Samuel Saks Article
Your Business Owners Policy
Insurance: Business Owners Policy (“BOP”)
There is no doubt that insurance is a key piece of any risk management plan. Very few businesses have enough capital set aside to cover for significant liability. Insurance is a way to “outsource” your monetary risk to a company that has enough capital and customers to protect against any liability that may arise among a few of them.
Most business face similar basic exposures, which is why many insurance companies package the most needed coverages into what is commonly called a Business Owners Policy (“BOP”). Often, these policies are standardized by the , (“ISO”) and have common policy language and exclusions. The following are the most common coverages in a BOP.
Commercial General Liability (“CGL”)
The cornerstone of insurance for businesses is a Commercial General Liability policy or CGL. In general, this policy gives you general coverage for accidental “occurrences” that cause “bodily injury” or “property damage,” which are technical terms defined in the policy. Put simply, a CGL policy will cover accidents like customer slips and falls, defective products, and damages you or your employees cause to another’s property. The policy will pay medical bills of customers injured on your business property. The CGL policy will typically exclude and not cover intentional actions by your employees, injuries to your employees (for that you need a Workers’ Compensation policy), or allegations that you breached a contract or failed to pay. As with any insurance coverage, the insurance company has a “duty to defend,” which means that if you are sued for something covered under your policy the insurance company will hire and pay an attorney to defend you.
There are fifteen common exclusions in most CGL policies, including the following:
• Claims arising from contracts are generally excluded, yet this is an area of significant liability for most businesses. Contract claims are discussed below. Some insurance companies will allow you to purchase limited coverage for contract claims.
• Electronic property and data is usually not covered. You need to purchase this type of coverage.
• Claims for harassment, discrimination, and wrongful termination are not covered. For coverage of these claims you need an Employment Practices policy (see below).
• Damages to your own business property are not covered under typical CGL policies. Only damages to other people’s property are covered. If you are concerned about damage to your own property, consider purchasing property insurance, which is discussed below.
• As noted, intentional actions like assault and battery are not covered under insurance policies.
A CGL covers accidental damage to another’s property, but will not cover damage to your own property. For that coverage you need property insurance, which will cover your own business property for things like theft, vandalism, and fire. Typically, property insurance will include coverage for office furniture, inventory, and computers. Your policy may cover equipment breakdown and water damage. Most policies exclude and will not cover damage from electronic failure or hacking.
If you work out a home office, keep in mind that your personal homeowner’s or renters’ insurance policy will exclude coverage arising from business activities. If you have customers who come to your home for business, you should consider purchasing business insurance or you may find out when it is too late that you are not covered.
Commercial Auto Insurance (“Business Auto”)
If vehicles are used for your business, you need to purchase a commercial auto policy. Personal auto insurance exclude damages incurred when a vehicle is used for commercial purposes. The classic example is a pizza delivery driver who causes an accident while delivering a pizza. Even if the driver has personal auto insurance, that policy will not cover his liability. If your business requires employees to use their cars for deliveries, you need to make sure you are properly covered. Driving is probably the riskiest thing you do every day. In Arizona there were over 100,000 car crashes in 2013. On average, two people were killed on Arizona roads every day as a result of vehicle accidents, and car accidents in Arizona cause almost $3 billion in damage every year.
Workers Compensation Insurance (“Workers Comp”)
In Arizona, workers’ compensation coverage is mandatory for every employer with  or more employees. Employers who do not comply face stiff financial and even criminal penalties. The good news is that a workers’ comp policy will cover employee injuries—even if the injury was your fault. The worker’s comp system is overseen by the Industrial Commission of Arizona (“ICA”) and is highly regulated. In general, injured workers have their medical bills covered as well as a portion of their wages depending on the nature and severity of the injury. Many cases revolve around whether work activity actually caused the employee’s injury as well as determining the true scope of the injury and circumstances of the accident. If a business does not have workers’ compensation coverage, the ICA has a Special Fund that will pay for the worker’s claim. However, the Special Fund will then seek to recover from employer all expenses associated with the claim plus penalties.
“Independent contractors” are not considered employees. However, the distinction between “employee” and “independent contractor” is often misunderstood and your employment contracts will not preclude an insurance company or state and federal tax collectors from determining that people you thought were “independent contractors” were actually employees. Unfortunately, many employers attempt to treat their employees as independent contractors, only to find out later that they were not. This can result in hundreds of thousands of dollars in tax liabilities and penalties.
To determine whether an independent contractor is really an employee, some key questions include: Does the company control or have the right to control what the worker does and how the worker does his or her job? Are the business aspects of the worker’s job controlled by the company? Is the work performed a key aspect of the business? For more information on this topic, go to http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee.
Directors and Officers (“D & O”) Liability Insurance
Directors and officers insurance protects directors and officers of a business from claims that they negligently mis-managed the business or organization without proper regard for the rights of others. The policy will pay any judgment for which the insured is legally liable, up to the policy limit. It also provides for legal defense costs, even where there has been no wrongdoing. When considering D & O policies, keep in mind that they:
• Typically cover cost of defending the directors and officers and will pay any resulting money damages when the corporation is not permitted to indemnify them or is financially unable to indemnify them.
• Typically cover management, staff, and volunteers. It may also cover claims for wrongful termination, sexual harassment, discrimination, unfair hiring/firing practices, mental anguish, and emotional distress.
• Cover misuse of funds, but probably not criminal fraud.
• Typically exclude deliberate or intentional conduct.
• Most D & O policies exclude coverage in situations when a director, officer, or business in fact profited or benefited from the actions.
Key Employee Insurance
Most business have a few people who are critical to its operations. A Key Employee policy can cover a business when certain key employees die or become disabled. This protects a business from some of the financial impact of losing a critical team member.
Errors and Omissions Insurance (“E & O”) or Professional Liability
An errors and omissions policy covers businesses that involve giving customers advice or making recommendations, like accountants and lawyers. Often this policy is referred to as professional liability or malpractice insurance, especially in the context of attorneys and doctors. An errors and omissions policy can also cover businesses that involve designing things for customers, like architects. For many professional businesses, an E & O policy is the most critical policy of all. Some professions make such coverage mandatory.
Employment Practices Liability Insurance
An employment practices policy covers liability arising out of the hiring and firing of employees, especially claims related to civil right and discrimination. Businesses that regularly hire, train, and fire employees should consider this type of policy. Businesses with few employees or infrequent turnover likely face less risk. However, those small businesses probably do not have human resource professionals and therefore may not be as on top of HR issues as bigger companies may be.
Umbrella Policy (“Excess Insurance”)
An umbrella liability policy provides general coverage over and above a company’s other liability policies and protects against catastrophic losses. An umbrella policy comes into play when the limits of another policy are spent, such as in the case of a serious accident or death or a high value lawsuit. The most likely scenario is an accident with a company car operated by an employee for business purposes.
Other Insurance Coverage
There are a variety of other special coverages that a company may want to consider. For example, a company that frequently hosts events may want to consider Special Event Insurance or a Host Liquor policy. Some of the risk from such events can often be handled through contracts with indemnity clauses. There is also Business Interruption Insurance, which covers your company for lost profits arising from equipment breakdown and other accidental occurrences. A technology company may want to consider Internet Business Insurance or a Cyber Insurance policy to protect from losses due to hacking and other internet activity.
This article is intended for informational purposes only and does not constitute legal advice or establish an attorney/client relationship.
Contributing Attorney: Sam Saks. Sam is the founder of Legal Aid of Arizona and a partner at the law firm of Guidant Law
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