The Legalities: Do I Need Business and General Liability Insurance?
We offer some great advice on whether or not you need business and general liability insurance
Nothing Can Take the Place of Qualified Advice
We are not attorneys. Although we have spent more money and time than we care to admit being advised by attorneys, insurance experts, and accountants, we have not been educated, trained, or certified in these areas of expertise. This article in no way constitutes legal, tax, or risk-mitigation advice and is intended solely for clarification and awareness purposes. For discussion and advice specific to your situation, contact a professional.
With that said, here is an overview of the information we have found to be most helpful and relevant to independent executives.
Keeping It Legal
A number of drivers contribute to whether a company should bring on an individual as an independent contractor or an employee for the business to remain compliant. The use of independent contractors by private industry has been in place for decades through temp agencies, which offer companies the flexibility and ease of a non-employee-based workforce while remaining compliant. As the need for a more independent and flexible workforce increases, so will options for recruiting, selecting, and engaging this workforce beyond traditional temp agencies; hence, the rise of the human cloud and online marketplaces.
As an independent consultant/interim executive, you are engaged by your clients to help them solve difficult problems. While all of these business relationships start off well, you cannot predict what you will encounter and whether engagements will end as amicably as they started. Business insurance is one option when you are looking to protect yourself from the unpredictable. In today’s litigious world, it is risky to be without some kind of insurance; you never know when someone will sue you.
We worked with an executive who really didn’t want to buy insurance because he had never needed it in the past. But we require all of our executives to have it as a prerequisite to engaging with one of our clients. We referred him to a few good sources we had used before and he bought from one of them. Fast-forward six months, and his own client he had just completed work for decided to sue him. In reality, it was considered a frivolous lawsuit. The owners made some decisions that had a negative impact on the company. Not wanting to accept responsibility, however, they tried to shift responsibility and accountability to the interim CFO. Regardless of how frivolous, fighting the claims would have likely have bankrupted the executive. His insurance covered the lawsuit and he was able to continue with his business knowing he had made the right decision to get insurance, even though originally, he had thought it wasn’t necessary.
The only other comment we will make about insurance is advice given to us from our attorney at one point: “People typically don’t sue for good reason; they sue out of desperation.” As much as you vet and hand-pick your clients, make sure you are protected. Fighting one frivolous lawsuit could leave you bankrupt.
If you are serious about being an independent executive, don’t risk your livelihood for the small annual cost of insurance. Look at it the same way you do car insurance or property insurance. It’s just a necessary evil in today’s litigious climate.
While there are many small business insurance products, these are the more common types recommended for independent executive businesses or listed as requirements by a client as part of a vendor agreement.
Many large corporations may require you to carry a certain level of insurance in various categories. Based on what the client is requesting, this may be a good time to consider some type of intermediary that does cover all requirements and/or may already have a contract and vendor certification set up with the company.
General Liability Insurance
The policy provides both defense and damages if a business owner, employees, products, or services cause or are alleged to have caused bodily injury or property damage to a third party. This is also called commercial general liability insurance. It is often applied or used to cover the following scenarios:
- Interacting with clients face-to-face: If you visit a client’s place of work or clients visit yours
- Having access to a client’s equipment: For example, IT professionals are covered against potential claims with IT business liability insurance.
- Representing your client’s business
- Using third-party locations for any business-related activities
- Meeting a requirement to have general liability insurance before entering into a contract Some examples of what could be covered are below:
- Bodily injury: A client falls over your bag and you are legally liable for the injury. This policy will cover the subsequent claim and related medical expenses up to your general liability policy’s limits of liability.
- Property damage and data loss: You spill coffee on a client’s server, causing damage and loss of data. This policy will cover the subsequent claim up to your general liability policy’s limits of liability.
- Personal injury: One of your employees is at lunch. He talks to the owner of the shop about one of your clients in a false and unflattering way. The client learns of this discussion and sues for slander. This policy covers the subsequent claim, up to your general liability policy’s limits of liability, and will pay for an attorney to defend you if necessary.
General liability insurance will not protect you from everything. For example, general liability will not cover you against claims of negligence, even if it isn’t you or your business’ fault.
Professional Liability Insurance
This is also known as Errors and Omissions Insurance. The policy provides defense and damages for failure to perform or improperly rendering professional services. A general liability policy does not provide this protection, so it is important to understand the difference.
For a professional services business, having errors and omissions insurance coverage can be an integral part of protecting the business. Accusations of negligence or the failure to perform the professional services are things for which any professional services business can be sued for, even if it hasn’t made a mistake or is at fault. Errors and omissions coverage is most useful for businesses that provide a professional service or regularly give advice. Some examples of what could be covered are below:
- Protection even if you haven’t made a mistake: You advise a client to change some internal processes to increase productivity. The recommendations aren’t implemented as you specified, and productivity subsequently drops by 15 percent rather than improving. Or if you manage the development of a new product. There are problems with the project (which are beyond your control) and you cannot deliver the final product in a timely manner, so your client sues you.
- Negligent acts: You advise a client to update their employment practices. Six months later, your client contacts you, stating a part-time employee is suing the company. You left out a key requirement about the number of hours that part-time employees are permitted to work, so your client sues you.
Business Owner’s Policy (BOP)
This is a combination of general liability and business property insurance. BOP insurance is often used to provide balanced coverage for small businesses who also want to protect their own business equipment.
- General liability insurance protects your business from another person or business’ claims of bodily injury, associated medical costs, and damage to their property.
- Property Liability Insurance protects your business furniture and equipment at up to five different office locations, which includes accidental damage. Some examples of what could be covered are below:
- Office insurance for fire and business interruption
- Electronic data loss insurance
- Hired or non-owned vehicle liability insurance
- Commercial crime insurance to cover the dishonesty of your employees
Worker’s compensation provides insurance to employees who are injured on the job. This type of insurance provides wage replacement and medical benefits to those who are injured while working. In exchange for these benefits, the employee gives up his or her rights to sue the employer for the incident. Such insurance protects the owner and the company from legal complications. State laws will vary, but all require a business to have workers’ compensation if there are W-2 employees besides the owner(s).