Are you a small or start-up business owner? What insurance do you need?

I belong to the Danvers chapter of the North Shore Networking Association.  The group is a little like BNI in that we meet weekly for the purposes of generating referrals, networking and to learn from each other.  Each meeting has a specified presenter who has 8 minutes to share with the group information on a topic of their choice.  I always strive to present something that everyone in the group can learn from and either use personally or pass along to their clients.  Those who have read this blog know that cyber liability is a deep interest and unfortunately for those in my group they know this as well, a little too well!  I just couldn’t subject them to more horror stories of unprotected networks, failed password policies, data breaches or employee blackmail!  So I decided to kick it back to the basics and present something more general in nature, but was specifically targeted to the start-up and small business owners that many of the members of the Danvers chapter work with on a daily basis. 

I think most people believe that as a start-up or small business the only insurance they need is a general liability policy.  They need the GL policy to show the landlord a certificate and mistakenly believe that they are now covered for all of the possible “bad luck” that could possibly befall them and their business.  In an earlier blog post I talked about this misconception I noticed many technology consultants had a similar misconception in common.  They thought that since they had a GL policy they were covered.  Period.  End of story.  For all claims!  We know that for most professionals your completed products, operations and services are not covered.  With that in mind I set to making a list of all the typical insurance a start-up or small business owner could potentially purchase to insure themselves from loss as their completed services and operations are not their only risk.  This list is not the ultimate list, but contemplates the common risks and exposures that can and should be covered. 

Here is the list of The Typical Insurance Policies That a Small Business Owner Typically Purchases:

General Liability (or Casualty Insurance)- insurance protecting business from “most” liability exposures other than automobile, professional liability, employment practices, media, cyber and directors & officers

Property Insurance- -First-party insurance that indemnifies the owner or user of property for its loss, or the loss of its income-producing ability, when the loss or damage is caused by a covered peril, such as fire or explosion. In this sense, property insurance encompasses inland marine, boiler and machinery, and crime insurance, as well as what was once known as fire insurance, now simply called property insurance: insurance on buildings and their contents.

Business Owners Policy (BOP)- -Like a Homeowners policy in that it combines general liability and property (usually includes business interruption and business personal property) coverage in one package policy.  Typically these policies will have additional “bells & whistles” that offer enhanced cover based on your specific type of business, very competitive in cost- -typically the same or less than what you would pay for s straight liability policy

 Professional Liability (E&O)- -Coverage designed to protect traditional professionals (e.g., physicians, CPAs, lawyers) and professionals whose work is their product (e.g., consultants) against liability incurred as a result of errors and omissions in performing professional services. Although there are a few exceptions, professional liability policies cover economic losses suffered by third parties, as opposed to bodily injury and property damage (which is typically covered under commercial general liability policies).

 Employment Practices Liability(EPLI)- -Covers wrongful acts arising from the employment process. The most frequent types of claims alleged under such policies include: wrongful termination, discrimination, and sexual harassment. The forms generally exclude coverage for large-scale, company wide layoffs. In addition to being written as a stand-alone coverage, EPLI is frequently available as an endorsement to directors and officers liability policies.

 Workers’ Compensation Liability- -An insurance policy that provides coverage for an employer’s two key exposures arising out of injuries sustained by employees. Part One of the policy covers the employer’s statutory liabilities under workers compensation laws.  Part Two of the policy covers liability arising out of employees’ work-related injuries that do not fall under the workers compensation statute.  The only insurance you are statutorily required to carry!

 Cyber Liability- – Liability exposures encountered when communicating or conducting “business” online. Potential liabilities include the internet, e-mail, data breaches, social media, pay processing, HIPPA, employee data, etc.  Claims arise alleging breaches of privacy rights, infringement or misappropriation of intellectual property, employment discrimination, violations of obscenity laws, the spreading of computer viruses/malware, and defamation all of which are not covered under a BOP or a General Liability policy.

 Directors & Offices Liability- -Insures corporate directors and officers against claims, most often by stockholders and employees, alleging financial loss arising from mismanagement. The policies contain two coverages: the first reimburses the insured organization when it is legally obligated (typically by corporate charter or state statute) to indemnify corporate directors and officers for their acts; the second provides direct coverage to directors and officers when the organization is not legally obligated to indemnify them. In addition, a third type of coverage, known as entity securities liability insurance is usually available on an optional basis, for additional premium. Such coverage insures the corporate organization in connection with securities it has issued. D&O forms are written on a claims-made basis, generally contain no explicit duty to defend the insured’s, and typically exclude intentional/dishonest acts and bodily injury and property damage.  These policies almost always require general liability and employment policies be in place in order to obtain coverage.

Life Insurance for financing a Buy Sell Agreement or Key Man policies- -Structured agreements that use the proceeds from a life insurance policy to allow the surviving business partner(s) to finance the “sale” of the deceased’s ownership in the business.  Also can be used to  finance the loss the business incurs from the death or a key executive.  Life insurance policies have  also been used as retention tools for high value employees as well.

 Disability Insurance- -Used to finance associated business obligations- -think mortgages, personal guarantees, etc. in the event of an owner illness or injury.

NonInsurance Risk Management- -Speak with your attorney & CPA to set up the appropriate corporate structure.  As a sole proprietor your personal assets are on the line so build a corporate structure that gives you a layer of added protection.  While you are doing that ask you attorney to place a declaration of homestead on your condo or home.  In Massachusetts the law changed in March and automatically every homeo wner in the state has up to $125k if protection on their home, but way not increase it to the max of $500k?  The filing fee is $35 and it is transactional law which means it’s typically low-cost to you!  Lastly, get to know your local banker.  When you get into a position to grow the business and you need a loan to do you’ll be glad your banker knows who you are and can advocate for you and your business. 

I hope this list helps.  Please call me if you’d like to discuss in further detail.

*Please note many of the definitions were referenced from IRIM.com’s Glossary website.

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This entry was posted in Errors & Omissions, General Liability, Professional Liability, Small Business, Start-Ups. Bookmark the permalink.

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