October 2011

State laws or lenders require people and businesses to buy certain types of insurance. Most states require Automobile Liability insurance on all registered vehicles. If the vehicles are financed, the lenders will require the owners to carry Collision and Fire coverage. Employers have to carry Workers Compensation in most states. Mortgage lenders require borrowers to insure their buildings against loss by fire and other perils. In certain areas at high risk of flooding, lenders might require them to buy Flood insurance as well.

However, many kinds of insurance are not required by anyone. In Texas, employers can opt out of buying Workers Compensation coverage. Although nearly all businesses use computer networks, no laws or lenders require them to buy insurance against damage to their systems or damages others might suffer because of a problem with their networks. State laws do not require employers to carry Employment Practices Liability coverage. Lenders normally do not require people who live in low-risk flood zones to buy Flood coverage. No laws require businesses to buy Umbrella policies, which provide additional liability insurance above standard Liability and Auto policies. This begs a question: If an individual or business is not required to buy certain types of insurance, should they skip them?

The reasons for passing on non-mandatory insurance are compelling. Although the future occurrence of a loss is uncertain, the cost of an insurance premium is not. Insurance can cost significant amounts of money that many people would rather put to other uses. Further, people might believe that they are unlikely to have some types of losses and therefore do not need insurance against them. Many businesses do not carry Cyber Liability insurance for this reason. People who do not live near bodies of water often do not even think about Flood insurance. Some types of insurance can also be difficult to get. In parts of the U.S. prone to earthquakes, the market for Earthquake coverage is very limited.

There are good reasons for buying insurance even if it’s not required. Many of these policies cover jury awards in injury and damage cases, and those awards can be substantial. Consider the following awards that would likely be covered by Employment Practices Liability insurance:

• A jury awarded $934,000 in damages to a deaf man fired by the convenience store that employed him.
• An Alabama man who was fired after complaining about his employer to the federal Equal Employment Opportunity Commission was awarded $314,000.
• A jury ordered an employer to pay $900,000 to a Cleveland woman for discriminating against her because of her age.

Umbrella policies would come in handy is situations like these:

• A woman who suffered injuries when she fell in a store was awarded $3.2 million.
• A jury awarded $11.7 million to an elevator mechanic who was injured while working on a construction site.

People and businesses who think they don’t need Flood insurance might want to reconsider. Floods can result from melting snow and water main breaks as well as rainfall. According to the Federal Emergency Management Agency, people outside of high-risk areas file over 20% of Flood insurance claims and receive one-third of disaster assistance for flooding. The agency estimates that as little as one inch of floodwater in a 2,000 square foot home can cause up to $21,000 in damage.

For these reasons, it is wise to at least consider buying insurance that no one requires. One of our professional insurance agents can answer questions and help you weigh the costs and benefits of buying extra coverage. Going without insurance can be a very costly mistake. Just because it’s not required doesn’t mean you shouldn’t buy it.

Directors & Officers Liability coverage is important for all medium and small firms. This form of coverage protects personal assets of directors and officers during a lawsuit stemming from mismanagement. When they’re charged with mismanaging the company, directors and officers who don’t have this type of insurance face the risk of significant losses. Directors and officers liability affords them the protection they need, and money for their legal expenses is also provided. If the company they work for must be brought into the lawsuit, this coverage may also be extended to include the company itself. There are many other beneficial provisions these policies offer.

Directors and Officers Make Mistakes. Nobody is perfect, so it’s important to be prepared for directors and officers to make mistakes. Although most mistakes that require this coverage are the result of negligence, it’s important to remember that anyone is capable of making such mistakes. Although training directors and officers to make responsible and ethical choices is necessary, don’t pay so much for training that there isn’t enough money for liability coverage. It’s better to create a healthy balance by preparing representatives and obtaining coverage to protect them.

Lawsuits Might Drive an Unprotected Firm into the Ground. Unfortunately, many firms don’t implement a Directors & Officers Liability policy. When a lawsuit is filed, the importance of this vital coverage is learned. If there is proof of the director’s or officer’s negligence, the case will be difficult to win. In a best-case scenario, a good attorney might be able to minimize the amount of damages the company or representative must pay. However, a good attorney is expensive. In addition to this, the damages that must be paid hurt the company’s finances. Some executives or companies are forced into further debt or bankruptcy to compensate for the lawsuit. There are many other smaller expenses that add to the total loss.

The Breadth of Coverage Is Generous. Many companies forgo liability coverage for their directors and officers because they think it’s too expensive. However, it’s actually very affordable, especially when the many provisions are considered. Each insurance company varies slightly in their specific inclusions. For example, companies that provide basic policies might cover only the attorney’s fees for the company, directors, and officers. Some insurance companies that have more extensive coverage might include lodging, travel expenses, and childcare reimbursement for defendants who must travel for court proceedings.

