Small business owners have a lot on their plates. In addition to being CEOs, they’re often CFOs, CTOs, CMOs, and just about everything else. On top of that, their personal finances are usually mixed with the business finances, making each dollar they spend or save that much more important.
This means that small business owners are often skeptical of new products and services (decidedly a good thing). But it also means small business owners have a heightened need to mitigate the many risks they juggle. The right business insurance can provide excellent protection, but small business owners should understand the truth behind these insurance myths before deciding on their coverage.
1. You Don’t Need Errors & Omissions Insurance if You Only Provide Advice
As a subject matter expert, you can be held liable for any negative impact that your advice causes a business. In fact, even if your work simply fails to live up to the expectations you set, a client could bring a lawsuit against you.
E&O policies provide funding for the legal services required to defend yourself against claims of negligence, even if those claims are frivolous. This is essential, since the legal defense costs (including lawyer’s fees) are often the most expensive part of an E&O lawsuit – they can easily range into tens of thousands of dollars.
For example, consider a marketing consultant who tells a client he can help them increase marketing ROI in a six week time frame. Even if the consultant does everything right, the client could be engaging in practices that decrease ROI, and by the end of the contract, could have a lower ROI than they did prior to hiring the consultant. Without a carefully worded contract and proper Errors and Omissions Insurance, the consultant could be at risk of a lawsuit for failure to perform his services.
2. You Don’t Need Workers’ Compensation Insurance if You Are the Only Employee of Your Company
Some states (New York, Nevada, and Utah) require all businesses to carry workers’ compensation insurance. Translation: even if you’re a sole proprietor, you could still be required to carry workers’ comp, depending on where you live.
In other parts of the country, your coverage needs will depend on how many employees you have, how those employees are classified, and what kind of work you do. For example, some states do not require business owners to carry workers’ comp insurance for contract (1099) workers, but do require coverage for full and part time employees (W2). An insurance agent can clarify the laws for your industry where you live.
3. You Don’t Need Business Coverage Because You Work at Home
Actually, most homeowner’s insurance policies don’t cover business-related damages that occur in a home office. Too many home based small business owners find this out only after they go to file a claim.
Even if your homeowner’s insurance protects some of your business property, chances are good that that coverage won’t be in effect when you are traveling for work, whether that means running to a client lunch or flying across the country for a conference.
A simple general liability insurance policy or business owner’s policy can offer home based business owners the protection they need for both basic business property (such as laptops) and certain types of injuries clients can suffer (such as slander), whether the incidents occur at home or on the road.
4. You Don’t Need Business Auto Insurance Because You Drive Your Personal Car
Many personal auto insurance policies exclude coverage for commercial (a.k.a. business) use. That means if you get into an accident while running to Staples or the airport for your business, you might run into difficulties with your insurance provider.
The insurance needs for your car will depend on how it is primarily used. In other words, if you use it most often for business purposes (but sometimes for personal uses), it will likely require commercial coverage. If you use it most often for personal purposes (with the occasional business errand thrown in), it will likely require only personal coverage.
An insurance agent can explain this to you in more detail.
5. You Don’t Need Property Insurance Because You Work at Your Client’s Location and Use Your Client’s Equipment
Your property insurance needs will depend on the terms and conditions outlined in your client contracts. Some clients provide coverage for physical damages for work done at their locations, and some do not.
For example, imagine a contractor who repairs a client’s dishwasher but leaves the hose loose after finishing. Say the hose causes a flood at the client’s house; even if the client has flood insurance, the contractor’s insurance would most likely be responsible for covering the damages.
This is because insurance companies provide coverage based on who is responsible for a device or piece of equipment: if you are in charge or in control of the equipment, your insurance is likely responsible for covering any related damages.
6. Your Personal “Umbrella” Policy Will Cover Everything
Personal umbrella insurance will not cover everything. In fact, umbrella policies come with explicit limitations and exclusions. Read over your contract to determine what is and is not covered.
7. You Need Insurance for Each Client Contract
In many cases, your business insurance will be sufficient for multiple client contracts. There are some exceptions, though. fidelity bonds, for example, may need to be renewed for each new client, and contracts that involve high or complex risks may require supplemental insurance.
While it’s a good idea to verify that your insurance policies cover you for each new contract you secure, there’s a good chance you won’t need a new policy for every new client. Most policies define the services covered very broadly.
More likely, your insurance needs will change when you add new services, move the business’ location, or change the number of employees who work for you.
8. You Don’t Need Insurance Because You No Longer Have the Client You Purchased it For
Insurance protects you as a business owner. While not every client you work with will demand that you have coverage, carrying insurance regardless of your client’s demands puts you in a better risk-management position.
More important, though, canceling and restarting coverage as you need it may trigger red flags at insurance companies and can make it difficult for you to get coverage in the future when you need it.
9. If You Get Sued, You Can Simply Shut Down the Business
Closing your business will not necessarily protect you from a lawsuit. Courts tend not to care whether or not a business is currently operational. In a worst-case scenario, you could be required to cover settlements or judgments from your personal assets.
10. You Don’t Need Business Insurance Because Your Contract Protects You
Contracts are put in place to outline the specific terms of a project and delineate whether or not lawsuits are available. In the event that you breach your contract somehow (for example, by missing a deadline or failing to perform on a key deliverable), the terms of the contract could be voided, opening you up to a lawsuit.
As a small business owner, the health and future of the business is among your primary concerns. While insurance protects against an uncertain future, it gives you the peace of mind you need to plan and manage your business.
Insurance Myth Photo via Shutterstock
Great insurance tips, Ted. Many of these I had no clue about, so I really appreciate you sharing them with us. Thanks!
Marissa @ Equibbly
Why is it that risk management is the last thing on the priority list of small business owners? Your advice here makes perfect sense and I’d be sharing them with our community. If there’s one thing I’d add on top of your list, it’s that you don’t have to go to a small claims court when filing an insurance claim; you can try alternative dispute resolution processes instead like online arbitration w/c saves you on time and cost.
Dang! Why do I have to live in one of the three states that require workers comp insurance for companies of one?
This post was really eye opening. I did not know about many of those things, including the first one about errors and omissions insurance.
Great tips! I’m a NJ State Farm Agent and would like the opportunity to help any small business owner reading this; give me a chance to help.
Business law can be a hard thing to understand and it would be smart to know some of these things. I liked that you pointed out that your contract might not always protect you. It does seem like it would be smart to talk to an insurance agent about what is the best type to protect your business.