Opening a business in California- Part 5 Insurance for Your Business.
This is the fifth in a series of articles written for the purpose of assisting persons who intend to start a business in
. It is designed for the small business owner
who may not be familiar with California
law or procedures. California
In this article, I will describe the process of finding and buying that will secure your company from liability. It is very important to be prepared for this potential insuring your business will protect both your assets and your business assets from liability. But choosing the right insurance can be a challenging task, especially for persons not familiar with the American commercial insurance industry. This article is intended to help you choose the right insurance for your needs.
I. Buying insurance.
When buying insurance, start by setting up some priorities that are most important for your company. First, check what coverage is required by state law and by your landlord (if you rent) and then tailor your coverage to these requirements. You also need to identify what your other business insurance needs will be. An insurance agent can help advice you. You and your insurance agent can discuss the best way to get the coverage you need, at the lowest cost. Keeping your cost low is important at the outset of your business since there will probably be many cash demands and few sources of cash inflow. Another way to keep the cost of insurance low is to purchase it through group plans that are often available through trade associations or other similar business organizations. Many trade associations and business groups such as the Chamber of Commerce provide members the benefit of purchasing insurance at group rates. Explore alternative trade associations for lower rates and a possible fit with your business.
To gain a better perspective on the amount of coverage your small business needs, take a look at your industry. Review the recent legal actions and settlements in your field. Talk to peers and find their level of coverage. Using your peer feedback and industry research, determine the average legal costs and settlement to set your coverage limits. If you find out what amount of coverage is enough for your business you can lower the premium by increasing the amount of your deductibles. The difference if you decide to choose $1000 instead of $250 as a deductible might save you 10-15% from your premium.
Another good way to lower your insurance costs is to find out what safety or security features serve to lower the rate. Sometimes even installing deadbolt locks or a sprinkler system may lower your rate significantly.
Before deciding on which insurance to buy, shop around, ask your business partners or even friends if they can recommend something. It is not a good idea to buy the first insurance that you have been offered. You might be able to buy comprehensive package which is specially tailored for your type of business.
Some firms choose to self-insure. This means that you don’t buy insurance but just maintain a special fund to cover likely loses or liabilities. Although it may seem like a good idea this could be a risky solution.
II. Types of insurance.
1. Property coverage.
This type of insurance covers the property where you run your business. If you own the building where your company is located than you definitely need such coverage. The insurance can cover not only the building itself but also additions, furniture, machinery, equipment, outdoor fixtures and work in progress. Most property insurance is written on an all-risks basis, as opposed to a named peril basis. The latter offers coverage for specific perils spelled out in the policy. If your loss comes from a peril not named, then it isn't covered.
Make sure you get all-risks coverage. Then carefully review the policy's exclusions. All policies cover loss by fire, but what about such eventualities as hailstorms and explosions? Depending on your geographic location and the nature of your business, you may want to buy coverage for all these risks.
Typically property insurance is written in one of three forms:
· Basic Form- this includes losses by lightning, explosion, windstorm, smoke, etc.
· Broad Form- coverage contains everything that’s on Basic Form and adds protection from other perils like falling objects or breakage of glass.
· Special Form- this is the most common form and affords the best protection. Instead of listing specific perils this type of policy simply covers all risks of physical loss unless the policy specifically excludes or limits loss.
When choosing the amount of coverage, remember that you only need coverage for the building and not for the land so you don’t need to insure the total value of your real property. Especially in
where land value is extremely high this might save you a lot of money. California
Another two options that you can get with your insurance are: “Replacement Cost Coverage and “Ordinance or Law Coverage”. Replacement cost insurance will pay you enough to replace your property at today's prices, regardless of the cost when you bought the items. It's protection from inflation. (Be sure your total replacements do not exceed the policy cap.)
Ordinance on law coverage requires the insurance company to not only replace the building but also pay for legally required upgrades when you own an older building and it will require some special renovation to fulfill building codes or other legal requirements.
Make sure the full value of an item is insured and check the terms for reimbursement. Just because you may have $1 million in coverage doesn't necessarily mean the whole amount is going to be applied in a given category of property. Also, if your company has a variable growth pattern, you may want to adjust your coverage annually.
2. Liability Insurance.
This type of insurance protects you against liability from lawsuits or other claims up to the amount of the policy limit plus usually the cost of defending lawsuit. The price you'll have to pay for liability insurance depends on the size of your business and the specific risks involved. The good news is that liability insurance isn't priced on a dollar-for-dollar basis, so twice the coverage won't be twice the price.
