What Types Of Business Insurance Does Your Company Need?
Welcome to part 4 of our 10 part series, Idea to Income, where I speak with business insurance agent, JR Tolver about the different types of business insurance and how they protect you and your company.
Many new entrepreneurs start their business with minimal coverage to save on costs. Unfortunately, they often don’t recognize the risks they are exposed to. Especially as your business grows and you recognize it will no longer be just a hobby or project, there are numerous benefits to conducting a thorough review of your insurance needs and plugging the gaps. These options can often be intimidating and confusing. Fortunately, JR take us through the key types of business insurance in an easy to follow and relatable manner.
In our discussion we review:
- Business liability insurance
- Workers’ Compensation
- Errors and Omissions (E&O)
- Umbrella Policies
- Difference between brokers and captive agents
We cover a lot and hope you enjoy our discussion!
Our video provides all of the information. For those of you who prefer to read, please find the most pertinent material below:
JR and I collaborated to make this helpful guide available to viewers:
What types of business insurance exist?
Welcome back everyone. Today we’re speaking with JR Tolver about the different types of business insurance available. JR is an insurance agent with a particular focus on partnering with business owners.
Without an understanding of the different types of business insurance available and what exactly they cover, many new owners find themselves asking, “Am I overpaying and under insured? or, How do I make sure I have the appropriate coverage?”
JR explains when an owner first gets started, they are typically renting a space and the landlord will require some type of business insurance. That requirement will typically have commercial general liability protection and likely workers’ compensation. Essentially, the landlord dictates what he wants you to have in order to do business at his property. That’s usually the first introduction a new business has to insurance. In that first lease, it’s going to have insurance requirements.
And JR says that’s where it gets tricky. People don’t necessarily know what each one of the insurance line items means. How much they should cost? Should it be more? Should it be less?
And you can imagine a lot of owners are just going with whatever bare minimum meets the landlord’s requirements whether its right or wrong for their business. Naturally this exposes them to a lot of unnecessary risk.
But not you! Here we lay out the major types of business insurance so you know which ones to evaluate in more detail for your business.
You may hear general liability insurance referred to as “slip and fall”. An example will help explain what it’s for.
If you have a storefront and somebody comes in, slips on a puddle, falls, hurt themselves, break something – then your general liability, or slip and fall, insurance normally covers that.
Importantly though, general liability insurance has two sides to it.
There’s, money that pays out. So, on a slip and fall case – your fault, you left the water on the floor, you get sued for $50,000. Your insurance company should pay out in order to handle that claim.
Then there’s also stuff that pays in.
JR notices this is where business owners need to be more intentional and understand, “what’s in it for me?” when it comes to their insurance policy. What if something happens to my business? Will this insurance policy pay me from a law standpoint, so that I can continue to run my business? For example, JR has a client that called him and said, “Hey, we had a water issue here in the city. It’s the city’s fault. The water’s contaminated, but they made me shut my business down for eight days. Do I have coverage?”
Imagine going eight days with no revenue from no fault of your own? That’s where the “pay in” part of a quality insurance policy covers you.
And in most cases when you sign a lease, the landlord just wants to make sure that you have coverage that’s going to pay out. They won’t necessarily pay attention to what pays in.
Therefore, as the business owner, its your duty to understand what the risks are in your business and look and see if those risks are line items covered in your policy, or if you should add them into the policy, or buy a different policy.
Worker’s compensation is business insurance required for employers to have for their employees in the state of California. Other State’s laws may be a little bit different, but in California, if you have W2 employees, you are required to take workers’ compensation out on those employees.
Workers compensation covers three things. Medical, a death benefit, and disability.
If the employee gets hurt at work, worker’s compensation is going to cover their medical expenses.
If an employee were to die at work, workers’ compensation would pay out some sort of death benefit to the employee’s heirs, depending on a formula related to how how many kids they have.
In the state of California, if your employee gets hurt at work and he can’t work because of the injury, the state of California is going to pay them up to 65% of the income that you’re already paying them.
You get to take them off your payroll. And the insurance then kicks in for 65% of their income.
As a business owner, how much you pay in workers’ compensation depends on what industry you’re in because it’s all risk-based. So a roofer is going to pay a higher percentage of their payroll for worker’s comp than an office job, like an Attorney or a CPA.
It’s important to know that workers’ compensation insurance is an auditable policy. This means that at the end of the year, the state of California is going to come back to you and say, “you told us you were going to have $200,000 in payroll. Did you have 200,000? If you did, great, you paid us what you were supposed to. Oh, you only had 100,000? Okay, we owe you some money back, so here’s a check. You have 300,000? Hey, you didn’t pay us enough. Write us another check.”
That’s why workers’ compensation is one of the types of business insurance where it’s more important for a business owner to plan based ahead on, especially if headcount is increasing, because it will be audited.
Can you shop the policy?
You may be wondering, since it’s a mandatory policy in the state of California, is there much negotiation room for workers’ comp?
Surprisingly, there might be. And if you have a big payroll and you’re in a high risk (and therefore expensive workers’ comp) industry, then it makes a lot of sense to look at new carriers and new policies every single year. Ultimately, every policy is the same whether you buy it from State Farm, Farmers, All State, Hartford, etc. The only difference is the rate that that company charges you for that policy. Therefore if you have $10,000 or more in annual workers’ comp expense, you should annually shop that policy to see if one company is 15-20% less than the other.
