As Originally published in the Cape Cod Times: The role of Insurance in small-business ownership
Question: I know I need insurance, but what kind and how much do I need?
Answer: Risk management is a key ingredient in organizing your enterprise. If you are starting or running a small business on Cape Cod, serving customers or interacting with the public, someday someone could lay blame on you for something you did or did not do. And you will have to resolve the situation whether you are at fault or not. You may even have to hire an attorney to prove your innocence. Or perhaps a genuine accident happens and you need to make someone whole. Insurance is designed to step in and transfer the uncertainty to another entity and help with administration, for a fee.
Every situation is unique and although insurance is designed to provide a package of protection, the fact is that uninsured losses have increased nationwide since the 1970s. The summary is: go talk to a few local agents and ask them about workers compensation and a business owners policy with auto and umbrella. That should be sufficient to get you off to a good start. As convenient as webchat, texting, email, and phone calls are (all of which professional agents do for their clients), it is best to set up appointments and visit a few agents, in person. This will help you “kick the tires” and get a sense of whether or not you like and can trust your future agent. A good agent will listen to your unique situation and make recommendations based on his or her experience.
Workers compensation is the sole remedy for workplace-related injuries, and if you have employees in Massachusetts, you need to buy workers compensation insurance. But even if you have no employees, there are a few things to consider. Do you hire subcontractors or any type of firm to carry out work on your behalf? Lawsuits about Uber’s subcontracted work force are one indicator that the line between employee and subcontractor is not clearly defined. The laws of employment are changing and even if you pay somebody via 1099 they could still be considered an “employee” in the eyes of the court. The surprising conclusion is that homeowners hiring a nanny or contractor could be understood as an employer subject to workers compensation laws. If you (and perhaps a business partner) are the only people working for the company, it is recommended you buy workers compensation insurance. What would you do if you were injured on the job with no workers compensation? Do you have an individual disability policy that covers you for workplace injuries? How would you cover your loss of income and injuries? The safest route to go, even if you have no employees, is to buy a minimum premium policy. Make sure to tell your agent if you have employees working out of state or out of the country, as there are important differences to make sure you are protected.
Business owners policy
A business owners policy, or “BOP” is similar to your homeowners policy; it is a package of protection designed to protect you from a multitude of exposures. The “package” part means that the insurer combines a bunch of coverages that you may or may not need so they can simplify the quoting, issuance, and service of policies and spread the risk so the coverage is surprisingly affordable when contrasted with mono-line policies. The BOP provides three main protections:
• Building, improvements, and contents coverage for company property
• Business interruption coverage: if your building burns down it is generally not enough to rebuild your building. You may need to rent a neighboring property and expedite replacement tools and equipment to stay in business. Your business hopefully makes a profit (which you may rely upon). This part of coverage also insures your profits.
• Liability that protects your company, including legal fees, when someone accuses you of negligence that causes them bodily injury or property damage.
Notable additions: some insurers are starting to include a small amount of cyberliability/data breach coverage in their BOP. Every business should buy this coverage these days, and getting it included on your BOP is a great way to start. Cyberliability typically helps the business notify customers after a hack, data breach, or lost laptop, pay for credit monitoring if required among other things. A whole book could be written on this subject alone. But most business owners know someone who has had their identity stolen, lost a laptop, phone, or tablet, or gotten an email from a Nigerian prince seeking to transfer the sum of US 30 million dollars to their account.
If your company has any cars trucks or trailers, you need car insurance to be legal in Massachusetts. But even if you don’t, I always recommend buying a “nonowned/hired” auto policy. This policy (starting around $175/year) protects the business when employees use their own vehicles for business purposes, or if they rent a car on a business trip. Even a quick trip to the post office or bank or Starbucks by an intern who smashes into a pedestrian, perhaps while glancing down at his or her phone, can quickly become a huge liability for a budding business because of vicarious Liability. Check if you can have this included on the BOP.
Each policy you buy will have its own limit of liability, meaning the most the policy will pay out in the even of a lawsuit. What happens when that limit runs out? A bad car crash, for example, could quickly escalate beyond a million dollars. Rather than increasing the limits of liability on each policy, an umbrella is designed as one policy to cover over any specifically listed underlying policy. So for example if you are protected by a $500,000 limit of liability on your car insurance and buy a $1,000,000 umbrella that includes your car insurance policy, you increase your total limit of liability for car crashes to $1,500,000. An umbrella is one of the cheapest ways to increase your business protection.
If you have more than 10 employees in Massachusetts, you need to provide and contribute toward health insurance. Providing benefits like health, disability and dental can also help make you an attractive employer.
If you are starting a nonprofit organization or have a board of directors (for example, a condo association), you should ask about including directors and officers coverage. In summary, the D and O policy protects the organization against alleged wrongful acts. If you are growing quickly, an employment practices liability insurance policy will help defend you if an employee sues you for wrongful employment practices, such as wrongful termination, discrimination, or sexual harassment. If your advice or work is your product (for example, as an attorney, doctor, architect, adviser, or web designer), you should consider errors and omissions insurance (professional liability if your line of works is considered a profession) and also glitch insurance if you program. This protects you from a claim that your failure/negligence as a professional caused damages.
There are a host of concerns out there and every situation is unique. Things like liquor sales/use, shipping, spoilage, boating, inventory, proximity to the water, pollution, environmental coverages … the list is never-ending. NFL player Troy Polamalu famously insured his hair for $1M.
In closing, interview a few agents and find the one that you can trust to provide value to your business and help navigate risk containment.
You want to know more about it?