Business owners need to invest in appropriate Insurance & Bonding tools to mitigate risk. But just knowing the types of risk you need to worry about can be confounding. Albany insurance expert Steve Lobel of Anchor Agency Inc. has been advising area startups for the past decade and shares on this page answers to common questions about insurance and bonding.
Any business, due to its mere existence, does carry with it some risk exposure, for which some form of insurance should be purchased, if possible, regardless of legal necessity. In the course of setting up and operating your business you may sign a contract with a landlord or a client for which you contractually obligated to carry specific insurance, for your protection as well as for the other party. Your commercial insurance coverage should always be tailored to the specific business being insured.
New York State law does not require a corporation to purchase any type of insurance due to the mere existence of the corporation. However, any business entity (Individual, Corporation, etc.) with employees, is required by New York State law to carry two insurance policies: both Workers Compensation and Disability insurance. Since the term “employee” is used liberally, you should contact your insurance professional to see if your operations meet the legal definition.
Commercial General Liability (CGL) & Property Insurance
Most businesses should carry a reasonable amount of Commercial General Liability, which is usually offered in a package with Property Insurance. CGL policies cover claims in four basic categories of business liability: Bodily Injury, Property Damage, Personal Injury (including Slander or Libel), and Advertising Injury. In addition to covering the claims listed above, Commercial General Liability policies also cover the cost to defend or settle claims, even if the claims are fraudulent. In addition, even if your company is negligent or liable for damage, injury or loss to another’s property, reputation or health, your businesses assets can be protected with adequate insurance coverage.
This coverage is the most basic type of commercial insurance and is limited to liability claims of bodily injury or property damage. Coverage is provided for accidents on your premises or at your customer’s location. You and your employees are covered if, for example, you physically damage a client’s server. It is important to remember that these policies exclude “Errors and Omissions” type claims related to the delivery of your professional services. E&O coverage is discussed below.
Basic commercial property insurance does not cover loss due to failure of power or other utility service to the described premises if the failure occurs away from the premises. Coverage may be provided only if the failure occurs at the insured location. Many insurance companies offer this coverage either as part of a Package Program or through an additional rider or endorsement. This insurance covers two different possibilities. One relates to direct physical damage to property such as computer equipment, and the other relates to loss of earnings or extra expense (also known as business interruption) caused by the power failure. All losses must be carefully documented through your organization’s business records.
Property claims involving infringement of patent, copyright and trademark are being filed and litigated at a tremendous cost to both parties. Few standard insurance policies protect businesses from loss or damage to their intellectual property. However, two types of coverage are available and can be written separately or in combination with the other. Various limits, deductibles and co-insurance options are available as well:
- Infringement (Defense Cost Reimbursement) Coverage reimburses you for your legal expenses when you must defend yourself against intellectual property infringement lawsuits.
- Abatement (Enforcement) Coverage provides litigation expenses incurred in enforcing the insured intellectual property (patents, trademarks, and/or copyrights) against infringers up to the policy limit.
Landlord General Liability
If you rent office space, your landlord’s General Liability Insurance should pay for any physical injury to a visitor in the common area of the building, assuming that you or your employees are not negligent. That said, it is important for your company to carry this type of insurance as well. As noted above, basic Commercial General Liability is usually offered in a package with Property Insurance, which provides for accidents on your premises or at your customer’s location.
Directors & Officers Insurance
Every corporate director and officer is a potential target for litigation. Company executives may be personally liable for the decisions they make. The cost of just defending a lawsuit is extremely high; combine that with damages and expenses, and you have a potentially devastating situation.
Lawsuits can be brought against directors and officers by shareholders, employees, and even by customers, suppliers, competitors, and regulatory agencies. They can allege: mismanagement of business; self-dealing and conflicts of interest; failure to deliver services; failure to disclose information; disclosure of materially false or misleading information; violation of state and federal laws; unfair trade practices, franchise disputes; etc.
Fortunately, insurance coverage is available to respond to these risks. Directors & Officers Liability Insurance can provide funds for the defense and settlement of these lawsuits. Please note that insurance coverage alone can’t fully protect corporate executives against their D&O liability exposures. Quality insurers also offer loss prevention guidance in addition to insurance coverage.
