When you buy insurance, you are betting against the odds. That’s why insurance companies are in business. They pay out less than they take in. Some do well at that. That said, if some of the things go wrong that can go wrong — maybe not something you think will happen, yet things that could happen — the insurance may save you. Hence the reason any of us with a real business has it.
Here is some of what I have learned about insurance for my businesses over the years:
One agent or broker cannot handle all of your needs. Just like anything else, specialization rules the day. The same person who sells you health insurance probably isn’t from whom you get your property insurance. That doesn’t mean you should not have a primary broker you trust. That person can probably hook you up with the other specialty experts you may need for health benefits, professional liability, or commercial or industrial properties you may own.
Check references — multiple ones — on anyone from whom you are considering buying insurance. Just as is the case with anyone from whom you buy expensive intangibles, there are good insurance brokers and agents and not such good ones. The good ones tell you the truth and give you good advice that protects you but doesn’t waste your money. The bad ones push you into buying stuff you don’t need and maximize their commissions.
Just because you have insurance doesn’t mean you are covered. Some years ago, after I got into the business of doing speculative renovations in houses that we bought, redid and put up for sale, I found out that the insurance we had on those properties would not cover them in the event some claim had to be made. The problem was they were insured with rental policies even though we had no intention of renting those properties. When I confronted my then-agent about the issue, he told me he couldn’t sell me a construction policy. But he never bothered to communicate that to me until I discovered the problem.
Just because someone you are doing business with claims to have insurance doesn’t mean they do. In the construction world, we must get proof of coverage for workers’ comp and general liability from all of the subcontractors we do business with. But what happens is some of these small companies will get insurance for a day or a month and show you their proof of coverage certificate. When in reality, they let their policy lapse. The way to deal with this is to be named a “certificate holder” on their policy. That way, you be notified if their insurance is canceled.
You probably don’t have employment practices liability insurance. You should get it. This insurance is very affordable and will cover you in cases of wrongful termination claims and other common employment-related issues you may encounter as a business owner. Even if you have a $25,000 deductible, that could be manageable. Whereas a $1 million wrongful termination judgment could put you out of business.
You should also get Directors and Officers (D&O) insurance. Piercing the corporate veil in closely-held corporations or LLCs and going after the individual owner or owners and directors in major liability cases can happen. You want to be protected, and anyone you bring on to your board of directors as an outside director will want that, too. This insurance also covers the company.
If you own a business, you need to educate yourself on insurance. It could make the difference in survival and prosperity or your eventual financial ruin. And that’s big stuff.
Mark Zweig is the founder of two Fayetteville-based Inc. 500/5000 companies. He is also an executive in-residence teaching entrepreneurship in the Sam M. Walton College of Business at the University of Arkansas. The opinions expressed are those of the author.