With statistics reflecting that two-thirds of new businesses close their doors within the first two years and only 50 percent of the rest survive the first five years, the prospect of becoming a small business owner may sound pretty unappealing. In addition, there are a myriad of expenses to consider, not the least of which is what type of insurance is needed to get started.
Before I go into which coverages are needed for what purpose, the concept of risk transfer needs to be explained. The purpose of insurance is to transfer a risk that is too great to pay from cash reserves (building fire, theft, lawsuit, etc.) in exchange for a predetermined premium.
For example, after building your new wash, it may be safe to assume that you and your investors may not have sufficient capital readily available to rebuild that wash in the event of a disaster. So, you purchase an insurance policy whereby you transfer the financial risk of loss in exchange for a premium paid — for a select period of time.
Business insurance is one way of ensuring that you’re in control of your future rather than being controlled by it. Business insurance for your wash operations can provide protection against common risks … if you carry the right types of business insurance for your specific and unique operations.
Unfortunately, insuring your carwash is not as simple as insuring your car. Because wash operations are all so unique, it is important to design a package of insurance that meets your business needs and provides the level of risk transfer that you’re comfortable with and can afford. The more risk you transfer to the insurance carrier, the higher your premiums will be. For example: A lower deductible puts the insurance company at more risk and thus would generate a higher premium.
As you start out your carwash operation, know that there are several types of business insurance that all operations need.
Property insurance protects the assets your business owns, including the building and equipment, from vandalism, fire, destruction or damage.
- Building/Structure: All structures should be accounted for and valued for what it would cost to replace. This would include wash buildings, vacuum bays, payment kiosks and storage buildings.
- Business Personal Property: Also known as “contents insurance,” this protects your business inventory and equipment. Think of it this way: If you turned your operation upside down and shook it, most everything that fell out would be considered Business Personal Property.
To determine how much property or contents insurance you’ll need, create an itemized list of your business’ assets and their individual dollar values. Remember, at the time of loss, you will be required to provide a detailed inventory of all items lost/damaged. The total dollar amount of insurance required will be listed as your Limit of Insurance.
In some cases, you may decide against insuring a particular asset, because it just doesn’t warrant the cost of the premium. In other cases, the premium may be well worth paying. Ask yourself: If this equipment (such as a computer) was stolen, would I be able to afford to replace it? If the answer is no, you should insure it.
Such factors as the total cost to replace, type of construction, location (proximity to fire station, hydrants, etc.) and safety measures in place (alarms, sprinklers, video surveillance, etc.) will all go into consideration to determine your final premium.
Note that it is becoming increasingly difficult and quite expensive to insure operations within 25 miles of an oceanic coastline.
General Liability insurance
General Liability insurance protects your business from liability lawsuits arising from negligence that may cause injury to others, such as a customer. It also protects your company if someone is injured as a result of using your product or service or while on your premises.
For example, if you own a self-serve carwash and a customer injures himself or herself while using the wand sprayer, your wash could be held liable for all injuries. General Liability can pay for the related injury medical expenses, property damage, plus any personal lawsuits filed by the customer. When you consider that the legal expenses and settlement or judgment expenses of a single lawsuit could drive your business into bankruptcy, you’ll see why this type of insurance is considered a “must-have.”
In addition to General Liability coverage, if your wash takes “care, custody or control” of your customer’s vehicle, you will also need to obtain Garage Keepers Liability coverage. This coverage provides liability protection while you have “care, custody or control” of your customer’s vehicle and also provides coverage for physical damage to the vehicle.
Here are several examples of how your wash may take care, custody or control of a customer’s vehicle.
The customer exits the vehicle and waits within a designated area until the wash is completed (your wash would be assuming temporary custody of the vehicle.) From the moment the customer exits the vehicle and until he or she gets back into the vehicle, the Garage Keepers Liability form would be providing Liability as well as Physical Damage protection for the customer’s vehicle.
The customer pulls into your tunnel and is told to take his or her hands off the wheel and put the vehicle in neutral (your wash would be assuming control of the vehicle). From the moment the customer relinquishes control of the vehicle and until he or she shifts back into drive and resumes control, the Garage Keepers Liability form would be providing Liability and Physical Damage protection for that vehicle.
