Insurance for Your Business: Some Key Insurance Coverage to consider

August 2005

We wrap up our series on business insurance this month with and overview of other key insurance policies a business may need to consider. There are many other forms of business insurance that can help you manage the risks associated with your specific business, some of which are:

• Business Interruption Insurance
• Key Employee Insurance
• Surety Bonds
• Employment Practices Liability Insurance
• Directors and Officers Liability (D&O)
• Errors and Omissions (E&O)
  

Business Interruption Insurance (BII) covers your loss of income if a catastrophe or accident shuts your business down. Floods, fires, hurricanes, tornados, and other unexpected devastating events do occur. BII pays if you are unable to operate your business, resulting in a loss of income. This is separate and distinct from the property insurance which replaces your physical assets. Depending on the type of policy and the perils the policy covers, lost income would be reimbursed if you are unable to conduct your normal business operations (catastrophic or accidental).

Key Employee Insurance protects your business against the loss of a key employee. The loss by death or disability of a key employee can be financially crippling to a business. Insurance policies on the life or injury of a key employee compensate the business against losses that occur because of the person's death or disability. If you are applying for a business loan, your banker may require this insurance (or life insurance) as a way for the bank to get its money back if you are incapacitated in some way. A policy on an owner can also provide the surviving partners or owners with the money to buy the dead partner's ownership stake from their estate.

Surety bonds guarantee to other businesses that your business will fulfill the terms and conditions of the contracts you sign. This is a way to get others to take a chance and do business with your small company that is unknown to them. Usually surety bonds are used in situations where you are signing a long-term contract to provide products or services to the other business. If you apply for a surety bond, be prepared for a thorough background check by the insurance underwriter. Some construction contracts and federal government work require surety bonds to bid on the opportunity.

Employment Practices Liability Insurance (EPLI) covers businesses against claims by employees that their legal rights have been violated. Employment Practices Liability Insurance is a relatively new form of liability insurance. It provides protection for an employer against claims made by employees, former employees, or potential employees. It covers discrimination (age, sex, race, disability, etc.), wrongful termination of employment, sexual harassment, and other employment-related allegations. It covers your firm, including its Directors and Officers. Employment Practices Liability Insurance is needed as soon as you start to hire employees. Most investors and directors require that you carry this coverage as part of your Directors and Officers Liability Insurance since they can also be held liable in suits relating to employment practices.

EPLI provides protection against:

• Breach of employment contract
• Deprivation of career opportunity
• Discrimination
• Failure to employ or promote
• Mismanagement of employee benefit plans
• Negligent evaluation
• Sexual harassment
• Wrongful discipline
• Wrongful infliction of emotional distress
• Wrongful termination
  

Directors and Officers Insurance is designed to help protect both the assets of the company and the personal assets of these individuals. The large exposure facing the Directors and Officers of a closely-held corporation in their role as corporate managers may well exceed the assets of their Company. For virtually any corporation, the cost of defending suits against its Directors and Officers can prove catastrophic. D & O Liability Insurance helps protect the Directors and Officers of the Company against claims alleging:

• employee discrimination or unfair employment practices
  
• wrongful termination
• disposal of corporate assets, without regard to the firm's ability to pay for or secure the Company's debts
• wrongful denial or termination of credit to any customer or client
• violation of the anti-trust laws or unfair methods of competition
• violation of a loan covenant
• exorbitant dividend payments or profit sharing contributions which were made by the Company
• improper loans made to Directors or Officers
  

Directors and officers of a private company can be held personally liable for the decisions they make. Any director or officer of a private company who is not provided D&O coverage is playing a dangerous game, risking his own personal assets (including his/her spouse's assets). Being private does not mean that the decisions of your board are immune from public scrutiny. While D&O coverage is critical for public companies because of their large shareholder base, most lawsuits don't come from shareholders, but rather from creditors, competitors, government bodies and employees. In fact, employee-related litigation represents the majority of D&O related claims. This makes comprehensive D&O insurance essential in this litigious business environment. Further, in some cases private companies must have D&O coverage to keep or attract high profile board members.

Errors and Omissions Liability Insurance (E & O) protects your company from claims if your client holds you responsible for errors or the failure of your work to perform as promised in your contract. Professional Liability (Errors and Omissions Insurance) coverage is not provided by a Commercial General Liability policy. Commercial General Liability does NOT provide coverage for errors, contract performance disputes or any other professional liability issues.

Coverage includes legal defense costs, no matter how baseless the allegations. Errors and Omissions Insurance will pay for any resulting judgments against you, including court costs, up to the coverage limits on your policy. E & O coverage extends to both W2 employees and 1099 subcontractors, and can be worldwide in scope.

Depending on your business, your personal risk and what your investors require, your company may only need one or two of the insurance options discussed here.  Consult with your insurance broker and others in your industry to learn about what coverage they have and the problems they've encountered in the course of doing business.  This will give you a better understanding of the likeliest problems you'll run into and help you determine what protection is advisable for your firm.

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