Studies suggest that almost 80% of all US businesses are established as a partnership or sole proprietorship. Either of these structures can put your personal and business assets at risk. That means that one of the things entrepreneurs have to think about when they have a business is insurance. This includes liability, workers compensation and commercial auto coverage.
Even if you incorporate, you can be personally liable if you injure someone, acted in an irresponsible way, or signed a personal loan guarantee.
Consider the following scenario:
- A tutoring company contracts to tutor children after school in the Chicago Public School system. The tutoring is done at the school with company tutors. One day, one of the children goes to the principal and complains that the tutor struck him. The parent sues the tutoring company. Is the tutoring company liable? Probably.
What the owner of the tutoring company needed for this was liability insurance.
There are three types of commercial business liability insurance:
General Liability: This protects you (the business owner) and any of your employees if you cause bodily injury, property damage or personal or advertising injury. This is known as commercial general liability (CGL) insurance. Actually, it may be the only type of liability protection you need depending on your business.
Product Liability: If you sell or manufacture products and someone gets injured as a result of using the product, this is the liability coverage that will protect you. Your business type will determine the risks inherent in your business and therefore, how much premium you will pay.
Professional Liability: This coverage is for business owners who provide a service like lawyers, accountants, architects, etc. It is also known as an errors and omissions policy. As such, it protects your business against malpractice, negligence and any errors and omissions you might make. In some professions, certain states may require this coverage.
Consider the following scenario:
- You have just started a small manufacturing company. In the first few weeks of operation with only five employees and one client, one of your employees gets hurt on the job. You did not purchase workers compensation insurance. Are you protected?
No, you are not. In fact, workers compensation is a required insurance coverage in every state if you have employees. If you do not carry it, you will be liable for any and all medical bills plus the employee could sue you. As if that isn’t bad enough, you can be fined by the state.
Workers compensation is not complicated but there are a few key points to keep in mind.
You can control a good portion of your premium cost. Workers compensation insurance is based on how much payroll your company generates each year. At first, the payroll is estimated. At the end of the policy period, your payroll will be adjusted using your actual payroll records. This means you will want to keep good track of your employee pay:
- While you have to pay your employees time and a half, for the purposes of workers comp insurance you can deduct the half time from the total payroll.
- Paid vacation and sick time can also be deducted since the employees were not at work.
Minimize your losses. Each year, the claims the insurance company pays out on your firm are tabulated and reported to the workers comp bureau. What’s called an experience modification will be developed for you. It is just what it sounds like—it modifies your rate based on your loss experience. If you have an experience mod under 1.00, you will receive a credit, if it is over 1.00 you will have to pay more. So, obviously, the fewer losses the less premium you will pay.
There are discounts and other factors you can take advantage of depending on your business risk.
Consider this scenario:
- You ask the forklift driver to run over to the hardware store for some screws you need. He takes his car. On the way over, he gets into an accident. Are you covered?
Not if you didn’t have commercial auto insurance. Specifically, in this case you would need non-ownership commercial auto insurance. This would protect you, your company and the employee from liability from an accident if the employee occasionally uses his or her car for company business.
If you have company owned vehicles, you will want to have them insured just as you would your personal automobile. In that case, you would want to purchase a commercial business auto insurance policy.
Find a good agent who can explain the fine print of all of these coverages and how they pertain to your business.