Insurance for protecting your small business

It’s Tuesday evening, it’s late, it’s raining, and you’re tired. Your last stop before heading home is to the dry cleaners to pick up your clothes, which should be pressed, starched, and ready for that Wednesday morning meeting. As your items are handed over to you, you notice that your favorite pair of pants are missing. Naturally, you begin to cycle through a cocktail of emotions: from disbelief (anything but your beloved pants!), agitation (now what will you wear to tomorrow’s meeting?), maybe even anger (how dare they!), but would you… sue?

If you’re a judge from Washington D.C., that is exactly what you do; for $54 million dollars to be exact.

Consider the fact that over 43 percent of small business owners reported having been threatened or involved in a civil suit. So if you don’t want the pants sued off of you (literally), then making sure your small business is protected should be a top priority. Here’s what you need to know:

Why small business insurance is necessary

Many companies fail to see that insuring their business should be seen as an investment protecting your business, not as an expense. Small business insurance is what helps your business cover its property, assets, income, and employees, against various kinds of losses that can take place.

Types of insurance

It’s always best to think ahead: what are some things that could go wrong in your company? Depending on what industry your company is in can also determine which insurance policies you may need.

All insurance companies are designed to ensure that they take in more than they lose. For instance, you car insurance covers your car, but your policy doesn’t necessarily cover the things in your car. That means you need an insurance rider in addition to your car insurance. Business insurance policies operate the same way. Here are a few policies that your small business may need:

Umbrella Policy

For companies just starting out, the easiest policy you can get is an umbrella policy. Most people don’t have a personal umbrella policy, but they should. A $1 million dollar umbrella policy can cost a business as little $500 per year and will usually come under your homeowner policy.

This policy however does not protect the company from employees who sue the business.

Employment Practices Liability (EPL)

For any company with employees, they should carry this policy. For instance, a company with a constant churn of employees, may experience a higher rate of pissed-off employees. If these employees feel wronged by the company or are experiencing financial hardship, they may turn around and sue the company. If this happens, you want to be sure your business is protected.

Errors and Omissions (E&O)

This insurance policy is for any personal services company. For example, a consultant may fortuitously give a client bad advice. Now that company wants to sue someone because they lost a lot money. That company may not only sue the consultant’s company, but they can also sue the consultant. Anyone who does personal services including doctors, lawyers, or accountants, should always have E&O insurance.

Directors and Officers (D&O)

This insurance policy protects all directors and officers of a company. For instance, a company who sues another company can also sue that company’s officers. Without a D&O liability policy, the company who is suing can also go after the personal assets of those directors and officers. As a director or officer of a company, it’s in your best interest to ask your employer whether they have a D&O liability policy to protect you.

At Risk and Bond

This insurance policy protects companies who offer 401k plans, whether they match or not. Because 401k funds go into a custodian, such as T. Rowe Price or Charles Schwab, if something were to happen, like another Bernie Madoff takes all of the money and runs off with it, it’s not Bernie who owes those funds back, it’s YOU, the business owner.

Why? Because it’s generally the business owner who is the trustee of the 401k and trustees have a fiduciary responsibility. Since 401k funds can hold tens of millions of dollars worth of assets, at risk and bond insurance pays that back. So unless you can 100% prove that you had no idea Bernie was running off with that money, you’re going to be liable.

Establishing insurance

Do you have employees?
Do you own a corporation?
Do you have a 401k?
Do you have a retirement plan?

Most companies don’t have an insurance broker or someone within the company who is a proactive advocate for the business. Since you don’t know what you don’t know, as a business leader, it’s key to start by asking and answering the above questions.

Other questions you may want to know before purchasing insurance policies, is what your current insurance is and when does it renew? Too many companies start with one insurance policy and never change it. Don’t be this company.

The price tag

Many policies are based on gross revenue. General liability is based on gross sales, so the smaller the company the less it will cost to insure it. Some policies have minimums on them, for instance At Risk and Bond may have a minimum of $400 a year. Both E&O insurance and Workers Comp have minimums of $500 a year, however, Workers Comp is based on payroll.

Liability insurance is less expensive, but is almost always based on gross receipts and/or value of all of the assets that a company owns. Insurance companies want to know that if your company gets sued, it has the ability to to defend itself in court. If it doesn’t, the insurance company won’t insure your business.

Additional Insured Certificate

One of the biggest things most companies who aren’t a manufacturer but sell manufactured goods miss is the Additional Insured Certificate. For example, say your company sells soccer balls made by another company. Unbeknownst to you, these soccer balls explode into Skittles when they’re kicked.

A father kicks a ball to his kid, causing his five year old to be hit with a hailstorm of rainbow candies. So the father sues you for selling a faulty product. And your company turns around and sues the manufacturers who created the explosive leather piñatas.

Manufacturers should already have Product Liability insurance, covering the company if their product hurts anyone or fails in any way. So rather than your company suing the manufacturer, you would ask the manufacturer to put your company on their insurance policy. This is called an Additional Insured Certificate. This will ensure that if your company gets sued, you will be covered under the manufacturers insurance policy.

If you’re overwhelmed, unsure whether your company is covered, or even where you should even start, contact us today. We’ll start by asking the right questions relevant to your business and advise you on the next steps.