Business Law: "Insuring" the Success of Your Business

By Nina L. Kaufman, Esq

As if you didn't have enough to worry about with running your business, there are a host of reasons your company could be sued. Millions of civil lawsuits get filed every year in the United States. Like the Biblical Ten Plagues, potential business perils swarm, and should they land on your company, can wreak enormous havoc. And in some situations, total devastation.

So rather than lose sleep over these issues, how can you protect yourself and your company? Insurance. Yes, it can seem like a "protection racket", particularly if the likelihood of anything happening to you seems remote. However, most entrepreneurs don't have the ability to self-fund the attorney fees and possible recovery awards that can result from a lawsuit or claim. And besides, insurance is deductible as a legitimate business expense, so it's worth investigating (I, for one, like to sleep soundly).

Insurance coverage is like vaccination against disease. So what are some of the types of coverage you should consider against these 10 Business Plagues?

1. Form a limited liability entity for your company. While not strictly a form of insurance, it can go a long way in shielding your personal assets (although not business assets), from creditors. Should tragedy befall your business, at least you won't have to lose your home and personal bank accounts in the disaster.

2. Property loss coverage. No matter how careful you are, you can't control how careless others might be. Fire and theft are significant reasons that cause property to get "lost" or destroyed. Employee theft falls under a slightly different category, called "defalcation insurance", so be sure to inquire about that, too. Also, consider other hazards that might be particular to your geographical area such as flooding, earthquakes, tornados/hurricanes. Don't forget to cover your business possessions as well as damage to the premises. If you are leasing space, chances are your landlord will have specified minimum coverage amounts in the lease.

3. Liability coverage. Speaking of careless, how about the daydreaming client who trips over the rug you bought in Colombia and falls head first into your glass coffee table? Liability coverage will protect you from personal injuries that occur on your premises. There are insurance "packages" known as business owner policies (BOPs), so double-check to see if this is included.

4. Business interruption coverage. Also referred to as business continuation coverage, this type of insurance is designed to ensure that your business can continue to operate when you're injured or otherwise incapacitated. Property insurance may replace what's been damaged, but what will replace the lost profits, taxes, and salaries that still need to be accounted for while you're trying to get back on your feet? That's where this type of coverage is helpful.

5. Product liability coverage. Any time you "produce" something (food, toys, clothing) which is distributed to the marketplace, you run the risk of a lawsuit. Food may spoil and cause health problems; a toy could shatter and hurt a child; clothing could catch fire. Because the damages for these lawsuits can run into the millions, it makes sense to have "deep pockets" to cover yourself and your business.

6. Malpractice/Errors and omissions coverage. Because of the nature of their work, professionals are involved in very sensitive areas of a client's business, harm to which can cause significant loss. Imagine a computer consultant, whose insertion of computer code crashes a client's computer network. As a result, malpractice (for licensed professionals: doctors, lawyers, architects, accountants) and errors and omissions insurance is highly recommended. . .especially as you may not be able to shield yourself from personal liability for any damages.

7. Workers' Compensation coverage. If you have employees, this coverage is a must. In many states it's a criminal offense not to carry it for your employees. Workers' compensation insurance provides coverage to employees who are injured on the job, regardless of whether the employees themselves are at fault or not. The benefit is that pain and suffering and punitive damages are rarely awarded under Workers' Compensation insurance. This kind of insurance is not needed if your workforce is outsourced to independent contractors. Just be sure you're not playing fast and loose with the employee/independent contractor rules. For more guidance, see our article, "Walking the Employee/Independent Contractor Tightrope."

8. Employment Practice coverage. The number of employee-related lawsuits continues to climb. Every year, over the past 10 years, the Equal Employment Opportunity Commission (EEOC) receives over 75,000 complaints of various forms of employment discrimination. In Fiscal Year 2005, over $104,000,000 was paid in damages. Employee training, handbooks, contracts - all are areas where small businesses skimp on preparation (and spending legal fees) to protect themselves. With this kind of litigation on the rise, it makes sense to investigate how this form of insurance coverage can protect you.

9. Disability/Long Term Care coverage. For many entrepreneurs, the income they receive from the business is their only income stream. What happens if you need to take an extended leave of absence for medical reasons? It's not such a far-fetched scenario. Disability insurance can help provide you with "wage replacement" funds so that you can continue to meet your expenses, despite a reduced ability (or inability) to work. Disability's sister coverage, long term care, helps cover the costs of care you might need while disabled, and these costs can escalate quickly!

10. Key person/Life insurance coverage. Have you planned for catastrophe? If you, a business partner, or key employee of your business dies, do you have the funds to keep your family and your company going? Especially if you have other business owners, you want to be sure you have the cash on hand to buy back that owner's interest in the business . . . and this insurance helps you do just that.

Just remember: you don't have to handle this all on your own. A competent insurance agent or broker can review all of the options and provide you with quote comparisons. Need to find one? Ask your colleagues or trade association for referrals. Make sure that the agent or broker has experience with businesses like yours. To know which questions to ask, get a copy of our program, How to Choose and Use Attorneys. You'll find that many of the questions we have covered work equally well with insurance brokers and other professionals!

© 2004-2009 The Legal Edge LLC. Nina L. Kaufman, Esq. is an award-winning business attorney, author, and speaker. Under her Ask The Business Lawyer umbrella, Nina offers easy-to-understand business law resources that protect small businesses and save them money. To learn more, and receive our FREE "LexAppeal" ezine, visit http://www.GreatBusinessLawTips.com  or contact Contact Us. This article is for your general information only. Be sure to consult with an attorney regarding your particular situation to make sure you get the specific advice you need.

Nina Kaufman, Esq. Award Winning Business Lawyer, Author & Speaker