When launching a new business, it’s crucial that you get the right insurance in place for your company. In addition to having the correct legal entity set up, insurance is the primary way to protect your personal assets from the activities of your business.
Without the right insurance—or with too little of the insurance you do need—you could be at great personal risk from the costs of a lawsuit, judgment, or in the event of an unforeseen emergency or disaster. To help ensure you obtain the proper coverage, this series discusses the 3 key steps involved with choosing the right business insurance for your startup.
Step One: Understand the role of business insurance
Business insurance is your first line of defense if you are sued by a client or customer, a team member, or vendor. It can also allow your company to recover and rebuild if it’s ever affected by a natural disaster or other potentially ruinous event. That said, insurance is actually about empowerment, rather than fear.
Empowerment comes from the knowledge that you have the right insurance in place, so if something does happen, you’re going to have the legal support you need (paid for by your insurance company) and be able to pay any judgment against you. Accidents happen, and insurance should be looked at as a supportive resource to allow you to take more risks.
Remember, anyone can file a lawsuit at any time, for any purpose. Even if you’ve done nothing wrong, you can still be sued. And if you are sued, you will have to hire a lawyer, likely at a minimum cost of $10,000 just to defend the action on your behalf.
With the proper coverage in place, however, your insurance policy will cover your legal bills and court costs as well as hire you an experienced lawyer, which in itself offers you huge peace of mind, especially in today’s highly litigious society.
Step Two: Know what coverage you need
There are numerous types of business insurance available, some of which are a must-have for nearly every business, and others you might not need. The type of coverage you require will ultimately depend on the specific risks your company faces and its assets, so you should meet with us to identify what your particular business should have in place.
In the meantime, practically every business will benefit from the following types of insurance coverage. And remember, make sure any liability insurance you purchase will cover hiring legal support in the event you ever face a lawsuit. If not, the policy is most likely not going to be all that valuable.
General liability insurance: General liability covers lawsuits initiated by third parties for injuries and/or property damage related to your business. Such coverage is needed regardless of whether you are found at fault, since the legal expenses alone can cripple your business.
Commercial property insurance: If you rent or own office space, this policy will cover damage to your property due to fires, storms, theft, and other events. If you work from home, your homeowner’s policy might not cover business-related liabilities, so in that case, you’ll need home-based business insurance.
Professional liability/malpractice insurance: Also known as errors and omission insurance, this covers lawsuits alleging your professional services caused a client to suffer damages, arising from actions like negligence, mistakes, and violation of contract. Such coverage can be essential for a wide range of service-based businesses such as accountants, lawyers, medical professionals, real-estate agents, consultants, IT firms, and others.
Employment practices insurance: This coverage provides protection for lawsuits initiated by your employees. While this is an often-overlooked coverage, it’s actually one of the most important, since employment claims are the most serious threat to your business, even if you think you are the best boss on the block.
Worker’s compensation insurance: If you have any W2 employees, worker’s compensation is typically mandatory in most states, and it’s included as part of your payroll taxes. Workers’ comp offers medical treatment, disability, and death benefits for employees. And even if your business is relatively low-risk, coverage is still needed for claims like slip-and-fall injuries and carpal tunnel syndrome.
Directors & officers’ insurance: This coverage protects your board members and executive officers from judgments, settlements, lawyer fees, and other legal expenses if they are personally sued for a decision or action they made on behalf of your company. Unlike your business, these team leaders are not personally protected by a professional liability policy. Such insurance can also reimburse your company if it pays for the defense, judgment, or settlement of a lawsuit on behalf of these individuals.
Step Three: Selecting the right insurance professional
Your insurance professional’s role is to make sure your business is fully protected with the proper types of insurance and levels of coverage. That said, choosing the right insurance agent for your business isn’t as simple as it might seem.
Indeed, there are a number of factors involved with business insurance that you should understand before making your final decision. With this in mind, here are three tips for selecting the right business insurance agent for your startup.
Choose the right type of insurance professional: The first thing to consider is what type of insurance professional you want to work with. There are generally two different types of insurance agent: a captive agent and an independent agent.
Captive agents are employed by a single insurance company, and they can only sell that company’s products. This means the prices, coverages, and premiums they offer will generally be limited. Plus, the agent’s loyalty will lie with his or her particular company, so they might not be capable of providing you with the best coverage available.
On the other hand, independent agents work with numerous different insurance companies, so they’ll have access to many different policy and coverage options. As their client, this can give you an advantage, and allow them to put your needs and preferences ahead of a particular insurance company’s bottom line.
In light of these differences, you may want to consider finding an independent agent. He or she will be able to search all available policy options from multiple insurance companies, which should ultimately provide you with superior coverage.
Look for someone with knowledge of your industry: These days, businesses are highly specialized, which means your company will likely have unique coverage needs. Your insurance professional is your partner in minimizing risks, so it’s vital they understand the exact nature and scope of your business. An agent that truly understands your industry and operation is far more likely to get you the proper coverage than someone who sells generic policies to every client, regardless of their individual risks.
While your insurance agent might not know everything about your business, he or she should be diligent enough to take the time to develop a thorough grasp of your operation’s particular needs. To this end, when you meet with a potential agent, watch to see what kinds of questions he or she asks and what level of knowledge the agent demonstrates about your industry.
Some things to look for in regards to this include:
- Does the agent ask relevant and thorough questions about your business, your goals, and your assets?
- Do they understand the unique nuances of your company?
- Do they grasp the risks that are inherent to both your industry as a whole and your particular operation?
Find an agent who will serve as your trusted advisor: Although you may feel like you know everything about your specific business, the right insurance professional can provide you with additional knowledge about your industry and competitors, combined with specialized knowledge of the latest insurance products. From there, the agent can test your assumptions, analyze your business practices, and offer custom solutions designed to minimize the risks your business faces at every level.
Ultimately, what you really want is a trusted advisor—someone who will really get to know you, get to know your business, and be available to help your business adapt and evolve over its entire life cycle. An insurance professional who fits this bill will typically ask specific types of questions, which should include the following:
- What is your plan for your business?
- What is your growth strategy?
- What is your exit strategy?
- What is your long-term vision for your company?
Once an agent really understands your business, your life, and your vision, he or she will tailor an insurance proposal to your specific situation and provide you several different options to choose from.
Enlist our support: Finding the right insurance professional is a key aspect in creating your business’s legal, insurance, financial, and tax (LIFT) foundation. Take the time to look around, and always interview multiple people before making your decision.
We can assist you with your search to help ensure you don’t end up with someone who’s going to sell you products you don’t need or leave you with the wrong type of coverage. Before you hire an agent, consult with us, as your Family Business Lawyer™, to evaluate the optimal types and levels of insurance your business should have in place.
This article is a service of Stafford Law Firm. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.