Small businesses not only have to contend with the ups and downs of the economy, but also unexpected events that effect the business. These events include employee injuries, lawsuits from customers, and unexpected property damage. In light of the recent COVID epidemic, groups of small businesses have even brought lawsuits against insurance companies like Travelers to ensure that their existing policies included coverage for the financial losses resulting from the recent economic shutdown. These small businesses specifically sued to enforce coverage under their ‘Business Income and Extra Expense Policies’ (BIEE), when Travelers denied coverage for their claims. Traditionally, BIEE coverage is intended to compensate the business owner when a business is temporarily forced to shut down, but Travelers claimed the policies did not include the losses incurred under the present Covid-19 situation.
Insurance plays an important role in managing the inherent risk in operating any type of business. This article discusses the importance of insurance to small businesses and the types of insurance small businesses should consider purchasing.
Why Do Small Businesses Need Insurance?
Small businesses need insurance to minimize the variety of risks they face every day. Insurance helps small businesses stay in operation during a loss or claim. Insurance is expected to cover the costs when inventory is accidentally destroyed, a customer sustains injuries on company property or a other types of common damages that may occur in the course of normal business. The intention of insurance is to compensate the for any losses that might otherwise financially cripple the business. Typically, insurance will not only cover various types of accidents that occur but also pay for legal fees associated with representing the business in a claim or lawsuit. This is because insurance policies provide a duty to indemnify and also a duty to defend.
The duty of insurance companies to pay a claim is called the duty to indemnify. This requires the insurance company to pay a judgment awarded against the business or a settlement for a covered claim within the applicable policy limits. The duty to indemnify is important for a small business because it means that when the business incurs a covered loss, the insurance company will pay for it rather than the business paying from their own reserves.
The duty of an insurance company to defend a claim means that the insurance company must pay for attorney representation and defense of any claim brought against the business that is within the insurance policy’s indemnification provision. This is important because even where a claim may not be covered by an insurance policy, the insurance company may still have to defend the business until the claim is resolved. The duty to defend in an insurance policy saves small businesses on attorney’s fees and court costs, which can be significant when a claim is brought.
Another reason why a small business owner may need to purchase insurance is that many states mandate for certain types of business to have coverage. In California, all vehicle owners must carry a minimum of $15,000 per person for bodily injury, $30,000 per occurrence, and $5,000 in property damage coverage per accident. All business-owned vehicles must also have coverage. Workers compensation insurance, which covers health care and wage loss for employees who are injured while working, is required to be carried by most businesses in every state except Texas.
Perhaps the most important reason to carry insurance is to ensure that the small business can continue running while it handles a costly claim or loss. Without insurance, a small business may not have enough capital or assets on hand to pay a claim or to hire an attorney.
Types of Insurance
There is insurance for almost every type of risk. There are many insurance policies available to small businesses. Some of the most common insurance policies for small businesses are discussed below.
General liability insurance is the most common type of insurance carried by small businesses. General liability covers businesses for bodily injury or property damage that is caused by the business or occurs on the business premises. Typical types of claims for general liability coverage include ‘slip and fall’ accidents in which a customer gets hurt while on the businesses premises. Oftentimes a general liability policy may cover the customer’s claim for not just an injury but also any pain and suffering.
General liability insurance may also cover injuries that result from consumer goods that are manufactured by a business. When a customer is injured after faulty or defective product causes injuries to the consumer, the general liability policy usually provides coverage.
General liability is important because it acts as a catch-all that covers a variety of different risks and is available with different monetary limits, of usually very high dollar amounts. It is crucial for a small business to have generally liability insurance because the insurer will not only pay for a covered risk, but also pay for attorney’s fees and the costs associated with defending a claim.
Professional Liability and Errors and Omissions Insurance
Professional liability or errors and omissions insurance covers a professional business from errors, mistakes, or misrepresentations that arise from their services to clients. Such errors could include mistakes or oversights. Professionals like accountants and tax preparers should carry professional liability to protect themselves from mistakes or oversights.
Errors and omissions coverage also cover attorneys and medical professionals for malpractice, which is required by law in many states. The ramifications of failing to carry professional liability or errors and omissions insurance include having to pay a claim out of business reserves, which can be costly. In some cases, paying a sizable claim for a law firm mistake or medical malpractice lawsuit may be impossible depending on the size of the claim, which can lead to bankruptcy.
Property insurance is another common and important insurance coverage that small businesses need. General liability may cover property damage, but it is also available as a separate policy. Property insurance covers the business property, including computers, machines and equipment, and inventory. It protects the business property from things like theft, fire, or destruction. Property damage insurance is important for businesses that own valuable inventory or office equipment.
Commercial Umbrella Insurance
A commercial umbrella policy provides an additional layer of protection that typically exceeds the limits and coverage of other types of insurance. An umbrella policy works in conjunction with other policies and provides extra coverage when a claim exceeds the policy limits of a general liability or other type insurance policy. Umbrella policies cover a variety of claims, including personal injury, product liability, or defamation. Umbrella policies are not required by law but do provide an extra layer of protection.
Workers’ Compensation Insurance
Most states require businesses with a certain number of employees to carry workers’ compensation insurance. Workers’ compensation covers employees for on-the-job injuries or illnesses. In states that require workers compensation, small businesses will face a penalty if they do not purchase coverage. In California, even businesses with only one employee must carry workers’ compensation.
Workers’ compensation pays for injured workers’ medical treatment, wage loss while off work, and any inability or diminished capacity to earn future wages because of the injury. The cost of workers’ compensation depends on the number of employees and the risk they face on-the-job. Thus, it can be costly for larger companies or for companies engaged in dangerous business activities.
Cyber Liability Insurance
Cyber liability is becoming more important due to the large amounts of personal, private, and proprietary data kept electronically. Cyber-attacks can occur in various ways, including phising emails or ransomware attacks. More than 3,800 data breaches occurred within the first six months of 2019. Those 3,800 breaches exposed 4.4 billion records. Cyber liability insurance would cover a small business for any breaches of data.
A general liability insurance policy may provide basic coverage for cyber liability. Businesses that keep and store personal identifiers for either employees or customers should consider specific coverage. Personal identifiers are things like date of birth, social security number, or bank account routing number. Small businesses may face claims for data breaches where the company should have employed more stringent security measures. Without insurance, a small business may not only have to pay for actual damages incurred by the theft of someone’s personal information, but also statutory fines related to mishandling of personal identifiers.
Important Insurance Exclusions
The purpose of insurance is to cover accidents. There is a strong public policy against allowing insurance to covering intentional acts. The purpose is to not incentivize a person from intentionally causing harm to others knowing that there is an insurance policy to cover the incident. Many states, like California, codified this public policy in statutes explicitly preventing insurance companies from covering willful acts. This is important because insurance legally does not cover intentional acts, such as assault and battery, unless the intentional act is inherent in the business. An example of this is when a bouncer hurts a belligerent customer while throwing the customer out of a bar. Insurance will likely cover this type of willful act.
In most states, punitive damages awarded against a business to punish it for an intentional or reckless act would not be covered and paid by an insurance policy.
An insurer may deny coverage where a claim does not qualify for coverage under the specific policy language. Insurance policy interpretation is highly technical. Although there is a strong tendency by courts to favor the interpretation of an insurance policy to provide coverage, there are situations where small businesses will be out of luck with no coverage even where they have an insurance policy in place.
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