14 JanInsurance That EVERY Self-Employed Business Owner Needs
This article is intended to provide both a checklist and brief description of the most common types of insurance that each and every business owner in America should maintain on a regular basis. Accidents happen unexpectedly - which is why they are not referred to as ‘planned bad things’ - and the financial impact to a business or an individual’s personal income can be devastating and may result in bankruptcy, business liquidation, and other serious issues.
1. GENERAL LIABILITY
The most common insurance coverage that most business owners are familiar with is ‘general liability’, but few people outside of the insurance industry really know what this is. A ‘general liability’ policy protects you and your business from legal and defense costs, settlement amounts, and medical costs associated with a claim against you for ‘Personal’ Injury, Bodily Injury (physical harm), Advertising Injury, and Completed Products and Operations (faulty or defective products and/or completed services). Depending upon your business, you may be able to obtain this coverage by purchasing an either a broad ‘Business Owner’s Policy’ or a stand-alone liability policy. Examples of claims you might possible face include:
Bodily Injury - (1) a customer walks into your premises, steps on a freshly-mopped floor and falls, injuring his knee and hip in the process. (2) Or, perhaps you are working at a customer’s location and you have a debris pile in the yard. During the night a neighborhood kid trespasses and loses an eye due to falling on the debris pile while at the site. Though this individual was trespassing, the debris pile you or your worker’s created is legally considered an ‘attractive nuisance’ and you could be held liable for the child’s injuries and medical costs.
Personal Injury - Similar to Bodily Injury above, ‘Personal Injury’ is a broad legal term used to describe any wrong or damage done to another in his person, property, rights, or reputation. This may (or may not) include bodily injury as well and this type of claim can be physical or psychological and examples include wrongful death, liable, slander, trespass, and nuisance. Personal Injury can be a physical injury, disease, or illness, or a psychological injury or illness. Examples of personal injuries are physical injuries to another party, psychological illness caused by you or your companies actions, an injury caused in a traffic accident, an injury received as a result of faulty goods or services.
Completed Products and Operations - If you sell a product or perform a service for another party and your completed product or service is found to be defective, you may face legal action. For example, assume you are a builder or general contractor building high-end homes. You sell a newly-completed home to the end buyer and three weeks later you receive a phone call telling you that there is water damage and that the downstairs floors are ruined along with the ceiling and much wallboard. It turns out that the plumber you hired to install the toilets upstairs used a cracked wax ring in the master bath and the water from the toilet had been leaking between the first and second floors until the ceiling fell in and the water ruined the wooden floors downstairs. This home is considered a ‘completed operation’ and if there were no extenuating circumstances regarding unauthorized work or similar, your general liability policy would cover the loss.
Damage to the Property of Others - A general liability policy also covers damage caused by you or your company to the property of others. For example, if your company were hired to clean the rugs of a customer and, for whatever reason, your employee or cleaning process ruined a customer’s $2,500 Persian rug, your policy would pay to replace the rug.
2. PROFESSIONAL LIABILITY (depending upon your business)
Professional Liability, commonly referred to as ‘Errors and Omissions’ (E&O), is a completely different type of coverage than the general liability just described. Professional Liability is designed to provide liability protection arising out of the negligent act or omission of a ‘professional’ (ie: accountant, attorney, real estate agent, mortgage officer, engineer, architect, etc) in the performance of their professional activities. For example, if a Realtor sold a home and withheld or neglected to disclose information that may have ultimately affected the buyer’s purchasing decision (such as a major roadway being planned immediately behind the home), the buyer would have a professional liability claim against the Realtor for ‘omitting’ or failing to disclose this information which, if it had been known, would not have caused the buyer to purchase the property and become encumbered with a mortgage loan.
3. HEALTH INSURANCE
Health insurance itself is designed to provide coverage for major medical events as well as some limited preventive care. However, all too often health insurance is put on the back-burner for self-employed individuals - though an uncovered illness or medical event could ruin the business and cause financial devastation. Unless covered under a spouse’s group policy, individuals who are self-employed often no longer have the luxury of a company providing health benefits. This puts business owner’s at a great risk for financial loss due to uncovered medical expenses and health insurance should be considered a very real part of every entrepreneur’s or self-employed person’s business and costs. Owning a business without properly insuring your own health is much like driving without a seat belt. You may make a hundred trips without incident, but the first time an accident actually occurs, it’s already too late – you can’t go back and put the seatbelt on. The same is true of health insurance, once you experience an unexpected and unforeseen illness or injury, it’s too late to call you agent and immediately have a policy issued to cover the expenses in order to save your finances.