Errors & Omissions Insurance
In any business relationship, it is possible for a customer to claim that work you performed or failed to perform created a financial loss or harmed them in some way. Because we live in a litigious society, many business owners protect themselves with Errors & Omissions Insurance (also known as Professional Liability Insurance). This insurance is essential for anyone who gives advice, makes educated recommendations, designs solutions, or represents the needs of others, such as teachers, consultants, software developers, ad copywriters, web page designers, placement services, telecommunication carriers, etc. Although a formal contract with your clients can help limit your liability, it cannot prevent a lawsuit. In many cases, the cost of defending a lawsuit represents the biggest expense. Errors & Omissions policies are designed to cover these defense costs and ultimately any final judgment if you lose the case. It is important to note that this protection is not routinely provided by the Commercial General Liability policy that most businesses buy to protect their interests.
Key Person Insurance
Key Person insurance is life insurance purchased on any key individual in an organization. Any one of several types of life insurance (Term, Universal Life, Universal Variable Life, etc.) can be used for this purpose. The organization (either for profit or not for profit) is usually the owner and beneficiary of the policy. The purpose of this insurance is to provide the organization with enough money to sustain the loss of a crucial individual due to their death. This typically includes costs associated with the search for and hiring of a replacement as well as loss of revenue. In some instances, the insurance contract can also be a source of funding for a buy-sell agreement where the death benefit can be used by the organization to purchase the shares of the deceased individual from their family. With increasingly greater frequency, lenders are requiring Key Person Insurance on the principals of an organization as a pre-requisite to closing on a loan.
Today, a standard business property policy may cover your computer in case of fire, theft, or vandalism, but if a virus wipes out your customer data or a hacker cracks your financial records, you won’t be covered. These risks are excluded from standard commercial insurance policies. However, there are comprehensive stand-alone policies that cover:
- Loss of data – for damage to or destruction of information due to viruses.
- Business interruption – for loss of income due to a network attack.
- Liability – for defense costs resulting from computer related financial or data losses.
- Public relations – for public relations costs associated with a cyber attack.
- Identity theft – for access to an identity theft call center.
Coverage needed is determined largely by the technology you use, the extent to which it’s implemented, and it’s importance to your business.
See Human Resources.
An insurance policy is a two-party contract that transfers individual risk from an insured to an insurer. In contrast, a bond is formed with three parties instead of two. One party, the surety, guarantees to another party, the obligee, the performance of an obligation by a third party, the principal. The surety is primarily liable not to the principal who purchased the bond, but to the obligee. In theory, the surety does not expect to have a loss if its underwriting operation is successful. In fact, if a loss does occur with payment being made to the obligee, the surety is subrogated to the rights of the obligee against the principal. The principal must reimburse the surety.
The traditional “three C’s” of the underwriter’s appraisal of his or her contractor client are the basic yardsticks for measuring his desirability: character, credit, and capacity. While the general reputation and experience of the contractor are essential ingredients, he or she must have the financial resources to complete the contract. Nothing takes the place of this prime requisite. Rates are quoted per thousand and are subject to minimum premiums.
- Bid Bonds: Bonds that guarantee that a contractor will enter into a contract at the amount bid and post the appropriate performance bonds. These bonds are used by owners to pre-qualify contractors submitting proposals. These bonds provide financial assurance that the bid has been submitted in good faith and the contractor will enter into a contract at the price bid. Bid bonds can be purchased from your independent insurance agent. The process is complex, not unlike getting a loan, and adequate time must be allowed for a bond to be written. Underwriters rely on the “Three C’s” in determining who will receive a bond. Character (integrity and reliability), Capability (or capacity), and Capital (of utmost importance) which is the financial strength backing the pledge. Financial statements are often required.
- Contract Bonds: Bonds that are designed to guarantee the performance of obligations under a contract. These bonds guarantee the obligee that the principal will perform according to the terms of a written contract. Contract bonds protect a project owner by guaranteeing a contractor’s performance and payment for labor and materials. Because the contractor must meet the surety company’s pre-qualification standards, obligees are also indirectly assured that the project will proceed in accordance with the terms of the contract.