For small business owners, insurance can be a huge pain. It’s just one more “trivial” item to add to the never-ending list of to-dos, right? The truth is that it’s one of the most important protections an entrepreneur can purchase, and it doesn’t have to be a confusing pain to get.
Let us save you the time and frustration. Here are the 4 major steps to getting a quality insurance program in place—and making the most of it!
1. Create the Game Plan
Think about any of your purchases over the last year. It’s a safe bet to assume that very few of them were made without at least a quick check on Google or Amazon, right? While you don’t have to become an expert, it’s important to feel out the lay of the land when walking into the insurance purchasing process. Once you know what’s out there, you can move confidently to the next step.
Here’s a quick overview of the important insurance plans for most small business owners:
Workers Compensation Insurance
Workers compensation covers your employees if they get injured on the job. This is a required coverage, but the requirement limits and coverage method vary by state: some states will build the cost of worker’s compensation into payroll taxes, while others—NY and CA, for example—require the business owner to purchase the coverage independently.
General Liability Insurance
While workers compensation covers injuries to your employees, general liability insurance covers injuries caused by your employees or your business operations. “Injury” could mean bodily injury, property damage, or personal injury.
- Your online shop sells cosmetic products and several customers have a bad reaction to a particular product, giving rise to a lawsuit.
- Someone spilled a drink on the floor in your restaurant and another customer slips and falls before you can clean it up. The customer then sues for the injury and related costs.
Note: These policies can usually be packaged with property coverage for your company’s equipment, adding another layer of protection.
Errors and Omissions Insurance
Service providers and consultative or creative businesses should be particularly tuned into Errors & Omissions insurance (“E&O”). E&O basically provides coverage for claims that your didn’t do your job properly. Think malpractice insurance for lawyers and doctors, but for any professional: designers, business consultants, accountants, technology companies, and so on.
- You’re a web/graphic designer and you’ve just done your best work yet. However, your client doesn’t see it that way—and demands their money back. The situation escalates to a written demand letter and a lawsuit.
- Your company’s software platform for businesses malfunctions and users lose access to their data. Users can’t access their leads pipeline, miss out on closing new deals, and come after you for the lost revenue caused by your malfunctioning software.
- One of your clients alleges that your accounting services cost them a bigger tax bill than they should have received, and they demand money back and payment of the difference.
Cyber Liability Insurance
This is an important one if you collect any customer data. Cyber liability insurance covers claims and costs incurred when your customer employee data—really any data that has personally identifiable information—is leaked or stolen. The scary reality is that 90% of data breaches affect small businesses. In some states, leaking just a name and email address can be enough to get you in hot water. You’ll have notification costs, lawsuits, forensic costs to see what went wrong, and more.
- An employee leaves their cell phone in a cab, and then next cab rider is able to access your client or employee data and commit identity fraud.
- Someone maliciously hacks your database and steals personal customer or employee data.
Directors & Officers Insurance
Directors and officers insurance (“D&O”) protects the personal assets of directors and officers, should they be sued personally based on a decision made or action taken on behalf of the company. This one is particularly important for business owners with outside investors or in regulated industries.
- Your restaurant is doing well, so you decide to reinvest some profits into adding some extra seating and upgrading the bar. Your outside investors file a complaint against you for withholding shareholder profits and mismanaging the company’s money.
- The EPA accuses you of a violation of a waste disposal regulation—government organizations tend to personally name directors or officers.
- The SEC files an action against you over an alleged reporting error when you raised a round of financing.
Employment Practices Liability Insurance
Employment Practices Liability Insurance is extremely important when scaling up hiring. It covers claims for employment disputes: hiring/firing discrimination based on age, race, disability or other protected classes, sexual harassment, wrongful termination, and all that.
- A prospective new employee slaps you with a complaint letter alleging that he was more qualified for the job but was not offered the position because of his race.
- You’re in lean times and have to let a couple employees go… But they turn around and serve you with a wrongful termination lawsuit.