4. ACCIDENT / CRITICAL ILLNESS / CANCER INSURANCE
This coverage, sometimes referred to as ‘supplemental insurance’, is NOT the same thing as health insurance, though a few (very few) health insurance companies may include some form of accident coverage in their policies (you must verify this with your agent). Supplemental insurance, which is usually very inexpensive, is designed to compliment a health insurance policy and it is used to ‘fill in the coverage gaps’ that naturally exist in most health insurance policies for things such as an accident (severe injury, stitches, broken bones, etc), critical illness (heart attack, renal failure, stroke, etc) and cancer. Since health insurance policies have a deductible that the insured must meet before benefits begin; this supplemental insurance immediately takes affect when a covered illness of accident occurs and it usually provides 100% immediate benefits with little or no out-of-pocket expense to you, possibly a lump-sum cash payment, and it pays the deductible for the other health insurance policy.
For example, if you had a health insurance policy with a $5,000 deductible and a 20% co-pay (your part) and you suffered an accident, under a traditional health policy you would have to pay $5,000 (the deductible) plus 20% of the remaining medical balance. If the bills for the accident totaled $10,000, you would have to pay at least $7,000 of this cost ($5,000 for your deductible and then 20% <$2,000> of the remaining $5,000 balance). This could be a devastating unexpected financial loss - not to mention lost income from time away from the business.
With an accident plan, the ‘supplemental’ insurance would begin paying the medical bills from this accident immediately from day one (usually up to $10,000), which pays for most accidents in full or, if a more severe injury with more medical costs, it completely pays for the deductible on your health insurance plan so that you don’t have to and you are now only responsible for the remaining 20% of the remaining balance, if any.
5. DISABILITY INSURANCE
Disability insurance is another often ignored or overlooked protection that few people ever seriously consider - though many previous business owners wish they had. As everyone knows, bills don’t stop coming in just because income does. In the event of an accident or illness which renders the insured person unable to work or perform the duties of running a business (such as an electrician, plumber), this insurance will pay up to 65% to 70% of monthly income while disabled. These payments may be used for mortgages, food, utilities, or anything else. Depending upon the type of policy selected (short-term or long term), benefits may be paid by the company to the insured anywhere from six months all the way to age 70.
6. LIFE INSURANCE (including ‘key person’)
Generally speaking, while one of the single-most important types of coverages available, life insurance is one of the least-favorite topics of conversation with most individuals and business owners because it brings up the conscious thought of mortality. The industry cliché is that “husbands seldom believe in life insurance but widows always do.” While somewhat krass, it is also very true. Life insurance isn’t for the person that purchases it - it’s for those people still alive and responsible for debts and financial considerations left behind when the policy owner passes. This includes spouses and families as well as business partners and/or lenders.
Life insurance for business owners and self-employed people is especially important due to the fact that, in many situations, the spouse has no full-time employment and the business is the sole source of income. If the business owner were to pass away unexpectedly, either by accident or natural causes, the spouse, by law in many cases, is suddenly responsible for all of the business’s debts, including inventory, payroll, taxes, leases, and so on - and this is in addition to the personal debts which are left such as mortgage and automobile payments, childcare, living expenses, etc. Life insurance can also be used with buy-sell agreements and, if purchased as a ‘key person’ policy, can also be paid for by the business with the business as the beneficiary.
In the event of the owner’s passing, the business itself receives the money from the policy in order to maintain meeting expenses, ‘buy out’ the owner’s spouse (if a partnership), or hire new personnel to replace the owner over time.
7. COMMERCIAL AUTO INSURANCE
Because it has never been fully explained, many business owner’s are completely unaware that that they are NOT INSURED under their existing personal auto policy. With regards to professions such as Realtors, traveling sales people, and similar professions, a personal auto policy (see below) may be fine if issued correctly and rated by the company as ‘business use’. This allows these sort of professionals to transport clients or drive on behalf of the business while still maintaining coverage.
However, if the vehicle is titled in the name of the business or it is used for ‘commercial use’, such as a plumber’s utility truck or a vehicle used for any type of delivery, the vehicle must be covered in almost all cases with an actual commercial auto policy as personal policies specifically prohibit these types of uses. If insured with a personal auto policy and the vehicle is involved in an accident or if a claim is made while in a commercial capacity, the claim will probably be denied altogether and the policy cancelled ‘flat’ from the original inception date due to the fact that commercial use is prohibited by the carrier’s underwriting guidelines. In addition, if insured incorrectly and the vehicle (or driver) is involved in a loss involving bodily injury or large property damage, the business itself could be sued for all damages plus legal fees and punitive damages – without the benefit of an insurance policy to pay these amounts.
Regarding the commercial auto policy above, all business owner’s should maintain high limits of personal liability on their own personal vehicles, whether used in the course of business or not. The reason for this is that if a driver is involved in an accident and he or she does not have enough insurance coverage to adequately cover the other party’s injuries, depending upon the circumstances, the business that he or she owns may be drawn into a legal battle and forced to liquidate assets or use monetary reserves to settle a civil judgment.