Building Strong Liability Coverage

Part III of the Protecting Your Business Series

By Mike DuBose and Blake DuBose

All individuals and organizations (non-profits, government agencies, and for-profit businesses alike) are subject to threats and liabilities; however, some have higher risks than others. For example, a company that owns many vehicles and has employees who drive them in the course of their jobs is at a higher risk of something going wrong and being sued than a private non-profit with few staff members and no company cars.

Using historical data on claims filed over many years, the insurance industry has studied liability risks so that they can properly decide whether to insure a person or company and, if so, how much to charge. The higher the risk, the more it will cost. The price also depends on a number of other factors, including your personal or company credit scores; the location of your business; the type of activities it is involved in; the number of employees or office locations you have; and the company’s financial strength, risks, past insurance claims, and history.

Whatever its costs, though, comprehensive insurance is essential to a business’s survival. No leader, no matter how visionary, could possibly predict all of the disasters (manmade and otherwise) that can befall a business. It’s vital that—when a catastrophe occurs—you have adequate insurance coverage to keep your business going. This was a hard lesson learned by many during Hurricane Katrina who lacked flood or general insurance coverage: more than 2,000 uninsured businesses failed as a result of the hurricane’s devastating effects. In addition, nearly 2 million insurance claims were filed across six states, proving that many others who did have coverage were able to fall back into the safety net provided by their insurance. Others with insurance learned the hard way that they were only partially covered for their losses!

Recently, to ensure that our business and personal assets will be protected in the event of a lawsuit, disaster, threat, or accident, we worked with our excellent agent Scott Moseley of Irmo Insurance Agency (www.irmoinsuranceagency.com) to audit our business, personal, automobile, and employee insurance coverage. One interesting finding was that many comprehensive business policies cover several unnecessary items (like radio and television antennas, outdoor signs, outdoor property, trailers, etc.), but lack other important features. Thus, we needed to buy additional liability protection in some areas. Some policies also do not cover individual corporate officers and employees, just the company in general; again, we had to purchase additional coverage to thoroughly shield our assets.

When you request insurance coverage, the insuring company (not your agent) will assess risks and liability and present you with different coverage options and costs. Here are some types of insurance you will need to consider for your business:

General Commercial Umbrella Insurance: This is a basic policy that covers property damage, arson, theft, fire, disaster, loss or damage of valuable records and business property, etc. It’s called an umbrella policy because it covers a wide range of threats, but often in smaller amounts, especially in the liability area. However, you can add on liability and other special coverage for additional costs. If your business is small, this umbrella coverage may cost less than $1,000 annually.

Liability Insurance: This covers several categories, including your homeowners and automotive insurance policies. For $200-$300, you can add on $1-$3 million in additional liability coverage for you as an individual and your family. You will also need to increase your automotive insurance to higher coverage levels of $500,000 for each occurrence and for incidents involving uninsured motorists. What you do as an individual and family can harm your company as well, especially if you lack proper legal structure as a limited liability company (LLC) or corporation. If you are a sole proprietor, your individual assets are exposed! You will also need to increase your company’s liability insurance to at least $1 million and preferably more, depending upon your threats, risks, and liabilities. If you hold special events, ensure that you secure at least $1 million in liability insurance. For example, our church, St. Andrews Presbyterian in Irmo, SC, purchased special coverage for its annual car and art show with children’s activities. Since our businesses were co-sponsors, the church added our companies to the policy as “additional insured” at no cost since we could be drawn into a lawsuit if an accident occurred and legal action was taken against the church.

Earthquake and Flood Insurance: These risks are typically not covered by general commercial umbrella insurance. In Columbia, SC, we recently experienced an earthquake due to our location near a major fault line in the Charleston area. Our 40,000-square-foot Columbia Conference Center was covered since we took out an additional earthquake policy to cover this threat, along with flood insurance.

Workers’ Compensation Insurance: This is a state-mandated insurance program that covers lost wages and medical treatment resulting from an employee’s work-related injury or illness. Workers’ comp also covers services needed to help an employee recover and return to work. However, some business owners fail to take out this policy, which can result in a lawsuit if an accident happens.

Director’s and Officer’s Insurance: If you are a director, corporate officer, major decision maker, or a member of a limited liability company (LLC), you could be dragged into the fray if legal action takes place against your organization. Thus, taking out an additional policy to cover leaders is a wise move. If you sit on a board of directors, you also want to ensure that the organization carries this type of insurance. Director’s and officer’s insurance is more expensive than general umbrella or broad liability insurance, but costs vary (from less than $1,000 yearly for most non-profits to thousands of dollars per year for businesses).

