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Time for an Insurance Check-Up

Protecting Your Business

Risk may be part and parcel of building a business. But no one says you have to be foolhardy. That's why your company buys insurance against a wide range of unforeseen calamities-from fire to product liability lawsuits-any one of which could wipe out the gains you've made, and then some. And that's just one part of the insurance story. Chances are your employees look to you to provide them with medical, disability, and other coverage, not to mention protection against job-related accidents and illnesses. And your family's well being depends partly on policies designed to replace your income in the event of your disability or death. But are you really getting the protection you need? Are coverage overlaps or gaps costing you money or exposing you to unknown risks? Is your sense of security just an illusion? Are you paying too much? If you're stumped by these questions, you're not alone. Owners of growing companies often give scant attention to insurance other than to grumble as they write premium checks. As a result, many small companies are buying coverage they may not need or is wrong for them.

With insurance premiums rising and potential liabilities mounting, it pays to get actively involved in the selection and design of your company's policies. Today, more and more small entrepreneurs are becoming their own risk managers-a trend that is encouraged by insurers that want a company to be actively involved in loss control and risk management. Because their insurance needs are fairly clear-cut, owners of small businesses usually work hand in hand with a local agent who represents one or more under- writers or an independent broker. Either way, it makes sense to do an insurance checkup at least once a year, using the same degree of diligence that you apply to annual operating budgets. Here are some things to keep in mind.

Commercial General Liability Insurance

A customer trips over a carpet flap and breaks a leg. A faulty product injures a child. No matter what business you are in, your company faces liabilities and potential lawsuits every day. A commercial general liability, or CGL, insurance policy is your first line of defense against costly claims. It will cover lawsuits, or threatened lawsuits, arising out of bodily injury or property damage caused by you, your employees, or subcontractors or suppliers working on your behalf. This includes accidents that you don't think are your fault, but that you'll probably have to pay for anyway.

Typically, CGL policies cover four types of injuries: bodily injury that results in actual physical damage or loss; property damage or loss; personal injury, including slander or damage to reputation; and advertising injury, usually charges of negligence resulting from the promotion of goods or services.

How much coverage do you need? A policy with a face value of $2 million to $3 million is probably sufficient for the average company.

Be aware that off-the-shelf business liability policies often exclude many hazards, requiring you to purchase specialized coverage. If you own the company and own the car you drive, you may need a more expensive commercial policy. If you hold yourself out as an expert in a field-medicine, law, accounting, engineering, consulting, or another professions professional liability, or "errors and omissions," policy will protect you against malpractice or negligence claims.

How much will you pay for liability insurance? That varies greatly with the size and type of business and level of risk as perceived by the insurance company. If you think you need a high level of coverage, you may be able to get the most for your money by buying an excess liability, or umbrella, policy. It will pay claims that exceed the limits on your other liability (except errors and omissions) policies, up to a specified amount.

Errors and Omissions (E&O) Insurance

Errors and omissions insurance (E&O) is a type of professional liability insurance that protects companies and their workers or individuals against claims made by clients for inadequate work or negligent actions. Errors and omissions insurance often covers both court costs and any settlements up to the amount specified by the insurance contract.

Insurance brokers/dealers, registered investment advisors, financial planners and other financial professionals can obtain E&O insurance. Regulatory bodies, such as the Financial Industry Regulatory Authority (FINRA), or company investors often require E&O insurance. The benefits an E&O insurance policy gives companies or individuals can vary greatly depending on the policy and issuing insurance company. E&O insurance may or may not cover temporary employees, claims stemming from work done before the policy was in force or claims in various jurisdictions,

In the financial industry, lawsuits happen, regardless of how baseless the claims may be. Clients sometimes sue an advisor or broker after an investment goes sour, even if the risks were well-known and within the guidelines established by the client. In these cases, even if a court or arbitration panel finds in favor of a broker or investment advisor, the legal fees can be very high, and E&O insurance is vital in these situations. A person or company that has had numerous litigation problems has a higher underwriting risk and is likely to find E&O insurance more expensive or less favorable in its terms as a result.

Directors and Officers (D&O) Liability Insurance

Directors and officers is a type of liability insurance that covers individuals for claims made against them while serving on a board of directors and/or as an officer. This type of policy can be written to cover directors and officers of for-profit businesses, privately held firms, not-for-profit organizations and educational institutions. There are several elements—called “Sides”—to a D&O policy, including:

  • Side A—Protects a corporation’s directors and officers when the company cannot indemnify the individuals.

  • Side B—Reimburses the organization when it indemnifies the individuals, thus protecting the company’s balance sheet

  • Side C—Also known as “entity coverage,” this eliminates disputes of coverage allocation when both the directors and officers and the insured organization are named as co-defendants in a securities lawsuit.

A wide range of claims against a business have the potential to target company leadership for responsibility—and liability. Business leaders can be held responsible for a company’s failure to comply with regulations and to provide a safe and secure workplace. In addition, if a company is found liable for losses because of operational failures and mismanagement, directors and officers may be exposed to liability as well. The types of claims that may target company leadership individually as well as the company itself typically include:

  • Shareholder suits over company or stock performance.

  • Creditor or investor suits over mismanagement or dereliction of fiduciary duties.

  • Misrepresentation in a prospectus.

  • Decisions exceeding the authority granted to a company officer.

  • Failure to comply with regulations or laws.

  • Employment practices and HR issues.

  • Pollution and other regulatory claims.

  • Cyber liability.

Aside from paying for claims against company leadership, there are several other benefits to carrying directors and officers liability insurance, including a company’s ability to:

Retain strong leaders - Many potential directors and officers will be reluctant to join your business if they are exposed to personal liability. D&O liability insurance helps address this issue.

Attract investment - Venture capital and private equity firms often require companies to have D&O coverage before they make an investment.

Cover legal fees - Even if directors and officers are exonerated of wrongdoing, your business may incur substantial legal fees in responding to a lawsuit against your leadership. If you have a D&O policy, your company’s legal fees will likely be covered.

There are several types of D&O policies, defined by what liabilities, legal costs and other exposures are covered. You should select coverage based on risks and how your business is organized. Your company’s bylaws or articles of incorporation may provide certain protections—or indemnification—for directors and officers. You should seek guidance from your insurance professional about this somewhat complex, technical type of insurance.

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