After following to the letter our article on how to start a business, you wipe the sweat from your brow and think, “what next?”
Once you’re licensed and legally able to operate your business, you shouldn’t actually operate until you have insurance. There are myriad different types of insurance policies and the list of available policies keeps growing as our world changes. An example is cyber insurance that didn’t exist 30 years ago. Here are the major ones:
E&O or errors and omissions
D&O or directors and officers
EPLI or employment practices liability insurance
Professional liability insurance
Product liability insurance
Business interruption insurance
I know what you’re thinking. THOSE are the major ones? Here you were worried about budgeting for licensing fees and now you have to pay premiums for a bunch of different insurance policies? I know. It’s a lot. But let’s discuss each one and why or when you’d need that type of policy.
General liability policies typically cover injury to your customers or employees at a location where your business operates. I say “where your business operates” because these policies often cover injury that occurs off-site if the activity that causes the injury is related to your business. The simplest example of something that would be covered by a general liability policy is someone walking into your office, not seeing the coffee spilled on the floor, and slipping and falling.
Where GL insurance covers injury to people, property insurance would cover damage to property. If your building catches fire, your property insurance policy should cover it.
E&O or Errors and Omissions aka Professional Liability Insurance
This type of insurance is commonly obtained by those who hold a professional license – doctors, lawyers, real estate agents, CPAs, etc. but can also be obtained by consultants and anyone giving advice that could go badly. These policies cover injury to people as a result of your screwups – bad advice, negligence, or inadequate work. Check your jurisdiction because sometimes professional liability insurance is required for your type of professional license.
D&O or Directors and Officers
D&O insurance would defend you if you were sued because of your decisions in serving on a board, whether it’s a nonprofit or for profit. This type of policy is especially important for nonprofits to obtain, as you can only attract good volunteer board members if they know they’ll be protected against liability, especially if they aren’t paid for their service.
EPLI or Employment Practices Liability Insurance
This type of policy protects the employer from claims filed by employees – claims for things like wrongful termination, sexual harassment, discrimination, invasion of privacy, false imprisonment, breach of contract, emotional distress, wage and hour violations, and failure to hire or promote. Yes, I said FAILURE TO HIRE. Here’s a horror story for you. A friend of mine works for the insurance company that offers the EPLI policy. One of their insureds operated a fast food franchise. They were trying to fill a low level position, so they put the call out for applications and conducted interviews. One candidate didn’t have the qualifications, so they didn’t hire her. She turned around and sued the employer for failure to hire. Nonsense, right? Well, at last count they’d been in court for 2 and a half years fighting this because despite the fact that the candidate didn’t meet the minimum qualifications and that’s why she wasn’t hired, when she filed the lawsuit she claimed she wasn’t hired because she was being discriminated against.
Workers comp insurance covers injury to employees that they sustain in performing their employment duties. For example, if you have a construction company and your employee gets in a wreck on the way from one job site to another, the employee’s injuries would be covered under workers comp. If the employee hurt someone else, though, that would be covered under a combination of general liability (discussed above) and commercial auto (discussed below), depending on exclusions (discussed further below).
If you have employees, you MUST carry workers compensation insurance. In Nevada, failure to do so can result in a criminal misdemeanor charge against the individual business owners. Don’t even ask me about my first and hopefully last experience in criminal court related to a business owner who refused to comply.
Commercial auto is just that. It provides coverage for any vehicles used in the business. This is especially important for construction companies, as they often have work trucks driven all over town from one site to the other, increasing the risk of damage to the vehicle and the driver. This is one policy that’s often required by a commercial landlord, even if you aren’t operating delivery vehicles.
Product Liability Insurance
Product Liability Insurance covers the legal and court costs of defending any claims of bodily injury, property damage, or financial losses caused by your product. We have a client who has a very recognizable brand in the beauty industry who wants to lend his name to a cosmetics manufacturer for use on some products they formulate. When looking at the contract, I made sure to specify that the manufacturer of the product has sufficient product liability insurance so that if anyone claimed an allergic reaction or some issue with the product that caused them harm, my client wouldn’t be on the hook for it.
Business Interruption Insurance
Business interruption insurance covers the loss of income your business suffers after a disaster and often provides for recovery. It might cover the income you lost while you were unable to operate plus the costs involved in getting your doors open again. Many businesses ordered to close by the government in reaction to COVID filed claims for business interruption. I reviewed a few policies which provided that coverage would only apply to interruption due to an equipment failure or failure on the part of a utility company to provide power, water, or gas. No one could possibly have predicted the global pandemic that shut down economies across the world and it’s a safe bet that most business interruption policies don’t cover that type of loss. In fact, even if policies had pandemic coverage, the insurance companies often argued that it wasn’t the pandemic that shut down the business, it was the government orders resulting FROM the pandemic and government orders are an exclusion. Sneaky sneaky.
Advertising injury policies can protect your activities as you advertise your product or service. They can protect an individual or business from claims they engaged in copyright infringement, libel, slander, or invasion of privacy. Some general liability policies contain advertising injury protection, so it’s important to read your policy and, again, make sure you’re dealing with an experienced commercial insurance agent.
These policies protect the policyholder from internet-based risks. System breaches and data theft of sensitive customer information are some of the risks a cyber insurance policy would protect against. Until recently, cyber insurance was a new thing and nearly impossible to get because carriers, or the companies writing the checks, didn’t know how to assess the risk or how to calculate their exposure.
It’s a good idea for everyone to have umbrella insurance, provided you have assets to protect. Umbrella insurance kicks in to supplement policies whose limits aren’t sufficient to cover the loss. Let’s say you have a $1 million general liability insurance policy and a $2 million umbrella. You are sued and the guy who sued you wins a $1.5 million judgment. Unless exclusions apply, your umbrella policy would cover the excess.
Now let’s talk about exclusions because they might be (probably ARE) the most important part of any insurance policy. If you read any insurance policy, you’ll see that the bulk of the language discusses what IS covered. However, toward the end, you’ll see the list of exclusions. If the policy giveth, the exclusions taketh away. These are super important because while you may think you understand your coverage, the exclusions may be hiding something you thought you were covered for. As an example, I was asked to serve as pro bono counsel to an animal rescue. One of the first things I did was look at the insurance policy. That policy covered injury to people and property, like any good general liability policy would, but had a very crucial exclusion. Actually, two. It excluded coverage for injury to volunteers AND injuries related to dog bites. Well, as a fully volunteer run DOG RESCUE, just about the only injuries that might happen were dog bites to volunteers. So I quickly contacted a commercial insurance broker who found us the right policy to cover those injuries.
Look, I get it. That’s a lot of insurance and each of those policies comes with a sticker price. That’s why I strongly encourage you to work with a commercial broker. The goal is to describe your business activities and let the broker suggest the policies, but that information is only good if the broker is experienced and has the integrity not to oversell you policies.
Especially those of you with oddball businesses, you must make sure your broker understands what you do. I had a client whose business was setting up giant projectors and projecting company logos on the sides of buildings. Think Gotham City with its bat signal but for hotels here in Vegas. These are the days before hotels starting hanging 50-story LED screens off the sides of their buildings (lookin’ at you, Resorts World). I read their general liability policy and it didn’t cover half the stuff it should have – damage to the building, injury to people on the ground, injury to people in the rooms if the light was shining into the window, etc.
How do you find a good commercial insurance broker? Call other people like me, or CPAs and bankers who work with them regularly because chances are we’ve sifted through some of the shysters and can provide good recommendations.