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 California 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 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.
·
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.
