Protect Your Piggy Bank!
When you think about protecting your business and reducing unnecessary risk, you should think in terms of layers. No single layer can eliminate all risk, but by using multiple layers, you can eliminate as much unnecessary risk as possible.
A business owner can reduce risk by intelligently drafting his or her contractual agreements with co-owners, vendors/suppliers, customers, and strategic partners. A business owner can reduce his or her personal risk by creating a distinct legal entity for the business (forming a corporation, LLC, etc.). A business owner can reduce risk by designing and implementing a formal hiring process, complete with background and reference checks. The list of ways to reduce risk is unlimited, and a great business attorney can help you implement all of them. One of the more critical layers on your list is insurance. I call it the ‘safety net’ or layer of last resort.
Insurance is a broad topic in that if you are willing to pay the premiums, you can insure just about anything. For the typical business owner, however, I will break down the most common types of business insurance. A more detailed guide for small businesses is available here from the California Department of Insurance.
Property (or first person) Insurance:
This protects your assets, for example, your building and all the stuff inside, from theft, damage, or destruction.
Casualty (or third person) Insurance:
This protects you against claims from third parties, like a customer who slips and falls while at your business, or if an employee is involved in an auto accident on the way to deposit the business’s earnings at the bank. Worker’s Compensation insurance falls into this category.
You will want to make sure you have both types of coverage.
Make sure you find a great insurance broker/agent. Get references from trusted advisors or other established businesses and interview several broker/agents. MAKE SURE YOUR BROKER/AGENT IS LICENSED! You can check on license status at the California Department of Insurance.
This last point is important and it’s easy to do. I have encountered several businesses which paid premiums to a broker who did not forward those payments on to the insurance company. That means the insurance policy was not in effect. The businesses were subsequently sued for non-related reasons and there was no insurance coverage. The businesses were on their own when it came to defending themselves in the lawsuits and paying the respective settlement amounts. Paying lawyers to defend you and paying a plaintiff to waive his or her claims is a very expensive thing to have to do without an insurance company backing you up.
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