FIVE FATAL ERRORS COMMITTED BY BUSINESSES PART IV-INADEQUATE INSURANCE

By Albert G. Marquis, Esq.

This is the fourth in a series of articles concerning the five fatal errors committed by businesses which bring about their downfall: deficient employment manuals; inadequate corporate records; incomplete contracts; inadequate insurance and no buy-sell agreement. Last week we discussed incomplete contracts. This week we discuss inadequate insurance.

No one likes to pay insurance premiums. But like dentists and lawyers, insurance is a “necessary evil.”

As far as businesses are concerned, there are three primary types of coverage that are essential: property and casualty; property and automobile liability; and key man insurance (which will be discussed next week in conjunction with buy-sell agreements).

With respect to property and casualty insurance, it is essential that every business be insured against fire, flood and other casualty damage. With respect to such insurance, it is important to have “replacement cost coverage.” Otherwise, insurance will only cover the depreciated value of the asset. In addition, every business should give consideration to whether they need lost income and file replacement coverage (relating to damage or destroyed files).

Of course, a necessary element of property insurance is property liability coverage--for obvious reasons. Customers can trip and fall on anything from stairs to curbs, and it is important for a business to have protection, not only from ultimate liability, but from the cost of defending the lawsuit as well.

Most businesses have inadequate automobile liability insurance. There are few activities that we engage in on a daily basis that are riskier than driving an automobile. Any one of us could inadvertently run a red light or a stop sign and be responsible for horrendous injuries or even the death of multiple individuals. If the individual driving the car is on company business (going to or returning from a job site, delivering documents, or even speaking to a customer on a cell phone), the employer is going to find itself named in the lawsuit.

A few years ago, I received a call from the owner of a construction company. One of his workers was returning from a job site. The driver thought he had lost something out of the back of the truck, so he looked behind him just for a moment. In that amount of time, the truck drifted off the shoulder of the road and rear ended a stalled vehicle, whose driver was standing in front of the car with the hood up. Both of his legs had to be amputated, and a lawsuit was filed for $1 million. Unfortunately, the business had only $500,000 of insurance. The balance of the claim, over and above the policy limits, had to be paid by the business.

The solution is an umbrella policy which provides extra liability coverage. In order to purchase such a policy, most insurance companies require basic policies with a minimum of $100,000/$300,000(meaning $100,000 coverage for injury and $300,000 for accident). Then, for a fairly modest premium, the insurance company will issue an umbrella policy that increases liability coverage to a designated amount (usually something between $1 million and $5 million). If my client in the above example had purchase such a policy, he would have been completely covered.

If you have employees who are driving their personal automobiles for a business purpose, don't rely upon them to have adequate insurance. Many of them carry the minimum: $15,000/$30,000. (You should recommend to every employee that they up their insurance to $100,000/$300,000 and that they have uninsured/under insured coverage in the same amount in order to protect themselves). Often businesses can purchase a blanket umbrella policy that covers all employee-owned automobiles.

Insurance policies are difficult to read, but you can submit them to your attorney to review or you can ask for a written explanation from your insurance agent. In any event, do something. Don't wait until it's too late.