Do you have the right legal infrastructure and insurance in place to protect your business from ‘Mayhem’?
by Michelle Bomberger | June 30, 2022Today, it seems like every other commercial is for an insurance company. From talking geckos to that Mayhem guy destroying things, we’ve become familiar with the needs and benefits of auto and home insurance–but what about protecting our business?
In this post, we discuss how to protect all that you have invested, sacrificed, and achieved in your business with the strategic use of insurance and legal protections together. How can you best protect your people, systems, and facilities from risk?
36% to 53% of small businesses are sued every year.
43% of all small businesses are threatened with a lawsuit every year.
About 45% of small businesses are currently involved in litigation.
90% of all businesses experience a lawsuit at some point in their lifespan.
There are around 12 million contract lawsuits filed every year against small businesses.
The average liability suit costs at least $54,000.
SOURCE: The Zebra
When to consider insurance
Just like personal auto insurance, when a “Mayhem” or an incident happens, it’s too late to start thinking about insurance. A business should regularly perform a risk analysis.
A good time to do this work is when you’re preparing for your insurance renewal. The insurance renewal process should include questions about changes in your business including geographical expansion, changes in the goods or services you sell, staffing changes, and other areas that might highlight new risks. During this process, you should consider where insurance fits into your overall risk mitigation planning.
What kind of protection does a business need?
Insurance typically fits into the plan where there is a low probability and high exposure. We typically think of events like theft, fire, or cyberattacks – they are unlikely to occur; but if they do, it will be disastrous. So how can you be sure you’re covered?
First, consider the dependencies of your business. If “X” happens, it would be impossible for us to function. Some examples:
People – Many businesses have a high dependency on key people. It’s hard to replace the knowledge, experience, and cultural connection a key person has to the business. A business cannot stop a key employee from leaving their job, but they can put in place incentives to keep them around. These are usually incorporated into contracts as additional salary or bonuses or equity. The business also can build in a transition period if the person leaves. However, if the person dies or becomes disabled so that they cannot work, the business loses that person immediately with no time to prepare. The business can purchase key person and disability insurance that will provide funds to fill some portion of the gap. When the person is also an owner, insurance can fund the buyout of that owner’s shares and help the family out.
Systems – A second critical area of dependency is systems. We rely on the availability of the internet and certain software systems to get work done. If a particular software system is unavailable, the business may be unable to operate. Ensuring your contracts with software vendors provide redundancy – if the location of one server goes down, another one is available – and security is critical. If the vendor fails to perform, you would have recourse against them under the contract. However, your customers may pursue you for the damages you caused them by failing to perform. Insurance is a tool that may help pay for these damages if the particular issue is covered. The everyday outage of your software vendor likely wouldn’t be covered; but business continuity insurance should be on your list of policies. It’s important that you also understand what exclusions exist in these policies. If there’s an earthquake and your servers are destroyed, will your insurance cover that? Another area related to systems security is cyberattacks. This is a growing area of exposure and cyber insurance coverage is essential to protect your business from phishing, ransom attacks, and other fraudulent schemes.
Facilities – Facilities are often the core area people think of for insurance coverage. Business continuity insurance and general liability insurance will provide coverage where you are unable to access or use your facilities due to an external event such as fire or theft.
What if your business becomes Mayhem?
As entrepreneurs, we know that things rarely go to plan. And as humans, we can all make mistakes. It’s important to consider the potential damage your business could cause to others.
Errors By Employees/Agents – If an employee makes a mistake that causes damage to a third party, you would first look to your contract terms, such as limitation on liability, indemnity, and warranty, to determine how to resolve the issue.
However, the contract may not offer you protection and then you’d look to yourgeneral liability insurance policy or possibly products liability insurance for coverage. Similarly, if employees are driving vehicles for work, automobile insurance is a smart addition to your portfolio. In businesses where the employees are licensed professionals, additional coverage under a professional liability insurance policy is prudent. The professional liability covers acts taken by that employee in their capacity as a licensed professional. In fact, “professional” entity types are often required to carry professional lability insurance.
A company’s directors and officers make both tactical and strategic decisions for the business. In this role, they could be named in a claim against the company. Directors and Officers (D&O) insurance is often carried by companies that have outside, independent directors and officers to protect them from such claims.
Errors By Employer – As an employer, you have an obligation to abide by employment laws and maintain a safe workplace for your employees. If an employee makes a claim against you for failing to do so, employment practices liability insurance is available to assist in the defense and/or settlement of the claim. You typically cannot use contracts to protect you in these situations so insurance is critical.
How much should a business invest in insurance?
Once you determine the coverage types you need, it’s important to consider the amount of coverage needed. The amounts should be driven by the business activities and exposure. You should also consider the requirements that your customers or vendors typically require in their contracts and be sure your policies comply. This evaluation should be done annually when you review your insurance needs.
Is insurance enough?
Insurance is an essential tool to be used alongside contracts, policies, procedures, and entity structure to mitigate exposure to risks. Understanding how it works and interacts with these other tools will help you to acquire the right policies in the proper amounts. You will have greater confidence in going boldly forward knowing these tools are in place.
Is it time for a Business Health Assessment?
Are your contracts, policies, and procedures current and working in tandem with your insurance coverage? Plan a Business Health Consult with one of our business-minded attorneys to see where your business stands.
A Business Health Consult is a complimentary, one-on-one discussion with an experienced business lawyer to talk through areas of concern, strength, and risk. The meeting is extremely personalized, tailored to your business’s individual needs, challenges you may be facing, projects on the back burner, and any areas of your business that need more focused attention. Within a week, you’ll get a customized summary of recommendations based on your Business Health Assessment.
This post is not intended to provide legal advice. Contact an insurance provider and/or an attorney familiar with your situation prior to taking or refraining from any action.