Transferring Risk Using Insurance for Commercial Businesses

  • California law requires that business owners act responsibly in managing the risks common to their industry and to protect against other areas of vulnerability. Businesses should consider transferring a large part of its risk to an insurer (which has deeper pockets) to protect against the full impact of an uninsured loss, which could threaten its viability.

    Home-based businesses

    If you operate your business from home, don’t expect your homeowner’s policy to cover you in case of a mishap without an endorsement or rider added to the policy. See our article: “Insurance for the Home Based Business” for details.

    Businesses with commercial locations

    Businesses with a commercial location generally have one of two types of policies available for coverage: 1) a business owner’s policy (BOP) or 2) a commercial insurance policy (CP). A BOP is often the most affordable way for businesses to obtain broad coverage (if they qualify). Businesses that don’t qualify will need to purchase a CP.

    Business owner’s policy (BOP)

    BOPs combine protection for all major property and liability risks in one package and can be expanded to cover loss of income and business interruption.

    • Bodily injury and property damage liability is one of the most important components of a BOP (especially if you deal with customers). Bodily injury lawsuits often involve big dollars. If coverage is too low, you could become personally liable for any judgment that exceeds the coverage.
    • Equipment.  When insuring business equipment, it’s usually a better value to purchase all-risks coverage as opposed to named-perils, due to the comprehensive coverage. If the loss of the equipment would be a devastating blow to your business, you may want to add replacement value coverage to your all-risks policy. Replacement value coverage pays the cost of replacing the equipment rather than paying your original cost, which in most cases is lower than the current replacement cost.
    • Product liability should be considered if you manufacture or sell products. If a product defect caused injury to someone, you could be sued for selling the item even if you had nothing to do with its design or manufacture.
    • Business interruption or loss of income coverage can help replace income or lost business profits when your business is interrupted by events, such as a power outage, a fire, or natural disaster.

    Commercial insurance policies (CP)

    If a BOP is not available for your business, you’ll need a CP. CPs can provide the protections described above, but will usually cost more for similar coverage. A CP has better flexibility to protect your business where it’s most vulnerable. In addition to the coverages above, you may want to combine some of the following protections with your CP.

    Directors and officers insurance (D&O)

    D&O provides financial protection for claims against the directors or officers of the company. D&O differs from E&O and general liability coverage. D&O covers claims for nonphysical harm arising out of the performance and duties of management, such as employment-related claims; wrongful termination, sexual harassment, and discrimination. General liability protects board members and officers from claims arising out of bodily injury and property damage.

    Professional malpractice or errors and omissions coverage (E&O)

    If you provide advice or services that could result in significant liability if something went wrong, you should consider E&O coverage. Even if your work is flawless, E&O can provide the funds needed for your defense, regardless of whether the claim has merit.

    Electronic communications and social media coverage

    Electronic communications (email and websites) and social media have exposed companies to new risks when employees or partners distribute information through cyberspace or to media sites. Damages could result from claims of defamation, copyright infringement, security or privacy breach or a disclosure of company trade secrets. Discuss these risks with your broker to determine if you need coverage for these types of mishaps. Consider adding media coverage to your E&O policy if you or your employees are active in social media.

    Cyber Liability (CL)

    CL coverage includes claims regarding privacy issues, theft of customer data, intellectual property infringement, virus transmission, or any other serious issues transmitted via the web.

    Intellectual Property (IP)

    IP coverage pays for losses associated with patents, trademarks, copyrights, and trade secrets. IP policies can ensure that funds are available to pay legal expenses if you or your company becomes involved in litigation.

    Umbrella insurance

    An umbrella policy may provide the best value for cost of coverage. It provides additional coverage over-and-above what your other policies provide and can protect your business against liabilities that the other policies don’t cover.

    Key executive or key person life insurance (Key Person)

    Key person coverage is essential, if the death of a partner or key employee would devastate your company. Key person life insurance provides funds for the company to buy the decedent’s business interest from his or her estate or to hire a replacement person to cover his or her specialty.

    Disability insurance / business overhead

    Disability coverage replaces a percentage of your salary if you can’t work for a period of time due to an injury or disability. Business overhead pays the company’s overhead for a time, when you’re unable to work in the business.

    Worker’s compensation (WC)

    WC is usually required if you have employees. Be careful that your “independent contractors” are not actually misclassified employees or the state of California may put you on trial for insurance fraud.

    Business vehicle insurance

    If you use your personally-owned vehicle in business, you may need to purchase a policy rider to ensure that you’re protected. Commercial vehicle coverage should be purchased if any vehicles are company owned. If you allow employees to drive your personal car or a company car on business, you should include non-owned coverage to your policy, which covers bodily injury and property damage caused by employees.

    Accident when vehicle is used in business: Who’s liable?

    What happens if you or your employee gets into a vehicle accident while on company business? Liability depends on a number of factors. First, the court would try to determine whether the accident was caused by a malfunction of the vehicle. If for example, the owner of the vehicle was aware of an unrepaired problem that contributed to the accident, he or she could be personally liable for negligence in a personal injury lawsuit.

    If malfunction was not an issue, the court would try to determine whether the employee was performing regular job tasks when driving the vehicle. If so, then the company would be vicariously liable for the employee’s actions. If the employee’s driving behavior appeared to be outside his or her regular job tasks, the court would then try to determine whether the employee was on a detour or frolic while driving.

    Detour versus frolic

    detour occurs when there’s a slight deviation in an employee’s acts, but the actions still fall within the scope of his or her job. When a detour occurs, the employer is still liable. For example, the employee drives on company business, but takes a slight detour to do a personal errand and then gets into an accident.

    frolic, on the other hand, is when an employee has deviated enough from the scope of his or her work that the employer is absolved of liability. Frolics include speeding, driving recklessly, or driving while intoxicated. When a frolic occurs the employee would be personally liable instead of the employer.

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