Workers’ compensation protects your business and employees by providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee’s right to sue your business for the tort of negligence.
Every state has very specific requirements regarding whether an operation is required to carry coverage. For example, in the state of Missouri, you are required to carry workers’ compensation insurance if you have five or more employees.
Even if your state does not require that you carry coverage if an employee is injured on the job, you would most likely be held liable for their lost wages and medical benefits. For the relatively low cost of this coverage, it is recommended to obtain coverage even if not mandated by your state.
Premium basis and considerations take into account the annual payroll of each class of employee, previous claims history and safety measures in place.
Some business owners stop here. But, there are other types of insurance that wise business owners will also want to purchase to protect themselves from incurring the kinds of losses that can close their doors.
Business Interruption insurance
Business Interruption insurance helps protect your wash against the income that is lost due to a covered property loss while it is shut down for repairs. Covered losses may include theft, fire, wind, ice, falling objects and lightning. Read your policy to make sure you know which types of loss your policy may cover.
Let’s say a fire damages your wash. The fire leaves the building unfit to do business in, and it destroys most of your equipment. Business interruption coverage may help reimburse you in two ways:
- For the loss of income during the period, your wash is shut down for repairs. Your pre-loss earnings are the basis for reimbursement under Business Interruption coverage. Lost earnings are typically defined as revenues minus ongoing expenses.
- For extra expenses, if it is necessary to expedite the manufacturing of replacement equipment or special shipping arrangements must be made. This coverage may help pay any additional expenses incurred.
Two specific scenarios may require the purchase of life insurance to protect your wash operations:
- If your wash is dependent upon the expertise, knowledge or celebrity of a particular person in your company, you should consider Key Person insurance. This type of plan helps to compensate your wash for the financial loss due to the death of a key person. The insurance provides additional funds to the business to offset the financial loss of the key employee.
- If you are a member of a partnership or your wash is backed financially by multiple investors, you may also want to carry Buy-Sell insurance. If one of the partners/investors dies, this kind of insurance provides the surviving partner/investors with the money to buy the deceased partner’s share of the business.
Choosing an agent
Equal to the importance of choosing the correct coverage is the task of choosing the correct insurance agent. Thanks to the many advances in technology, it is no longer inevitable that you choose the agent that is located closest to your wash.
When you start your search for an agent, you’ll have a couple of different types to choose from. You can pick an independent agent or a captive (sometimes called direct) agent.
An independent agent will have contracts with many different insurance companies. A captive agent writes exclusively with one company. It is generally to your advantage for your agent to be able to solicit coverage for your operations from multiple sources.
The agent chosen to represent you must be knowledgeable and well-versed with handling the unique exposures associated with the carwash industry. If there are unusual exposures or complicated agreements associated with your wash operations, it is imperative that you deal with an agent that has the required expertise to insure complex situations.
The leading authority on training insurance agents in complex dealings is the National Alliance for Insurance Education & Research. Since 1969, this organization has been training and registering agents in its Certified Insurance Counselor (CIC) program.
To obtain the CIC designation, agents must attend a rigorous series of classes and pass the corresponding exams. Agents that obtain the CIC designation must also complete ongoing continuing education classes to maintain the designation. This ensures that all designees will stay well-versed in any changes that may be affecting the insurance marketplace. Other designations are available for specific areas of specialization; however, the CIC designation should be a minimum requirement as you decide on an agent.
The extra time it takes to locate an agent who is well-versed in the carwash industry and has obtained additional training designations will help ensure that your operation has the exact coverage needed to protect not only your customers and employees, but also your investment and financial obligations.
Dan Tharp, CIC, RWCS (Registered Workers’ Compensation Specialist) is property/casualty insurance licensed in all states (except Alaska & Hawaii) and is the vice president of sales for The Insurancenter and the director of the Car Wash Insurance Division. Dan has been assisting business owners protect their operations, customers and employees for over 30 years. For questions regarding this article or any other insurance matter, he can be reached at [email protected] or by calling (800) 444-8675.