Mind the Gap
When it comes to insurance, holes in coverage can be costly.
One can obtain insurance against the possibility of alien abduction, or “change of heart” insurance in case you get abandoned at the altar. And then there’s Rolling Stone Keith Richards’ middle guitar finger — it’s insured for more than $1.5 million.
Today it would be close to impossible to find anyone who hasn’t purchased some kind of insurance. Whether it’s for life, home, car or business, insurance gives us financial security against catastrophic and dreadful events with policies that cover our risks and help us recover.
An agreement developed in early Babylonian law is commonly recognized as the first prototype of an insurance contract. It resembled “bottomry,” a loan secured by the master of a ship, and it provided an interest rate on the loan, as well as an additional premium charge in exchange for potential loss of the ship and cancellation of the debt.
Nowadays, however, the masters of today’s businesses need to take a close look at the following:
Worker’s compensation insurance protects a company from legal complications when an employee is injured on the job. This type of insurance provides benefits such as medical care for the injury, indemnity wage benefits, vocational rehabilitation services, and/or death benefits. According to Jeff Schwaner, vice president of Stone Insurance, one misconception is that you only need worker’s comp on those employees who file a W-2 tax form.
“If you hire someone on a one-time basis to deliver your product to a client, and there is an accident and they don’t have their own workman’s comp policy, you will be held responsible,” says Schwaner. “Employers should have workman’s comp on everyone they employ to protect their employees, but to also protect their future earning power. If you are held responsible for a costly accident, you could easily go bankrupt and be put out of business.”
If a business uses company vehicles, it needs commercial auto insurance. If you do not have company vehicles, but employees drive their own cars on company business, you should have non-owned auto liability to protect your company in case the employee does not have insurance or has inadequate coverage.
General Liability Insurance
Every business needs to have liability insurance. The policy provides both defense and damages if an owner, employees or products or services cause or are alleged to have caused property damage or bodily injury to a third party. Commercial general liability also enables a business can continue operations while it faces real or fraudulent claims of certain types of negligence or wrongdoing.
“General liability insurance is the most broad insurance your business can buy, and it’s generally the first insurance most businesses get, but that’s really just a start,” says Ryan Daul, producer with the family-owned insurance company Daul Insurance. “It’s important to then look at additional specific risks to your business and focus on getting coverage for those too.”
Product Liability Insurance
Companies that manufacture, wholesale, distribute and retail a product may be liable for its safety. Product liability insurance protects against financial loss as a result of a defective product that causes injury or bodily harm. The amount of insurance you should purchase depends on the products sold or manufactured. For example, a company that sells candy would most likely have less risk than a company that sells fireworks.
Commercial Property Insurance
Generally, the definition of “property” is broad and includes lost income, business interruption, buildings, computers, company papers and furniture. Property insurance covers everything related to the loss and damage of company property due to a wide variety of events, such as vandalism, fire, smoke, hailstorms, wind and riots.
Home-Based Business Insurance
Contrary to popular belief, homeowners’ insurance policies do not generally cover home-based business losses. According to the National Bureau of Labor Statistics, more than 66 percent of the estimated 20.7 million people who work at home are self-employed and run a home-based business. It’s further estimated that more than half of home-based business owners are underinsured. A typical homeowner’s policy usually only covers damages up to $2,500 on the premises of the home-based business. In addition, your homeowner’s policy won’t typically cover liability arising from your business. For example, if a FedEx driver falls and breaks a hip when delivering an important package, you might not be covered.
Personal Umbrella Insurance
Business owners may also want some additional coverage, on top of insurance policies they already have. Personal umbrella insurance is an extension to an already existing insurance policy and covers beyond the regular policy. Generally, it is sold in increments of $1 million and is used only when liability on other policies have been depleted.
Insurance for Contractors
There are also insurance policies that cover a business when it is outsourcing work or working for others. Keeping work in-house gives an owner complete control over the production or services provided. When working with subcontractors, freelancers or independent contractors, a business owner loses, in part, some of the direct control over his/her business operations.
“This risk can be managed by careful selection of safety-conscious contractors on the front end and a well-crafted contract that clearly spells out the parties’ expectations and duties,” says Megan Guy, executive counsel and producer with Gillis, Ellis & Baker Inc.
“Insurance, both yours and the contractor’s, can support some of these obligations.”
Almost all businesses require that subcontractors have their own insurance and other requirements before they can qualify to bid on jobs. For example, the McDonnel Group, a Louisiana-based general contractor, has a subcontractor/supplier qualification form on its website.
“This helps subcontractors and suppliers understand what they need to do business with us,” says Christie Watts, human resource director for The McDonnel Group. “We are also very open to helping businesses — and especially disadvantaged businesses —navigate our guidelines so they can qualify.”
As a subcontractor or vendor you will almost always have to submit proof of insurance to a contractor. “Certificates of Insurance are routinely required by contracting parties because they provide a summary of the insurance coverages, limits and effective dates,” says Guy.
Professional Liability Insurance
Professional liability insurance or errors and omissions insurance is applicable for any professional firm such as lawyers, accountants, consultants, notaries, real estate agents, hair stylists and social workers.
“This is designed to protect against liability as a result of errors and omissions in performing professional services,” says Guy. “For example, those involved in drafting, designing, or preparing and working with plans and specifications, are all likely to have professional liability exposures.”
The John Hancock Tower, a 60-story skyscraper in Boston designed by the I.M. Pei & Partners architectural firm is a perfect example of a time when this kind of insurance was needed. When it was built in the 1970s, the building had a major issue; the windows kept falling out and crashing to the pavement. This was due to unanticipated, repeated thermal stresses to the panels. Ultimately, all 10,000 of the building’s windows needed to be replaced at a cost of $5 million. Without professional liability insurance, the company would have taken a big financial hit.
Each business is different and has different insurance needs besides the coverages already mentioned. There are many options that can better fit your business’ needs such as pollution, cyber or data breach, and marine insurance. You might also consider a business owner’s policy or a BOP.
Often, BOP’s will include business interruption insurance, property insurance, vehicle coverage, liability insurance and crime insurance. Generally, a business owner can save money by choosing a BOP because the bundle is less than the total cost of all the individual coverages and can be tailored specifically to your business.
The cost and amount of coverage of policies vary among insurers. You should discuss your specific business risks and the types of insurance available with your insurance agent or broker. So how much coverage is enough?
“That is akin to asking, ‘How high is up?’” says Guy. “However, as a general rule of thumb, a business should maintain enough insurance to satisfy its contractual obligations and reasonably protect its assets at risk.”
Questions you (and your insurance agent) should ask when hiring contract employees
Most industries employ contract employees of some type. When doing so, follow these tips from Gillis, Ellis & Baker to ensure a smooth and mutually successful relationship.
1- Ask for and check references. “Heard they were good” is not enough.
2- Develop a written contract that will govern the relationship.
3- Ask the contractor to provide a copy of their current certificate of insurance outlining active coverages.
4- Loop in your insurance agent to review both the contractor’s insurance certificates and the written agreement that outlines the relationship.
Things your agent should be on the lookout for:
• Do the contractor’s insurance coverages provide additional insured status and waivers of subrogation, which stop the contractor’s insurer from seeking reimbursement from you after paying a claim to the contractor?
• Does the contract you will be signing contain provisions that will defend, indemnify and hold you harmless from and against any claims that arise out of the contractor’s negligence?
• Do subcontractors hired by the contractor have similar insurance coverage and will those coverages extend to the business owner? (It should, and you should ask for it).
• If the project involves renovation or new construction, who is providing the insurance for the building itself during construction — the owner or contractor?