Add it to the annual checklist.
Note to business owners. You are not covered by workers’ compensation!
Workers’ compensation policies only covers the employees of the business. The business owner themselves is not covered.
Therefore, when looking at workers’ comp as a business owner, take a second to think about yourself. Ask yourself if you have enough life insurance? Does your health insurance provide adequate coverage? Make sure that if you get hurt and you can’t work, are you going to have to take money out of the business or will you have a disability policy that can replace that income?
Studies suggest one in four young workers can expect to miss at least a year of work due to disability before they reach retirement age.
As a business owner, you can buy a policy for yourself that covers you if you get sick, hurt, or can’t work. Whether it’s work related or not, having that policy will help with your income.
Employers Practices Liability Insurance (EPLI)
How can business owners protect themselves from any claims against employees and anything that may arise in the work environment?
It’s very important to know that any type of employee related lawsuit – discrimination, harassment, anything like that. A lawsuit in which an employee comes back to the employer and says, “you didn’t treat me right”. Workers’ compensation won’t cover that. General liability won’t cover the claim. Your E&O policy won’t handle it. There’s a separate policy that you have to have, or an endorsement on one of your other policies.
It’s called EPLI, or employers practices liability insurance. And that’s the policy that protects the business owners from employee related lawsuits.
Evaluating this insurance is critical because many general liability policies will add EPLI as a rider, but it is typically extremely inadequate. For example, it’s common to see riders with $10,000-$25,000 in EPLI coverage. Keep in mind the average employee to employer lawsuit in the state of California costs $377,000 between settlement and lawyer fees! That rider won’t be helping you much there.
Erros And Omissions (E&O)
JR provides a helpful example to explain E&O, also called professional liability insurance. “I like to tell people it’s very similar to a barbershop because we’re used to going to barber shops or beauty salons. So if you walk into the barber shop or beauty salon, you slip down and you hurt yourself. Recall that general liability covers that slip and fall. But once you sit down into that chair and the barber starts working on you, and let’s say he’s cutting your hair and he slices a little bit of your ear off. E&O covers that professional mistake. So it’s important if you’re offering a service that you search for any type of E&O coverage that could cover the type of services that you provide.”
Essentially, if you’re a service provider and you know that there is an E&O policy that covers the service you provide, you should look into it.
Is likely one of the most important policies, and unfortunately, also one of the most overlooked. An umbrella steps in if there’s a claim that exceeds one of your underlying policies – so your general liability policy or your automobile policy for example. As an example, let’s say you have a big claim against you. The claim is $1.3 million, but you only have $1 million on your underlying policy. If you don’t have an umbrella, that other $300,000, has to come from somewhere.
It’s important to understand claim flow is threefold.
- It starts with insurance. If you don’t have enough insurance,
- It’s going to move down to your assets. If you don’t have enough assets
- Then it trickles to your income. The state of California can garnish your wages for up to 10 years to satisfy a judgment.
That’s why an umbrella policy is so important. It’s a very low cost way to bring all your policies together and add a layer of protection.
When you’re operating a business, it’s essentially a no brainer because we’re in such a litigious society that it makes sense to create a package that is going to holistically protect your business. God forbid there is a claim, you let the lawyers do the work.
That’s an important point to recognize when it comes to insurance.
What you’re doing when you buy insurance is you’re hiring a team of lawyers and a bank. So if the lawyers lose, you have a bank there to pay out. But they don’t want to pay out. They want to defend you. Therefore the lawyers come in, they defend and they try to settle it out. And if they can’t, then you have the bank to pay out the claim.
Broker or Captive Agent?
What’s the difference between a brokered agent and someone working at the traditional insurance companies on TV?
Brokers are a little bit different because they don’t represent a company. They sit in the middle between companies and people that need coverage. A broker will go out and talk to multiple companies on the owner’s behalf and based off the owner’s conversation with them and their expertise, try to configure the best policy, with the best company, at the best price.
Captive agents, the more traditional State Farm, Farmers or All State, they sit with one company where they serve as an agent of that brand. Normally those companies have policies that the agent knows very well because he only works with that one policy. The downside is, it may or may not totally fit your needs and it may or may not be the most cost effective policy. But, by hiring an agent that’s with a captive company, if there’s a claim, you have a person, an advocate, who’s going to be able to sit between you and the company and make sure that things are going the way they’re supposed to.
Either way, any good broker or agent, sells policies because they want to make sure the business owners they work with are protected. Whether a broker or an agent, the responsibility should be on that person to help in the event of a claim. That’s when you really need them.
Admittedly, captive agents probably have a little bit more pull with their respective company than brokers would have across multiple companies. At the end of the day, put the broker or the agent to work. If there’s a claim, make them work for you and help you get as much out of it as as possible.
A special thank you to JR Tolver for providing this helpful information and helping owners navigate through these types of business insurance.
Remember, this course is all about taking action.
Be sure to contact JR or a business insurance agent in your area to learn more about these options. And feel free to contact us if you’d like help evaluating the financial implications of your decision.