Liability Insurance for Small Businesses: Protecting Your Assets

It’s the letter you dread: you’ve been contacted by
someone’s attorney. For many small-business owners, the
threat of a lawsuit keeps them up at night, even when
they know they’re running the safest operation around.
In our litigations society, doing everything right may
not protect you from a claim.

by Vicki Gerson

http://www.nfib.com/object/IO_16774.html

Insurance is one tool you have to protect yourself from
claims made by customers, employees and the public at
large. Each business has its own unique
characteristics, which are indicators of the types of
claims they are most susceptible to incurr. Even if
your company has done nothing wrong, the costs of
defense and the ability to properly prove your
innocence is a costly endeavor.

In a 2004 survey released by NFIB, 30 percent of
small-business owners ranked the cost and availability
of liability insurance as the second most important
problem to them compared to a 2000 survey, where only
11 percent of small-business owners felt this was a
critical issue.

Insurance cost and availability are an ongoing concern
for all businesses, but small companies are especially
susceptible to the unforeseen changes in insurance
market conditions and contractual and legal obligations
placed upon them. How will you respond if a customer
slips and falls on your premises or is injured by your
product? What if you are sued for personal or
advertising injury without insurance?

Most small businesses will buy general liability or
commercial general liability coverage as part of a
commercial package policy or business owners policy.
This insurance may also be purchased separately.
Policies issued by various carriers are not guaranteed
to use the same forms (policy language or coverage),
but are basically designed to provide insurance
protection for bodily injury or property damage for
which your are legally liable.

"As with all policies, know the coverage provisions,
limits, policy exclusions, terms and conditions," said
Phil Kuhn, a partner at Emerald Insurance Services in
Alsip, Ill. "Typically professional liability/errors
and omissions, intellectual property/trademark,
employment related practices, as well as a host of
other potential loss causes are not addressed in the
standard business liability policy."

After two years of a hard insurance market, meaning
higher prices and greater restriction on availability,
some sectors are again seeing a level of competition.
This takes the form of at least some potential rate
relief and greater availability. However, not all
sectors are benefiting from these changes. What can you
do to maximize your ability to obtain insurance and
control your costs?

Insurance companies evaluate a business based on a
number of factors. In addition to your company’s claim
history, the industry you operate within is evaluated.
Carriers look at the potential severity (large losses)
as well as frequency (number of claims) that they
believe an industry or company is likely to have.
Characteristics such as length of time in business,
experience, financial stability, laws within your state
of domicile as well states of operation, your products
or operation, sales methodology and your own analysis
and proactive approach to controlling the businesses
exposure to loss are a few variables carriers review.

"Managing one’s own risk is a fundamental ingredient of
successful insurance marketing," Kuhn recommends. "A
comprehensive risk management approach allows you to
identify the components of the risk in your specific
business and your industry in general. You want to
provide your broker with the tools needed to help
obtain the best coverages competitively. Ask your
broker, current carrier or outside consultant for
assistance in developing a risk management team in your
organization. You want less risk and better insurance
prices than your competitors after all."

One aspect many small businesses overlook is risk
transference. No major company Kuhn is aware of
fails to transfer risk wherever and whenever it can.
What does that mean in practice? At a minimum, ask your
subcontractors to name you on their policies as
additional insured on a primary/non-contributory basis.
Ask the manufacturers of the products you sell or your
suppliers of component parts to do the same. Verify the
adequacy of their limits and follow up every year. You
may believe they will balk at your request, but you
will probably find they are doing it for your
competitors. Review your contracts to verify that you
are passing on risk where appropriate and that the
contracts you are signing are not conferring liability
for which you are unprepared.

You should analyze your operations for ways to avoid
unreasonable risk. Can one part of your operation be
affecting your overall operation negatively? Can it be
outsourced or even discontinued to the benefit of your
overall company operation? Understand the total cost of
risk to your organization and the various means of
controlling your exposures. And of course, follow
recommended safety procedures. Create a safety manual
tailored for your industry to protect your employees
and your bottom line.

General liability premiums typically are based on
sales, payroll, area or, in the case of office-only
exposures, they may be flat-rated by class. The higher
the risk, the greater the rate. A manufacturer may pay
$3 per $1,000 of sales, or on $10,000,000 of sales the
premium would be $30,000. Another company manufacturing
a less "risky" product or one with better
documentation, loss control measures and appropriate
risk transfer mechanisms in place might pay $1.50 per
thousand of sales, or $15,000. Contractors’ liability
premiums are typically based on payrolls. Be aware,
initial premiums are based on the sales and payroll
estimates you provide prior to policy inception. Should
actual sales/payroll be greater, the carrier will ask
for additional premium. You are usually entitled to a
refund if the sales or payrolls are less than
estimated.

"The bottom line is anyone can need liability
protection; anyone can be sued. Do not risk more than
your can afford to lose and don’t risk a lot for a
little," Kuhn emphasizes. "A general liability policy
is most likely your first step in providing for
protection for your business. Discuss its limitations
with your broker as well as steps you can take to make
your company more attractive in the marketplace.
Remember, it’s your assets you are protecting."

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