Prevention: The Importance of Business Insurance
It’s boring and vexing and beyond confusion. Not only that, it’s expensive and nearly as fun as a postmortem. If you’re lucky, you won’t need it, but if your luck turns on you, it could be the most important thing you’ll ever do for your business.
It’s business insurance. And, in case you think you’re immune from life’s catastrophes and can get along without it, consider this story:
Six months ago, I woke at five in the morning to a less-than-gentle rapping on my door. It was a process server. Addled by sleep and surprise, I signed the receipt without asking what I was in for and learned, as soon as my head cleared, that I was being sued by a company I’d never heard of.
Why? Years ago, a client asked me to register a domain name that may have infringed on their copyright. Since my name was on the registration as the technical contact (a person whose job is to move the domain from server to server, and little more) I got sued for my troubles.
I won. But it cost me a pretty penny, and if I’d lost, it would have cost me double, triple or more—enough to push me to the cusp of bankruptcy.
What Can Happen
Let’s face it. Life is risky enough as it is, and when you hang out your own shingle, you’re taking the biggest risk yet. You’re being an entrepreneur. There’s no reason not to buy the right insurance and tempt fate. Consider what can happen:
- You have an assistant go on a Starbuck’s run. Halfway there, he runs into a Mercedes, and you get sued.
- You’re an expert in Samba or Linux, not the Byzantine world of employment law, so you ask the wrong question in an interview. Before you know it, you’re in court.
- You’ve been meaning to install a ramp to your front door for months. By now you’ve run afoul of the Americans with Disabilities Act, and it carries a steep fine for infractions.
Here’s a question every consultant should ask at least once a year: If you’re the epicenter of your business, what happens if you’re disabled? You could be the type who likes to surf in a hurricane. Or, a bit more prosaic, you might come down with carpal tunnel syndrome. Remember, we’re in a high-risk profession. Will your business survive your illness or accident?
The moral is simple: Hedge your bets. Learn to balance the risks and the rewards.
What You Can Do
There are three types of insurance you need to consider. The first is workers’ compensation, which the law in every state but Texas requires you to have. It covers your employees’ medical fees and lost wages if they’re hurt on the job. The second is property insurance. It lets you replace something when it’s stolen, broken or damaged. And the last? It’s liability insurance, which keeps you safe in case you get sued.
Employees have a right to know they’ll be taken care of if they’re hurt on the job. Thus, workers’ comp: It covers a legitimate illness or accident—no drunken falls or drug-induced damage, no accidents that occur off the job and no coverage for self-injury or any injury that’s suffered in the course of a crime.
It works like this: If you have a coder who tumbles down the stairs on his way to lunch, his benefits are paid regardless of who’s to blame. As the employer, you don’t have to admit liability—always a plus—and the employee gets a check without having to sue. In theory, everyone goes away happy.
The trick is knowing how much insurance you need, and the answer, here at least, varies from state to state. Your state has laws on the books that direct you to purchase a certain amount of coverage and pay a certain percentage of an employee’s salary if he’s injured and out of work. Bear in mind that if you have less than five employees, you may be exempt from workers’ comp—but don’t assume anything. Instead, hit the tables at www.insure.com to make sure you’re in compliance. It might be expensive, but it’s better than breaking the law.
My first business, a Web design shop, was built in a hurricane zone. I think you know how that story ends.
You need property insurance to protect your desks, chairs, computers, monitors, media, printers, speakers, servers, routers, hubs, wires, supplies, cars, vans and records in case of fire, flood, lightning or storm. If you live in Miami, where hurricanes are as common as heat, or in other strike zones like Tornado Alley or somewhere along the San Andreas Fault, expect to pay more.
Property insurance can be purchased in one of two ways. The first is on the basis of the real value of the property, in other words, what it costs to buy it again, minus the depreciation. (Depreciation is the amount of money you lose as assets age. If you bought a P3 when it just came out and paid $3,000, it’s worth half that today. Thus, your depreciation is $1,500.) If you insure an asset based on its real value, say, the P3 in that example, you’ll get $1,500 from your insurer—hardly enough to replace it.
The second way is different. It’s based on the replacement value itself. Using this method, the insurance company will pay you the amount that’s needed to buy the asset new, no matter what its current value. You won’t get burned on depreciation, but you’ll pay more for the premium. Bear in mind that if your most important asset is hardware—your notebooks, desktops, servers and such—they’ll depreciate as fast as the wildfire that takes them from you.
You may not be able to insure everything you own. If you’re a new business or margins are tight, take an inventory. Decide what you can’t live without and what you’ll need to replace immediately in the event of a problem. Then price a policy and get those things covered, and add your other assets when your wallet lets you.
And whatever you do, don’t think you’re covered just because you’ve moved your business out of your home and into an office park. If you lease an office, the building’s owner will insure the building itself—but nothing else, including your equipment.
In case you think you’re immune from a lawsuit, let me draw your attention to the Stella awards, given to the most specious lawsuits in the nation. This year’s small-business winners include:
- A jury that gave a young man in Los Angeles $74,000 when a pizza delivery truck ran over his hand. He was trying to steal its hubcaps at the time.
- A jury in Austin that gave a woman more than three-quarters of a million dollars because she tripped over a child who was running inside a department store and otherwise misbehaving. It was her child.
- A Philadelphia jury that ordered a restaurant to pay one of its customers six figures when she slipped on a soft drink and broke her coccyx. Note: The drink was on the floor because she threw it at her boyfriend a few seconds before.
Thus it pays to have liability insurance, which protects the assets of your business in case you get sued. Your company can be sued for anything it did that results in injury or damage to someone else, another company or its property. This includes intellectual property like copyrights and trade secrets.
If your case goes to trial (these days, less than a third of all lawsuits get to court), liability insurance will pay for the award against you. It will also pay for the legal fees and other costs, such as travel, incurred by your defense. Bear in mind that a good lawyer can charge $300 an hour, often more. And juries have minds of their own. Are you willing to accept the risk to your business without it?
A Pound of Prevention
As an IT consultant, you have to pay for your machines, software, travel, printing, marketing and meals, not to mention your salary. The last two years have been the worst landscape we’ve seen in the industry for a decade. And the truth is, it might get wo