A reoccurring question business attorneys often receive after helping a new business owner with their initial formation is, “What type of insurance do I need?” What type of insurance you need hinges on what type of business you are in. For example, if you are offering any type of service, such as consulting, real estate, accounting, or the like, you will want to purchase professional liability insurance also known as errors and omission insurance (E&O). However, if you are operating in the cyber world you will likely want to purchase cyber or data insurance. A type of insurance designed to insulate you from unwanted hackers or the improper implementation of data. Regardless of what business you are in, there are a few types of policies that a new business owner should know about to best protect your new business.
Directors and Officers Insurance
When writing bylaws for a new business any good attorney will indemnify both the incorporator (person who started the business) as well as the board of directors (those in power to make daily decisions for the business). Indemnification means that the corporation will take responsibility for any action that may have resulted in injury to the shareholders of the business or to the public at large, by the incorporator or board. Under California law, to utilize an indemnification clause, the board must secure insurance. This type of insurance is called Directors and Officers insurance. Without it, directors and officers are personally liable for their actions while operating within the scope of their duties to the company. Remember, however, that Directors and Officers insurance will not protect you from liability for criminal conduct. (Think Bernie Maddoff). So avoid crime and get a D&O insurance policy and you will be better protected.
Workers compensation or “workers comp”, provides insurance to employees who are injured while working. Workers comp provides wage replacement and medical benefits to those who are injured while on the job. Injuries can happen in a multitude of ways. Simply lifting a box wrong can lead to a slipped disc. While, continuous repetitive movements using a keyboard can cause carpel tunnel. If you have, or plan to employ any W-2 employee, workers comp insurance is required under CA labor code section 3700. CA labor code section 3700 applies, “so long as a business employs just one employee.” However, under 3700 a sole proprietor has the option to purchase workers comp to cover him/herself only. Your payroll service provider may include workers comp insurance as an option. Cost varies depending on the type of business. The more physically demanding or dangerous the profession the more expensive workers comp will be.
Patent and Trademark Infringement Insurance
If your business owns or plans on owning intellectual property, consider purchasing a Patent and Trademark infringement policy. This policy helps cover legal fees in the event of a lawsuit against you.
Another important policy to consider is general liability insurance. Regardless of the type of business, we always recommend purchasing a strong general liability policy. It does not matter if you are a home-based business, or you manufacture goods in a 10,000 square foot warehouse, a general liability policy will help to insulate you from liability should something go amiss while working. A general liability policy provides both defense costs (which can become very expensive) as well as damages. The more severe the injury, the more damages are paid. Legal fees and damages may bankrupt businesses. A good general liability prevents this thus enabling a business to keep the lights on in the event of litigation.
Property insurance is always a wise investment for any company that owns real estate or any type of expensive equipment. Your lender will probably require you to carry it. Equipment can include items like computers, inventory, tools, etc. Property insurance will protect against unforeseen catastrophe. The key is to determine if the premiums outweigh the expense of replacement. A supplement to property insurance to consider is an interruption/ loss of earning rider.
Professional Liability Insurance
If you have a business in which you are giving any type of professional services, consider purchasing professional liability insurance. Another common term for professional liability insurance is Errors and Omission insurance or “E&O”. “E&O” provides a defense and damages policy for those who give professional services. Don’t get confused, E&O insurance is in addition to a general liability policy (discussed above). E&O is NOT a replacement for a General Liability policy. E&O is a good decision for any professional firm including consultants, lawyers, accountants, notaries, real estate professionals, insurance agents, or the like, and helps licensed professionals pay the expense of litigation.
Business Owners Policy
Finally, another type of insurance to discuss is a business owner’s policy or BOP. A BOP is not a single type of insurance, but rather, a bundle policy offered by most business insurance carriers. A BOP can combine several different types of coverages into one policy usually for a lower monthly premium. Although a BOP will often save a business owner a considerable amount in premiums, it is very important to know which types of insurance are necessary for your business. For this reason, it is very important to consult with an insurance or legal professional with experience in business claims who is able to advise you appropriately.
Nothing in this article is meant to take the place of seeking the advice of a licensed insurance agent and/or legal counsel. The information provided is for educational purposes only. Several types of insurances policies have been discussed above. Policies vary depending on the business you are in and where the risks are. Insurance is daunting not because the policy is not available, but rather, because of how many policies are available. If when looking at what it is you do you think there is a chance you could hurt someone physically or financially purchase a policy to cover it.