While shopping for a variety of insurance coverage recently, we had to complete several lengthy applications. Different insurance carriers asked many of the same questions to assess risk and deliver a cost estimate based on how much coverage we desired. The following are some of the common questions and requests you can expect if you and your company are in a similar situation:

• Who are the directors, officers, and owners within the company?
• Provide a signed copy of last year’s financial statements.
• Has a CPA expressed any financial concern about the company over the last 36 months, or have there been any discussions about bankruptcy?
• Has the company, officer, or any employee been involved in any lawsuit, litigation, or discriminatory or criminal investigation? Are any of these individuals aware of any issue that might result in any of the above?
• Do any of the officers serve on any board outside the company?
• How many employees does the company employ and where are they physically located?
• How many employees were demoted, resigned, terminated, or laid off in the last 12 months?
• Are there currently any plans to reorganize the company’s structure, lay off or terminate staff, and/or close any operations?
• What other types of insurance do the company and/or officers have in effect? Have there been any claims to these policies in the last 24 months?
• Does the applicant have a formal employment application? If so, include it with the insurance application. Does the company use any type of personality, performance, and/or physical tests to assess new and current employees?
• Does the applicant have an employment handbook? Does each employee complete a signed and dated statement indicating that they have received and reviewed the handbook?
• Which of the following policies and procedures does the handbook address? (a) at-will employment; (b) sexual harassment; (c) discrimination; (d) annual performance evaluations; (e) progressive disciplinary procedures; (f) Family Medical Leave Act (FMLA) (if the company has 50+ employees); (g) American Disabilities Act (for businesses with 15 or more employees); (i) procedures for dealing with customers, vendors, general public, and other third parties to avoid discrimination, with specific procedures on how to investigate complaints; (j) employee relationships; (k) confidentiality and intellectual property rights; (l) employee sick, vacation, and special leave and absences; and (m) fringe benefits.
• Does the applicant use outside certified public accountants (CPAs), human resource experts, and/or attorneys for independent advice?
• Does the company use alternative dispute resolution (ADR), arbitration, or mediation to settle employer/employee disputes?
• Does the applicant use written, executed severance agreements to avoid future litigation?
• Are supervisors and directors formally trained on diversity, harassment, discrimination, and cultural sensitivity?
• Does the applicant have a person or department designated as human resources?

 

In addition to helping insurers determine whether to offer coverage, these questions are a valuable resource to business owners as well. They’re a great list of potential threats that businesses face! Address them, and you can help protect your business and assets, as well as make yourself qualified for great insurance coverage. Over the years at our companies, we have developed many policies and procedures to address these issues, updating our employee handbook regularly with the advice of human resource experts.

The bottom line: New threats and liabilities are constantly arising, so organizations must always be alert. By addressing common threats before they swell into emergencies, businesses can help protect their assets in the present and the future. Another key component: thorough, comprehensive insurance coverage. Always get more than you think you need, and you’ll be relieved if your business faces a major attack!

Threats, risks, accidents, and lawsuits are a part of running an organization, and leaders need to be aware of these in order to prevent and reduce any losses when (not if) they occur. By adopting our philosophy of “hoping for the best and planning for the worst,” you can help protect your business from dangers. Being grilled by a lawyer in a courtroom and possibly losing a fortune is not our idea of having fun…but you had better be prepared to go there!

For a detailed version of this three-part Protecting Your Business series, visit www.mikedubose.com/lawsuits.

 

About the Authors: Our corporate and personal purpose is to “create opportunities to improve lives” by sharing our knowledge, research, experiences, successes, and mistakes. You can e-mail us at [email protected].

Mike DuBose, a University of South Carolina graduate, is the author of The Art of Building a Great Business. He has been in business since 1981 and is the owner of Columbia Conference Center, Research Associates, The Evaluation Group, and DuBose Fitness Center. Visit his nonprofit website www.mikedubose.com for a free copy of his book and additional business, travel, health, and personal published articles.

Blake DuBose graduated from Newberry College’s Schools of Business and Psychology and is president of DuBose Web Group (www.duboseweb.com).

Katie Beck serves as Director of Communications for the DuBose family of companies. She graduated from the USC School of Journalism and Honors College.

 

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