A Nationwide survey reveals that 75% of small businesses don’t have a disaster plan, even though more than half (52%) stated it would take three months (at least) to recover and open up their doors should one strike. The survey also mentioned that only one out of three small businesses had business interruption insurance. But do business owners need it, let alone other insurance types? Read on to find out! (Plus, learn if you could benefit from conducting a Washington Secretary of State business search.)
Demystifying a Key Business Myth
You may consider business insurance if you are a sole proprietor or work in a litigious-friendly field. But, LLC and corporate owners could have their reservations about whether they need it and how extensive business insurance is. LLCs and S and C corporations already have limited liability coverage built into their business structures; they don’t need more of something they already have—or so the myth goes.
The Truth About Limited Liability
You see, just because your assets are protected (assuming this is not a pierce-the-veil case) does not mean your business is completely off limits. It’s important to distinguish that, unlike a sole proprietorship and some partnerships, limited liability coverage protects you from personally being liable for LLC- or corporation-related actions. Business insurance provides more protection for your business—as well as yourself and employees—should a natural disaster strike, customer sue, you name it. But, out of the many business insurance packages and policies out there, who needs what? Ask yourself these questions to determine what type(s) of business insurance you need, not to mention how much coverage is enough.
1. Do you have employees?
If you are a one-man (or one-woman) shop, you probably can go without worker’s compensation insurance. However, for those who have employees (even if just one), you probably need it. Actually, Texas is the only state that does not require worker’s compensation. Worker’s compensation comes in when a workplace injury happens—say an employee slips and falls while on the job, which (unfortunately) is not uncommon. In a nutshell, this type of insurance would cover the employee’s medical expenses. Worker’s compensation insurance also takes care of disability and even death.
Besides worker’s compensation, to prevent high turnover and show employees you care, you may want to provide health insurance (and life insurance) packages—especially given the rising cost of healthcare for single- and family plans. In fact, according to Glassdoor research, employees ranked healthcare insurance as the most important benefit.
2. Do you work in a litigious-friendly industry?
According to Forbes, 36%-53% of small businesses are engaged in a lawsuit and 90% of businesses in general are involved in litigation. This does not just show we live in a very litigious-friendly country but conveys that it is very possible for your business to get sued. Of course, there are some industries that are more lawsuit-prone than others, medicine and law being two of them. However, that’s not to say musicians and scientists can’t be. Actually, The Beach Boys vs. Chuck Berry (1963) and Led Zeppelin vs. Willie Dixon (1972) are two landmark copyright cases. Profession aside, you may need professional liability insurance, which helps protect the business against negligence claims. Should a business, customer, or employee sue your business, you’ll have access to funds to pay for the legal costs.
Depending on the state and your profession, liability insurance may not be recommended but required, as is the case for lawyers practicing in Oregon. Be sure to check your state’s rules and regulations to determine if you are required to have this type of insurance.
3. Where do you work?
For business owners who own or lease a space, you may want to get property insurance, which protects your inventory, furniture, and equipment from natural disasters and theft. To determine how much how extensive the insurance, check if you work in a flood or earthquake zone. Also, talk with a professional to see what customizable options there are. If you work from home, you may not need this type of insurance. However, discuss with a professional whether your personal insurance will be enough.
4. Which business problems do you deal with the most?
Or, what are your biggest business problems? Knowing this will help you determine if you could use a more specific insurance type like employment practice liability or go the more general route. If you work in a sue-friendly industry, perhaps a more specific type of liability insurance? If employee safety is a pressing issue, maybe more extensive worker’s compensation insurance? Know that there are several add-ons and customizable options you can add.
5. What is Your Business Type?
Are you a sole proprietor? Do you own an LLC or operate a corporation? You see, your business structure may determine your insurance choice more than you think. For instance, because sole proprietors don’t have automatic limited liability coverage, they may gravitate towards property insurance and business interruption insurance, two favorites for small businesses. That’s not to say LLCs and corporations can go without these types; in fact, having insurance can be the difference between securing a client and having them walk. Some financiers may want to see your insurance before considering investing in your business.
And then you have to consider how much insurance you need based on your business type, number of employees, etc.: a one-person sole proprietorship may not need to allot 20% to 30% of his or her gross sales for insurance. While a large corporation with over 500 employees may need to bump those figures up. Needless to say, it is important to consider all of the ins and outs before getting insurance you don’t need.
6. Does your business have company vehicles?
Like with homeowner’s insurance, personal car insurance probably won’t cover your company vehicles, in which case you may want to think about vehicle insurance. This insurance protects against injuries resulting from car accidents so if one of your employees gets in a car crash on the job, you won’t personally have to shell out the cash for their medical expenses.
7. What about your customers?
Do you sell a product? Do your customers go to your physical location to buy your product or service? If so, you may need product liability insurance, which comes in handy if a customer suffer damage from your product and sues your business. You may also want to consider business interruption insurance, especially if your business is not remote and cannot operate without a physical location.
8. Do you work in a field that requires insurance?
In some industries and depending on the state, you may be penalized for not having insurance. Construction companies, health care, and law are some field where their reputation and career are at stake without certain types of insurance. We recommend to talk with companies and professionals within your field, as well as a professional about insurance options.
Bonus: Do you work in a flood zone or disaster-prone area?
Is your business in a flood zone or fire-prone area? Is your business on or close to a fault line? Or, is your business located on a beachfront in hurricane-friendly territory? Look at a map, talk to professionals and neighboring businesses to see if your business could benefit from major disaster insurance like business interruption insurance.
In the case that a major disaster does strike, business interruption insurance can provide the financing needed to pay for employee salaries and repairs, helping your business get up and running. Even if your business is not in a disaster-prone zone, you still may want to look into business interruption insurance, as all it takes is an out-of-hand grease fire or busted pipe for your business, employees, and customers to be at risk.
Final Thoughts: What the Question Really Is
The truth is, the consequences of a lawsuit, employee injury, or yes, natural catastrophe is not worth rolling the dice and operating without business insurance. Your business stands to lose too much, especially given that more than 40% of small businesses don’t reopen after a major disaster and, of the businesses that do, only 29% remain open after two years.
Now the problem isn’t if you need business insurance but which type(s) and to what extent? A writer’s business insurance needs are going to be different than a lawyer’s. Be sure to do your research and consult with a licensed industry professionals for advice.
At the same time, you may find that you don’t need business insurance, in which case, unless your state requires it, you are free to not have it. That said, do you have business insurance? If so, which type? Do you think businesses need insurance or can some go without? Feel free to leave a comment in the comments section below.
Consider Doing a Washington Secretary of State Business Search?
Or how about a New Jersey business entity search? Or perhaps a North Carolina or District of Columbia name availability search? Sec States, an easy-to-use database of secretary of state pages, is here to help. Within a couple clicks, you can access multiple secretary of state pages in a matter of minutes.