Key Person Insurance
Key Person insurance is a life insurance policy. The only difference is that the beneficiary of the policy is the company rather than a spouse or family member. This can be a lifeline for the company should the unthinkable happen to one of your executive MVPs, and if you’re venture-backed, expect your investors to require it.
2. Find Your Broker
So now that you have a basic overview of some of the core products out there, it’s time to take the next step: getting some actual quotes for the products you need.
Here’s the problem: there are hundreds of insurance carriers out there offering similar but slightly different products. Which one do you choose, and how do you get to them? That’s where your broker comes in. Here are some tips on finding the right broker for your needs:
Specialization is key
While some are more proactive, many small business owners initially get insurance in place simply to meet contract requirements and land a big customer. They’ll throw the requirements at the first broker they find and hope for the best.
If you take the time to find a broker that specializes in your industry, however, you’ll get way more value out of the exercise. A good broker will help you get insurance that is less of a contractual burden and more of an investment, letting you grow confidently and land more big clients.
Vet for knowledge and technique
Once you’ve found a broker practicing in your industry, vet their expertise. Are they asking the right questions about your business? Do they have clients with a similar business model and target customer? Can they provide references? It’s important to remember that you’re choosing a partner, not just a generic service provider.
You should also learn about the broker’s technique: will you be working with one person or the whole team? Is the relationship face-to-face or digital? Will you be on the phone or mostly working via email? Gut check the methods against your preference to make sure the relationship will run smoothly.
Stay the course
Once formed your partnership, stick with it. Using multiple brokerages at the same time can cause clogs in the pipeline and delay the quoting process, so give your chosen broker a chance and have an open dialogue before switching it up.
3. Review Your Quotes
Once you have the quotes in hand, it’s time to review and ask plenty of questions. Remember, you’ve recruited your broker to navigate the nuances of some pretty complicated insurance products, so leverage their expertise for some hand-holding.
Insurance quotes and policies aren’t exactly light reading, so here’s a quick list of some of the bigger items to look at:
Limit(s) of liability
The limits of liability are the heart of the proposal: they tell you how big of a loss the insurance carrier will actually cover. The “occurrence” limit is the total compensation available for any one claim/loss situation. The “aggregate” limit is the total that can be paid out out over the entire policy period—usually one year. As with most things, bigger generally costs more. Higher limits mean you’ll pay higher premiums.
This is the deductible—just in insurance lingo. It’s arguably the next most important item, because it shows you how much you’ll have to pay out of pocket for each claim before the coverage kicks in.
How will you pay for the policy? Are you billed by the broker (“agency bill”) or carrier (“direct bill”)? Is payment due up front or in installments? Wire, check or credit card? Understand these terms—they’ll usually be on the first page or two—and align them with your current cash situation.
Insurance carriers have something called an A.M. Best Rating, which is basically a letter grade system that shows the financial health of the company. Anything above an A- will be ideal: that means the carrier is in a strong financial position… And it’s usually the minimum required by most contracts!
Those bullet points will get you started, but definitely talk through the quotes with your broker to get a full understanding of your coverage before pulling the trigger.
4. Stay Current
Once you’ve picked your coverage and have the policies in hand, the work is done, right? Not quite…
Remember, this is a partnership with your brokerage, so you want to keep in touch with them. Your insurance policy is sort of like your living situation: over time, you switch apartments and move houses to adapt to life changes.
The same goes for insurance. You want to make sure that as your company grows and adapts to the market, your insurance policy adapts with it. The only way to do this is to keep an open dialogue, and make sure that adjustments are made when you change your operations, move offices, purchase new equipment, and more. If you’re going through a big change, let your broker know!
When it comes down to it, purchasing business insurance for your company shouldn’t be seen as a burden or check-the-box exercise, but rather as an opportunity to invest in your company’s long-term future.
from Fundera Ledger https://www.fundera.com/blog/2016/02/05/4-steps-business-insurance/