Introduction
Your business is ready to launch, so what insurance do you buy? Money is tight and it is your hide on the line. This article focuses on the insurance choices faced by entrepreneurs working to get a new business running. Three main categories to consider: 1. Required Insurance, 2. Critical Risks, 3. Economic Risks.
Required Insurance
For a new business entrepreneur, a core issue is the insurance required to open the business. These requirements can come from multiple sources.
Landlord - Often a Landlord requirement for a leased location is an early insurance barrier. A typical office, store or other commercial space lease has several clauses that trigger insurance requirements to protect your lessor. Your landlord will want your business to protect him from lawsuits stemming from your operations with Public Liability coverage. Another frequent landlord requirement is to have property coverage for any tenant building improvements. An Indemnity or Hold Harmless Clause will force your insurance company to waive any claim payment collection from your landlord even if they contributed to a loss. Your landlord will also want to be named as an Additional Insured to have access to your insurance policy and to be notified if the policy is cancelled. Before you sign your commercial lease, have your insurance agent read it and prepare a quote to consider.
Bank Loan - A bank loan is also a source of initial insurance requirements. If you borrow with your business assets as collateral, your bank will want it protected. Your banker will want adequate insurance to cover their risk and to be named as a Loss Payee. This forces the insurance company to settle any claim with approval from your banker and also to provide notice if the insurance is cancelled.
Jobsites - Construction trades often have specific jobsite requirements. If you are an artisan subcontractor, these requirements are set by the General Contractor or Jobsite owner. Most construction jobs will require General Liability Insurance. Other requirements can include Business Auto Insurance and Worker's Compensation. The bigger the job, normally, the more intense are the insurance requirements. Before to start to work, get a copy of the insurance requirements and have your insurance agent quote what is needed. Be very wary of any job or General Contractor that is not upfront with these requirements. They will hold your paycheck until the insurance requirements are met.
Government - Legal requirements come up most often with business vehicles. In Texas, there is a minimum auto liability requirement. For larger vehicles, special types of vehicles or passenger carrying vehicles, much higher legal requirements are imposed and special state filing requirements must be met. In Texas, Worker's Compensation is voluntary but most other states impose this as a legal requirement for business owners. State licenses for some trades will impose liability insurance coverage and reporting requirements.
Critical Risks
Once the required insurance is handled, the next focus should be on the risks that are so critical that, without insurance protection, they can destroy the business. Protection for some of these risks may be already in hand with the insurance protection that was required. However, you should still review your overall situation and identify risks that you can't afford to take and can be offset with an insurance contract.
Perhaps you need higher liability limits than are required for your business to be a safe investment. Maybe an asset is so expensive that replacing it would bankrupt the business. Even though it is not required in Texas, Worker's Compensation can be critical protection from the huge risk of an employee being hurt at work. Lawsuits can come from many potential directions. From which risks does your business need liability protection? A legal review from your business lawyer can help identify points of lawsuit venerability.
Even if you cannot fund this added protection at business opening, you should strive to purchase insurance for these critical risks as soon as possible. Until you are able to offset your business-ending risks with insurance protection, your new business will not be a safe investment.
Economic Risks
The third priority is risks that you want to insure because the protection is a good value. Why take a substantial risk, even if you can survive the loss, when you can offset the risk with affordable insurance? Often, the economic risk worth insuring is a business asset like equipment, inventory or vehicles. Consider the trade-off over a reasonable length of time. Ask yourself: is it better to pay an insurance premium and be protected or is it better to save the insurance cost and self-insure for a potential loss? A high property deductible can be a good strategy by taking the smaller risks yourself and shifting only the large asset risks to an insurance company.
Your cash flow may not be sufficient to buy protection for economic risks early but have your list ready to gradually add this productive coverage as you are able. Your long-term profitability will be improved by prudent use of insurance protection for your important assets.
Summary
Insurance should be part of your business plan. Your focus will first be on the insurance requirements that are barriers in the way of starting your business. Beyond these minimum requirements, fund insurance protection for your risks that have the potential to destroy your business. Finally, as revenues become available, enhance your long-term financial outcome by adding protection for your larger assets that can be economically insured. Good luck on your new business venture.
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