it turns out that the insured was negligent and contributed to the loss, the policy will pay up to the policy limits. 

It is worth mentioning that there are other important coverages included on a general liability: personal and advertising injury and medical payments. Explaining these coverages is somewhat beyond the scope of this article, mainly because these are not the primary reason a business gets or needs General Liability. I will however briefly mention that medical payments, which have a lower limit (usually between $1,000 and $5,000) are for no-fault injuries and are NOT to be confused with bodily injury claims that would be subject to the full policy limits (usually $1,000,000).

There are some things that are not covered on a BOP – usually about 18-20 of them.  I’ll go over a few of the main ones and summarize the rest. About a quarter of a standard BOP’s liability exclusions are done so because they belong on a separate policy. For example, auto liability, aircraft liability, watercraft liability, and workers comp are all excluded because they are meant to be covered on separate policies.  There are usually other exclusions that most people would be surprised to know are excluded and can be purchased separately. For example: liquor liability, pollution liability, and product recall expenses are all  excluded, but can be purchased either on the BOP, or as a standalone separate policy. Some situations are simply excluded and there’s no way to get coverage back, such as expected or intended injury and war. Finally, there is a handful of exclusions meant to prevent your policy from acting as a warranty to fix your work or product if you had made a mistake.

Warning: sometimes insurance companies add additional exclusions and limitations that eliminate or reduce coverage where you might expect it to apply.  Some examples are prior works exclusions, classification limitations, premise limitations, and products and completed operations exclusions. Explaining all these potential exclusions is an exhaustive and lengthy process, and for that reason, we highly recommend that you review your policy. Or call us and we’ll review it for you!

Fortunately, most BOP policies don’t have a classification limitation. This means that you are covered on the general liability portion of the BOP for whatever legal operations you do, even if you add a new one or change your existing one during the policy period. For example, let’s say you run a tire shop and you decide to sell pies on the side. Would you be covered if a person got sick off one of your rhubarb pies? Most policies would not exclude the loss, meaning, you would be covered. This is a general answer, of course, and it is also possible that your insurance company could have placed a classification limitation on your policy, which would exclude coverage for any type of operation performed outside of the operations described on your policy. Because policies can vary immensely, our best advice is to review your policy’s exclusions and limitations to make the determination. 

This is a coverage that allows others to be covered on your policy if they are held vicariously liable for your actions that caused bodily injury or property damage. The most common example of an Additional Insured is the landlord of the building your business occupies. If you do something that causes someone to slip and fall, get hurt, and then come sue you and the landlord for the injuries, the Additional Insured endorsement will cover your landlord on your policy since you are the reason the landlord is getting sued.

• Flood – this policy pays for physical damage to your property resulting from a flood
• Earthquake – this policy pays for physical damage to your property resulting from an earthquake
• Crime – this coverage primarily pays for losses to covered property resulting from dishonest criminal acts by your employees, as well as pays for loss to categories of property not coverage, such as accounts, bills, and currencies.
• Employment Practices Liability Insurance (EPLI) – this policy primarily pays for claims made against you by your employees for wrongful acts such as discrimination, harassment, and wrongful termination.  Often pays for claims of the same type made against you by 3rd parties such as your customers or clients.
• Umbrella – this policy primarily provides additional liability coverage on top of your other liability policies such as General Liability and Commercial Auto Liability
• Errors and Omissions / Professional Liability – this policy pays for claims made against you by your clients holding you responsible for financial loss cause by your errors or the failure of your work to perform as promised in your contract.
• Directors and Officers – this policy pays for claims made against you by third parties for alleged wrongful acts committed by your directors and officers acting in the capacity of directors and officers.
• Cyber Liability – this policy primarily pays for loss of your data, damages incurred by others that you’re liable for once your clients’ data gets released to the public, and the costs imposed by law to notify your affected clients resulting from a computer accident or attack.
• Employee Benefits – this coverage pays for claims made against you by your employees for errors or omissions made in the administration of your employee benefits programs, such as health, life, and retirement.
• Hired and Non-Owned Auto – this coverage pays for bodily injury and property damage resulting from either a vehicle that you’ve rented or a non-owned vehicle of someone else, such as an employee’s vehicle.

BOP pricing is based on the unique characteristics of the individual business applying for coverage.

First, insurance companies start with the industry the business is in. High-risk businesses will have higher rates and lower risk businesses will have lower rates.

Location makes a difference too. If the business is in a high-risk area, such as a high-crime city or a high-wildfire-hazard area, then rates will be higher. The converse, a low crime / low fire hazard, will result in lower overall rates.

On the General Liability side, they look at the size of the business in whatever measurement they see fit, whether it be gross annual revenue, employee count, payroll, square footage occupied, and/or the number of customers, etc. Bigger businesses will have a higher premium and smaller businesses will have a lower premium.

On the property side, the rates are based on the industry as well as the limits required. Are there millions of dollars of property to insure, or a few thousand? The more the business needs to insure, the more the policy will cost.

Insurers also underwrite based on the safety and loss-mitigation practices such as burglar alarms, fire alarms, and fire sprinklers. They will look at the pride of ownership, such as cleanliness, organization, and other morale hazards. They look at the building specifications like age and construction type and quality.

Additionally, insurers base price on the applicant’s experience, such as how long they’ve been in business, whether they’ve had any claims in the past. Less time in business and greater amounts of claims will translate to higher rates.

Lastly, the limits, additional coverages, and deductibles will all have a significant impact on pricing. Higher limits and more property insured will cost more than lower limits and less property insured.

That being said here’s an example of a potential policy for a fast-food restaurant business based in California, with $2,500,000 in sales, no liquor sales, 25 employees, and no claims.