The Likelihood of a Lawsuit Is High. Whether or not a company is in a high-risk business, there is always a high risk for lawsuits against directors and officers. In a study performed in 2010, 25% of small firms said they purchased Directors & Officers Liability insurance. About 12% of the executives interviewed stated that they experienced a lawsuit. The average cost of the litigation process was more than $200,000. However, some executives reported losses as high as $5 million. This example paints a clear picture of how likely it is to experience a lawsuit. It also illustrates how expensive such legal procedures are.

It’s important to compare insurance companies before selecting a policy. As mentioned before, not all companies offer the same coverage. Comparing rates and provisions is the best way to get the most value for every dollar spent. To determine how much coverage is needed, it’s important to assess risks. Most insurance representatives are happy to provide current and useful resources for this matter. They usually ask a series of general questions. Most agents ask several industry-specific questions also. There are some policies that are better than others for specific industries. Another important aspect of searching for Directors & Officers Liability insurance is researching underwriters. The companies who underwrite insurance policies have varying policies. It’s rare to find two underwriting companies with identical rules. By performing some research on each preferred insurance company’s underwriter, it’s easier to determine which policies are the most solid. Be sure the company is rated with an A. Avoid doing business with insurance companies who use underwriters with lower ratings.

As every business owner knows, risk is an unavoidable part of doing business. However, it is manageable and controllable. Although it is a challenge that requires time and experimentation, finding a perfect balance between profitability and peace of mind is essential. It’s impossible to eliminate risk completely, so it’s important to set realistic goals. Policies that are enacted in an attempt to fully eliminate risk could actually hamper business growth.

The Importance of Risk Management. The common concept of risk management among small business owners involves simply purchasing regular insurance protection. Other aspects of protection often escape consideration. Risk management is much more complex than simply purchasing insurance and implementing rules. These are both necessary parts of every plan. However, there are many other things to consider.

Tips for Implementing a Realistic Risk Management Plan. It’s best to start with a simple plan that is easy to follow. The prime goals should be mitigation and management of business risks. After trying the plan, analyze it and make any necessary changes or additions. Consider the following steps in order to make a positive change:

1. Identify the Risks. There are some risks that are universal. However, there are also some that are specific only to certain types of businesses. It’s important to conduct a thorough risk analysis to identify them. The best way to accomplish this is to use a standard risk checklist. There is a Small Business Insurance & Risk Management Guide available from the Small Business Administration. This guide is helpful in outlining potential risks. While going through the list, pay close attention. Most business owners are able to think of other potential risks that are unique to their situation during this process. Some of the most important initial risks to consider include:

• Property losses that occur from loss of use, physical damage or criminal activity.
• Liability losses that happen to customers and are the fault of the business.
• Business interruption losses stemming from fires, natural disasters or other unpredictable occurrences.
• Key person losses or the loss of important employees, which results in a negative impact on the company.
• Employee injury losses that occur when an employee is injured on the job and must be compensated.

2. Determine How Vulnerable the Company Is to Various Risks. Consider the various risks and how much each one would cost the company. Not all types of companies are as vulnerable as others. Companies with high vulnerability to expensive risks need to make those specific areas a strong priority in their risk management plan. The risks that aren’t worth worrying about should receive a much lower priority. Keep in mind that it’s not feasible to eliminate every possible risk. However, some need much more consideration than others. For example, a paper manufacturing company should consider the risk of employees losing limbs on dangerous presses in the manufacturing line before they become concerned with possible paper cuts to fingers of employees in the inspection department. As an overall rule, the cost of preventing the risk should never exceed the amount the estimated loss that might result from that risk.

3. Create a Contingency Plan. There is more to this aspect than purchasing insurance. Be sure to implement plans that place employee safety higher than efficiency. Install a security system to protect all property from theft and damage. Avoid transactions with unknown customers. Implement plans to train supervisors to minimize loss of key employees.

4. Purchase Adequate Insurance. In addition to purchasing enough insurance, it’s imperative to purchase the right types. Some of the key types of coverage to purchase include:

• General Liability insurance, which covers the legal liabilities faced from injuries to third parties. Medical expenses, property damage and bodily damage are typically covered.
• Professional Liability insurance, which covers allegations of malpractice, negligence and other errors in services.
• Product Liability insurance, which covers the expenses related to injuries or damages resulting from a defective product. This is essential for all companies producing tangible products.
• Commercial Property insurance, which covers loss and damage costs for business properties. Business interruption is typically covered by this provision.

5. Revise as Necessary. Be sure to review and update risk management plans regularly. Reassess risks and make any necessary changes. It’s important to have regular review meetings with department heads, owners and a risk management consultant. Be sure to inform the insurance company of any changes or new risks.

Business owners who plan to raise capital from investors must be especially vigilant in their risk management planning. Having a good plan and updating it regularly is important for gaining their trust and making them comfortable with the opportunity to invest.