Protecting Your Business
Want to avoid major business lawsuits? Our Start-Up Legal Expert suggests getting the right kind of insurance.
Q: Iwant to do everything possible to protect myself and my newbusiness from serious losses, so I'm thinking of incorporatingor 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 topurchase insurance to cover common situations that might arise inany business, such as fire, theft, customer or employee injury andthe like. Of course, you probably won't need every type ofinsurance coverage and probably couldn't afford it anyway, butworking with a good insurance agent should help you clarifywhat's needed for your particular business. Here are somethings to keep in mind:
Find an agent. Locatingan agent to help you identify the right insurance at the rightprice should be a high priority for every new business owner. Otherbusiness owners in your industry are good sources for names ofagents. It helps if the agent is already familiar with your type ofbusiness, so he or she will know what coverage to recommend andwhere to go for affordable rates.
Research your options. As withany buying decision, comparison shop and make sure you understandwhat you're comparing. Find out how and where claims will beprocessed. Ask your agent to provide you with a rating of thefinancial health of any insurer you're considering. You canalso check on the company in one of the rating publications such asMoody's Bank and Financial Manual or Best's InsuranceReports. Find these in the reference section of your publiclibrary, or purchase a more detailed report from Weiss Inc.(800-289-9222). After all, if you have to submit a claim, you wanta company who can afford to pay it.
Types of insurance. After youdecide on an agent, sit down with him or her to consider what typesof insurance you may need. These might include property, liability,auto, workers' compensation and business interruptioninsurance.
Property coverage. Ifyou'll be renting space for your business, the kind and extentof required coverage is usually spelled out by your landlord inyour lease contract. You can also obtain a renter's commercialpolicy, provides product liability and names your landlord as aninsured 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 usedin the business. Everything covered will be listed.
Property insurance comes in more than one form, and many agentsrecommend a special form policy, which provides coverage forall risks of loss unless the policy specifically excludes or limitsa particular loss. A special form policy obviously provides thewidest coverage but is more expensive than less-inclusive types ofproperty insurance types such as the basic form and thebroad form.
Liability insurance. As abusiness owner, your business can be legally liable for injury orproperty damage due to your negligence or that of your employees.If a lawsuit should occur and a judgment is rendered against yourbusiness, a liability policy will pay up to the amount of thepolicy limit plus the cost of defending the lawsuit. There'sgenerally a payout limit per incident and a total payout limit forthe entire policy year.
If you sell products, you also need to carry product liabilityinsurance. How much coverage you need depends primarily on the kindof product you're selling and its potential for harm.
Vehicle insurance. Althoughvehicle insurance is actually a type of liability insurance, itshould be considered separately because it's not provided undera general liability policy. If your employees use their ownvehicles for business purposes, the business needs to cover thosevehicles.
Workers' compensationinsurance. This type of insurance provides coverage forinjuries sustained by employees on the job. Although some statesrequire such coverage only if you have a certain number ofemployees (perhaps three or more), even if you're a very smallbusiness, you may want to consider having the coverage anyway. Anemployee injured on the job who's covered by worker'scompensation insurance is limited to the amount he or she cancollect and, in most instances, can't sue your businessseparately, so you don't have to lie awake nights worryingabout paying a huge judgment for pain and suffering or mentalanguish.
Lastly, here are some general rules for insurance coverage:
1. Consider buying acombination policy that covers both property and liabilitycoverage. This may save you some money.
2. Look for a small-businessinsurance package that includes a full range of coverage. This isoften much cheaper than buying coverage from several differentcompanies.
3. See what your trade orprofessional association, chamber of commerce or other businessassociation offers for group insurance coverage. The buying powerof a large group may mean lower rates for you.
Before purchasing insurance, always read the policy carefully tomake sure it covers exactly what you need covered.
Before you choose just any insurance package, check out"Needs ToKnow" 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 andemployer/employee relations, she's been a consultant tosmall-business owners since 1981. She worked as a staff attorneyconcentrating in employment law issues before joining the SmallBusiness Development Center national network in 1986. Currentlyarea director for the Kennesaw State University Small BusinessDevelopment Center near Atlanta, she has developed two nationallyrecognized programs: The Cobb Micro Enterprise Council, which wonthe Vision 2000 award for small-business development in 1999, andthe Franchise Institute, developed to provide assistance tofranchisees.
The opinions expressed in this column are thoseof the author, not of Entrepreneur.com. All answers are intended tobe general in nature, without regard to specific geographical areasor circumstances, and should only be relied upon after consultingan appropriate expert, such as an attorney oraccountant.