Making the decision of which incorporation designation to pursue, C-Corp, S-Corp or LLC is a relatively straightforward decision. If you still haven’t made up your mind, read our Types of Corporate Entities article to get a better idea of which designation is best for your business. However, one of the most important decisions you will make for your business, especially at the start, is what type of insurance is best for your company.
The Importance of Insurance
A 2005 study by the Small Business Administration [PDF] concluded that 63,000 businesses, both small and large, are involved in civil cases in any one year. Of those 63,000 businesses that are involved in a civil lawsuit, 36-53 percent are small business with fewer than 50 employees. The average legal cost for actual litigations for those businesses ranged from $3,000 to $150,000. Many owners surveyed by the SBA mentioned that payment of damages nearly put them out of business and effected the growth of their business for an extended period of time as they had to shift resources to rebuild the business and recoup their losses.
The important takeaway is that even if the state you operate in or if your clients don’t require your company to have some type of insurance, having a policy is still a good idea. Depending on the type of policy you purchase, you can be protected from litigation costs, loss of company assets and personal injury or illness to yourself. Yes, you may see business insurance as an unneeded expense or luxury of an established business, but every business should have some form of insurance to protect it.
General Liability Insurance
General liability is one of the most basic forms of business insurance and is often considered the keystone of a business protection plan. If you own or plan on owning commercial property that is open to the public or perform a service on someone else’s property, you should get general liability insurance. In fact, you should have general liability insurance no matter what type of business you have due to litigious society we live in now.
What Does General Liability Cover?
General liability insurance will protect your company’s assets for any damages incurred from:
- Bodily Injury
- Property Damage
- Medical Expenses
- Defending Lawsuits
How Much and What Type of Coverage Do You Need?
General liability insurance premiums can range from $750 to $2,000 depending on your business and the coverage that you need. An insurance broker will be able to give you an accurate quote but if your company has a high-perceived risk, for example a lawn care service, you will need more coverage than an app developer. Your coverage needs are also state dependent. Some states have caps on how much can be awarded for bodily injury lawsuits while others have uncapped awards. It’s important that you talk to a licensed insurance broker in your state of operation to determine the type of policy you will need.
Professional Liability Insurance
Professional liability insurance, also known as Errors and Omissions insurance, is primarily used to cover claims resulting from financial damage to a client caused by negligence on the part of your services. The main difference between Professional Liability Insurance (E&O) and General Liability Insurance is that E&O insurance focuses more on the intellectual decisions you and your company make as a service rather than some form of tangible property.
Almost any company that offers some sort of service can cause a client to lose money and are potential victims of litigation and would be covered under E&O Insurance policies. For example, if you are a website developer and the website that you designed does not perform as promised, a client could take you to court claiming that your negligence caused financial loss. Just like a general insurance policy, E&O Insurance will cover some or all of your legal defense costs and any damaged awarded due to your lawsuit.
The most common professions that need professional liability insurance are:
- Technology Companies
- Finance Companies
- Insurance Agents
- Medical Professionals
Should you have both?
As a business owner, you want to make sure that you and your business are protected and that’s why, in most cases, you should have both types of insurance to adequately protect your business. At any moment, a dissatisfied customer, either yours or a 3rd party through your client, can bring a lawsuit against you. When thinking about which insurance type you need, think about how much is out of your hands when it comes to client actions and the potential of being caught in a lawsuit. Moreover, more often than not, the clients you work with will more than likely require you to carry both types of insurances. They may even ask you to add them as an “additional insured” on your policy so that they feel protected as well in case of a lawsuit – often a $20 fee with your insurance broker to add a third party as additional insured. Regardless of what course you pursue, it’s important that like anything else, you find a broker who is willing to help you find the right insurance for your business. Just like purchasing homeowner or car insurance, various brokers can offer different rates and packages for your business. Shop around and get piece of mind that you and your business are protected from any litigation.