There are few different types of Liability Policies:
A. Product Liability Insurance- covers liability for any injuries caused by products you design, manufacture or sell. Product Liability Insurance covers you against unforeseen circumstances. Bad workmanship or defective products are not covered.
B. Comprehensive General Liability (CGL) Insurance- coverage insures a business against accidents and injury that might happen on its premises, as well as exposures related to its products. For example, one of your clients slips on wet floor while visiting your office and breaks his leg. A CGL policy covers his claim against you. But let's assume that your company is a window manufacturer, with hundreds of thousands of its windows installed in many homes and businesses. If something goes wrong with them, general liability covers any claims related to the damage that results. CGL policies tend to have a lot of exclusions. Make sure you understand exactly what your policy covers and what it doesn't. You may want to purchase additional liability policies to cover specific concerns. For example…
C. Errors and Omissions Liability (E&O) - this type of policy protects you in case you are sued for damages resulting from a mistake in their work. So if you are designing windows and for example the window leaks because of your design you may be protected by this type of insurance.
D. Vehicle Insurance- this type of policy should cover cars and trucks you own but also employees’ cars and trucks when those vehicles are used for business purposes. Many states set minimum liability coverage, which may be well below what you need. Make sure you get enough coverage. If you don't have enough coverage, the courts can take everything you have, and then attach your future corporate income, thus possibly causing the company severe financial hardship or even bankruptcy.
E. Workers’ Compensation Insurance- workers' compensation, which covers medical and rehabilitation costs and lost wages for employees injured on the job, is required by law in all 50 states. Each state has a law setting out what an employer must provide for workers’ compensation benefits. This type of policy is only required for employees, not for independent contractors.
When talking about Liability Insurance it’s important to mention the insurance company’s Duty to Defend. Most policies state that the insurer has an obligation to defend the insured in a suit brought by a third party. For occurrences covered by the policy, a defense must be provided even if a suit is found to be groundless or false. Make sure the insurance you purchase contains this duty to defend.
3. Other Types of Insurance.
There are also other types of insurance and depending on your location and other factors you might consider choosing one of these:
· Coverage Against Employees’ Theft- covers you if your employee steals from you.
· Crime Coverage- protects your company against burglary and robbery but also other thefts and loss or disappearance of property.
· Business Interruption Insurance- When your business property is damaged or destroyed this coverage will pay lost income while your business is closed as well as expenses you incur in order to keep your business going.
· Disability Insurance- sometimes called "income insurance," can guarantee a fixed amount of income, usually 60 percent of your average earned income, while you're receiving treatment or are recuperating and unable to work. Because you are your business's most vital asset, many experts recommend buying disability insurance for yourself and key employees from day one.
III. Making a Claim.
When one buys insurance, one hopes that it will never have to be used. However, frequently the need to make a claim arises and there are many important things to remember about. To make a claim you need to:
· Notify your insurance company immediately when you experience a loss, or have a lawsuit filed against you or your business. You should also notify the police of a theft or accident immediately.
· Read your insurance policy to make sure what your responsibilities to the insurance company are.
· Make a list of damages and any items lost, stolen or destroyed.
· If possible, find receipts or proof of ownership for all your lost, stolen or destroyed items.
· When facing a lawsuit from a third party, gather any information you may have on the incident or reason for the lawsuit.
· Send written notice by certified mail to have verifiable proof of the date that you notified your insurance provider regarding a claim.
When you have filed a claim, be prepared to do battle with your insurance company. If you feel your settlement offer is not fair, schedule a time to talk with the claims adjustor and contact the customer service division of the insurance provider. Negotiating with your insurance company is always a good start to reaching a better settlement. Although, if you are completely dissatisfied with the final result, you may hire an attorney to help you with the negotiations, and if necessary to pursue a lawsuit or arbitration against insurance company.
CHRISTOPHER A. KEROSKY of the law firm of KEROSKY PURVES & BOGUE has practiced law for over 25 years and has been recognized as one of the top lawyers in Northern California for 10 years by “Super Lawyers” www.SuperLawyers.com . He graduated from University of California, Berkeley Law School and was a former counsel for the U.S. Department of Justice in Washington D.C. His firm has offices in San Francisco, Los Angeles and 7 other locations in California.
WARNING: The foregoing is an article discussing legal issues. It is not intended to be a substitute for legal advice. We recommend that you get competent legal advice specific to your case.