Protecting Your Business
Want to avoid major business lawsuits? Our Start-Up Legal Expert suggests getting the right kind of insurance.
Q: I want to do everything possible to protect myself and my new business from serious losses, so I'm thinking of incorporating or forming an LLC. Should I also purchase insurance also? If so, what kind and how can I get the best price?
A: Even if you incorporate or form an LLC, you'd still be wise to purchase insurance to cover common situations that might arise in any business, such as fire, theft, customer or employee injury and the like. Of course, you probably won't need every type of insurance coverage and probably couldn't afford it anyway, but working with a good insurance agent should help you clarify what's needed for your particular business. Here are some things to keep in mind:
Find an agent. Locating an agent to help you identify the right insurance at the right price should be a high priority for every new business owner. Other business owners in your industry are good sources for names of agents. It helps if the agent is already familiar with your type of business, so he or she will know what coverage to recommend and where to go for affordable rates.
Research your options. As with any buying decision, comparison shop and make sure you understand what you're comparing. Find out how and where claims will be processed. Ask your agent to provide you with a rating of the financial health of any insurer you're considering. You can also check on the company in one of the rating publications such as Moody's Bank and Financial Manual or Best's Insurance Reports. Find these in the reference section of your public library, or purchase a more detailed report from Weiss Inc. (800-289-9222). After all, if you have to submit a claim, you want a company who can afford to pay it.
Types of insurance. After you decide on an agent, sit down with him or her to consider what types of insurance you may need. These might include property, liability, auto, workers' compensation and business interruption insurance.
Property coverage. If you'll be renting space for your business, the kind and extent of required coverage is usually spelled out by your landlord in your lease contract. You can also obtain a renter's commercial policy, provides product liability and names your landlord as an insured also.
If you own the building in which your business will be housed, be sure your insurance covers the building and any fixtures, furniture, machinery, equipment, inventory, and anything else used in the business. Everything covered will be listed.
Property insurance comes in more than one form, and many agents recommend a special form policy, which provides coverage for all risks of loss unless the policy specifically excludes or limits a particular loss. A special form policy obviously provides the widest coverage but is more expensive than less-inclusive types of property insurance types such as the basic form and the broad form.
Liability insurance. As a business owner, your business can be legally liable for injury or property damage due to your negligence or that of your employees. If a lawsuit should occur and a judgment is rendered against your business, a liability policy will pay up to the amount of the policy limit plus the cost of defending the lawsuit. There's generally a payout limit per incident and a total payout limit for the entire policy year.
If you sell products, you also need to carry product liability insurance. How much coverage you need depends primarily on the kind of product you're selling and its potential for harm.
Vehicle insurance. Although vehicle insurance is actually a type of liability insurance, it should be considered separately because it's not provided under a general liability policy. If your employees use their own vehicles for business purposes, the business needs to cover those vehicles.
Workers' compensation insurance. This type of insurance provides coverage for injuries sustained by employees on the job. Although some states require such coverage only if you have a certain number of employees (perhaps three or more), even if you're a very small business, you may want to consider having the coverage anyway. An employee injured on the job who's covered by worker's compensation insurance is limited to the amount he or she can collect and, in most instances, can't sue your business separately, so you don't have to lie awake nights worrying about paying a huge judgment for pain and suffering or mental anguish.
Lastly, here are some general rules for insurance coverage:
1. Consider buying a combination policy that covers both property and liability coverage. This may save you some money.
2. Look for a small-business insurance package that includes a full range of coverage. This is often much cheaper than buying coverage from several different companies.
3. See what your trade or professional association, chamber of commerce or other business association offers for group insurance coverage. The buying power of a large group may mean lower rates for you.
Before purchasing insurance, always read the policy carefully to make sure it covers exactly what you need covered.
Before you choose just any insurance package, check out "Needs To Know" to analyze your exact needs.
Carlotta Roberts has a J.D. degree from Atlanta Law School. Having worked in the areas of business organization, contracts and employer/employee relations, she's been a consultant to small-business owners since 1981. She worked as a staff attorney concentrating in employment law issues before joining the Small Business Development Center national network in 1986. Currently area director for the Kennesaw State University Small Business Development Center near Atlanta, she has developed two nationally recognized programs: The Cobb Micro Enterprise Council, which won the Vision 2000 award for small-business development in 1999, and the Franchise Institute, developed to provide assistance to franchisees.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.