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Calculating the Cost of Risk

By Karen E. Klein Q: I am evaluating insurance quotes for my auto-parts warehouse. What percentage of total sales and payroll should I be paying for each category of insurance, such as general property and liability, worker's compensation, and auto insurance? -- R.T., Plainfield, N.J.

A: While it would be convenient to have figures to use for comparison, it's nearly impossible to find them. There are too many variables in business ion general, and the insurance industry in particular, to quote percentages without knowing the details of your operation, says Jim Palitto, manager of RK Risk Management, based in Roseland, N.J.

CUSTOMIZING COVERAGE. "The amount of risk your company is exposed to needs to be calculated based on what kind of work you are doing and where," he says. "For instance, is your staff doing parts delivery, heavy lifting, and stocking? What types of parts will be stored in your warehouse? Flammable products will put the warehouse at increased risk."

In general, the best way to find comparables is by joining industry organizations and trade groups. Most of these groups conduct surveys on a myriad of issues, including operating expenses and insurance costs, and publish them in member-only newsletters and magazines. They also hold conferences that provide you with a chance to connect informally with other owners in your industry and swap information.

Martin Lehman, a New York-based counselor with the executive advice group SCORE, suggests that you find a reliable commission broker who can design an insurance package based on your individual needs. "Risk is part and parcel of building a business, but don't be overinsured," he cautions. "Are you getting the right protection you need? Are coverage overlaps or gaps costing you money? The most important point is to sit with a professional and let him design the package." The old adage rings true: Get a second opinion. If you're not sure the first broker is getting you the best deal, try another.

KNOW THE VARIABLES. In your particular industry, auto-parts importers, distributors, and retailers are insured in specialty programs designed for these specific classes of business, says Rick Hagemeier, of Bolton & Co., a Pasadena, Calif., insurance brokerage. This specialty insurance is more expensive than that sold to other distributors, and can significantly vary by location, past experience, and a broker's ability to access these special programs, he says. Some of the variables that most business owners should be aware of include:

Property insurance is calculated according to the property values at risk. "Rates are based upon building construction -- which goes from wood frame, which is highly combustible, to steel/concrete, noncombustible -- with a number of construction types in-between," Hagemeier says.

"Fire protection, like automatic fire sprinklers, is another critical factor and can reduce rates by 50% or more," adds Hagemeier. The combustibility of your building's contents will also be reflected in your insurance rates. If you store solvents and other flammable liquids onsite, you'll pay a higher rate than will most other distributors.

Liability insurance premiums are based on sales, and can be determined by the products being sold and the financial likelihood of the company being brought into a major product-liability case. "For instance, if your warehouse is bringing in plain-wrap parts from Asia, where the manufacturer may have no product-liability insurance, the liability targets [in a major lawsuit] will include the retail seller, the distributor, the importer, and the manufacturer," Hagemeier says.

Worker's compensation varies by state and class code. Most distributors are classed as "warehousemen," Hagemeier says, which can mean a rate that is around 20% of payroll. But the experience of your company will also be taken into account. "If a small company has a number of worker's compensation claims, their 'experience modification' could be two times the [standard] rate level," he says.

Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues

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