Is Your Business a Safe Investment?
By David Crump
A good sales result, of course, is a key factor in your company being a good investment of your time, talent and money. However, to be a “Safe” investment, you also need to protect your enterprise from potential losses. Below you will find a list of some of these risks. Insurance is an important method of limiting your risk exposure and making your venture a safer investment.
1. Owner Safe? You, the owner needs to be safe for your firm to be safe.
a. Personal Liability
A venture owner is a particularly likely target for a lawsuit. A typical owner has both increased wealth and increased visibility. Your personal lawsuit risk is the back door to your company. Higher liability limits on your personal insurance policies including a Personal Umbrella (Excess Liability) policy are important to lock and bolt this back door.
b. Owner Succession Plan (Life Insurance to fund?)
Proper estate planning and owner succession should be part of your business plan. Don’t work a lifetime to build wealth with company ownership and then pass it to Uncle Sam in taxes instead of your family. Also, the value of your venture depends on your leadership. If you are not available, a plan for a successor can be crucial to its value if you are no longer available to be that leader. Life insurance on you, the owner, can be a tool to help manage this risk.
c. Owner Health Insurance (personal bankruptcy risk)
If you are your own boss, you often will need to provide for your own health insurance. Approximately half of the bankruptcies in the United States are due to unpaid medical expenses. If you become overwhelmed with medical bills, it could impact your firm. Don’t expose yourself to the potential catastrophic financial risk of a major illness or injury by not protecting yourself with a major medical insurance plan.
I particularly like the High Deductible Health Insurance plans that are Health Savings Account compliant for business owners. Self-insure the everyday medical costs with your contributions to your H.S.A. funds but have the Major Medical Insurance backstop provided by the High Deductible Health Insurance to protect you (and your company) from the financial costs of a major illness or injury.
2. Asset Safe?
Your investment in the property assets of your firm can be critical to your operations and ability to continue to operate. Replacing business assets damaged or lost can also affect your profits. Protect your company assets from loss with commercial property insurance.
If you own your firm’s facilities, loss due to fire, tornado or other perils can endanger this significant investment. If the buildings or other fixed assets are mortgaged, your bank loan normally will require insurance to protect the lien.
b. Building Improvements
Often overlooked, most commercial ventures with leased facilities have a considerable investment in fitting out the landlord’s space to suit their operations. This can include very expensive installed equipment. Think in terms of a fire that destroys the building. The landlord’s insurance normally will only rebuild your space to bare walls and concrete floor. Your insurance protection will need to be structured to fund the cost to rebuild this bare space back to the facility you need.
c. Contents / Equipment / Inventory
Business property includes all the loose items like tools, office equipment, computers and inventory that you have. Each specific item may not be significant in cost but they can add up to be a large investment. Visualize a total loss event like a tornado or building fire and think how much it would cost to replace all your contents. See Business Equipment Insurance.
3. Lawsuit Safe?
Liability = lawsuit. Most commercial operations have specific risks of lawsuits that can result in significant financial losses. The cost of a lawsuit includes the legal costs to defend the allegation and if found guilty, the cost to settle. The business environment in the United States is very litigious – check out any phonebook cover for opportunities to hire a lawyer and sue the company of your choice.
a. Premise Liability
Any enterprise that has a business location including jobsite locations has a premise liability risk. This is often also called the “Trip & Fall” risk — a person of the public getting hurt from walking on your location. A retail store is a clear illustration of the premise risk with an open door to the public to enter and browse.
Premise Liability protection is normally a key component of the Commercial General Liability insurance contract.
b. Products / Completed Operations Liability
Product Liability is the risk of offering to the public a product that may cause injury. An example would be a restaurant serving food that makes everyone sick or a manufacturer that creates a defective product which results in injury. Even if your business operations does not create products, your company still can have a significant lawsuit exposure to a defective product you resale or distribute that causes injury and results in a damaging lawsuit.
Completed Operations is the risk of work you have finished being defective and causing damage or injury. An example would be an auto garage installing brakes wrong causing a traffic accident. Another example would be an electrician installing wiring wrong resulting in a building fire.
Product & Completed Operations protection are normally components of the Commercial General Liability contract. Manufacturers typically have a separate Product Liability contract to provide the higher level of protection needed for that type of firm.
c. Worker Injury Liability
Any employer with hired help has the risk of a worker being injured while at work and suing the business. A frequent mistake is hiring “1099 Contract Labor” and not realizing that they are employees for purpose of work related injuries. A single lawsuit from a worker hurt on the job can result in a very large settlement and overwhelm your company finances.
Worker’s Compensation Insurance is a state mandated benefit package that shifts the worker injury risk from an employer. A Work Comp contract normally also includes Employer Liability to protect a company if a lawsuit attempts to skirt the Work Comp statute. The cost of Work Comp varies depending on the type of work being done.
d. Auto Liability for commercial vehicles (Work Truck Insurance)
Many enterprises provide delivery service or use vehicles for their operations. Auto accidents are the source of many lawsuits and a significant risk for any business with work trucks and other owned vehicles. Another less recognized risk is on “non-owned autos” (example: employee auto) that are on job errands and “hired autos” (example: rented truck for a special delivery) that are rented for company activities.
Commercial Auto Insurance is available and can be customized to meet the particular insurance protection needs for your work vehicles.
e. Employment Practices Liability
Most employers don’t think about the lawsuits that can result from unintended mistakes in their relationships with their employees. Using professional practices in hiring, terminating and promoting employees is the best defense to lawsuits resulting from an angry ex-employee but any employer needs to have insurance protection as a backup.
Employment Practices Liability is often a component available with a Commercial Insurance Package policy.
f. Professional Errors & Omissions Liability
If you are a licensed professional or provide important professional advice, you are at risk of a lawsuit resulting from giving the wrong advice. Consultants are particularly at risk for Professional Liability because your business activity is professionally grounded advice. Even if your advice was sound, defending a lawsuit can still overwhelm your company finances.
Professional Errors & Omissions Liability is normally available as a separate insurance contract.
g. Other Lawsuit risks?
No one can predict all the possible events that could result in a lawsuit. A prudent owner should discuss their business liability risk with their lawyer on a regular basis. You visit your doctor for an annual health check-up, why not an annual legal liability check-up with your lawyer? Your insurance agent can then discuss insurance plans to provide protection for lawsuit risks identified by your lawyer.
4. Business Continuation?
The secondary economic hardship of an insured loss can be more challenging than the actual damage.
a. Income & Continuation – Ongoing wages and expenses
Income and Continuation keeps your firm alive while the damage is being restored. Most enterprises cannot afford to cease operations and must find an alternative location and continue to serve their customers. Also important to any company is retaining its important talent.
b. Extra Expense to accelerate reopening or relocation
Being out-of-business due to an insured loss can damage your market share as clients seek service elsewhere. The sooner you can reopen the better. Extra Expense helps accelerate re-opening or relocation by minimizing the time your firm is closed.
Risk is part of the commercial environment. Reducing or avoiding risk is just good business. Understanding your business risks and buying valuable insurance protection to offset risks that must be taken is another key component to helping your venture be a safer investment.