There is a 99% likelihood that a small-business owner has one or more major gaps in his or her insurance program, any one of which could cause serious financial loss to the business and to the owner personally. This article addresses some of the common risks faced by small-business owners and the preferred method of handling them, using both insurance and non-insurance strategies. I will focus on the concerns of two types of operations: (1) the home-based business; (2) the free-standing business.

For simplicity's sake, I've written this article as a question-and-answer conversation about insurance and risk management with a small-business owner. As such, it might be useful to share with your own small-business clients.Q: I don't have employees. Do I need workers compensation insurance?A: Yes, if you get any help from "independent contractors." No, if you don't. Why? Because "independent contractors" who get injured on the job often will sue you for all their medical bills and lost wages, alleging they were your "employees." If you don't have the coverage, you will have to pay out-of-pocket at least your defense costs-$50,000 or often more. If you lose the suit, you'll be responsible for the rest.So buy a small workers compensation policy. The cost is nominal. It will completely pay all claims and all defense costs. In Minnesota, if you exclude coverage on yourself, the net annual cost is only $160.Q: What else can I do to reduce my risks when using independent contractors?A: Have an attorney create an "independent contractor agreement." In the agreement, your attorney will include a lot of language clarifying that such workers truly are contractors and not your employees. Be sure to include an insurance paragraph in which the contractor agrees to be responsible for all of his or her insurance–workers compensation, automobile, personal property, public liability, professional liability, health, disability and life insurance.Also have your attorney include an "indemnity agreement" in which independent contractors agree to defend you and pay all judgments against you arising from claims caused by their errors.Q: Am I legally required to insure myself for workers compensation as an employee?A: That depends on state law. Many states allow small-business owners to exempt themselves. Minnesota does.Q: Do you recommend that I insure myself if I can?A: No. Workers compensation insurance will cover only job-related injuries. Too limiting. You are far better off to buy health and long-term disability on yourself. Two cautions:oMake sure you buy both coverages. I had a client who declined workers comp and long-term disability. Two years later, he lost his home and his business from a fall that kept him from working.oMake sure that neither the health nor the disability policy excludes coverage for injuries on the job. Many do.Q: Should I incorporate the business to protect personal assets?A: Probably–especially if you have sizable personal assets. The law often prevents an injured party from going after your personal assets when you are incorporated. Be sure you use a good small-business attorney to ensure the job is done correctly.(Caution: If you abuse this protection by carrying no corporate liability insurance at all, the judge may expose your personal assets.)Q: I lease space in which to operate my business. What do I need to look out for in my office lease before I sign the form?A: Before you sign, have your insurance agent review the lease, as well as your attorney. Make sure you're not taking on responsibilities or liabilities that should be the landlord's. See who is responsible for insuring the build-out, if there is any. It's not uncommon for a landlord to spend $75,000 to remodel your space but then pass on the insurance responsibility to you, hidden in the lease language, without your knowing that it's your responsibility. Make sure you are carrying enough liability insurance to comply with the lease requirements. If your agent doesn't know how to read and interpret a lease, get a different agent–one who specializes in small-business insurance needs.Q: Should a small business offering a professional service use contracts with customers?A: Again, yes. Not only because it is more professional (and not only because you can agree on terms that will reduce misunderstandings), but also because you can incorporate some limited-liability language in which, in the event of a professional error on your part, the customer agrees in advance to a pre-agreed maximum liability–usually the amount of your fees for the project.Q: I use a car in the business. The corporation owns it for tax reasons, but I insure it personally. Any problems?A: Yes. The corporation has zero insurance coverage under your personal policy. No coverage for lawsuits–and no collision or theft coverage at all. (If your corporation–not you–is the owner, the personal policy will owe you [the policyholder] nothing.)Q: What can I do to solve that gap?A: Two possibilities. If your personal auto insurer will agree, you can co-name the corporation as the "named insured" on page 1. The advantage is zero added cost. The disadvantage is that the coverage for the corporation is somewhat less broad than it would be under a business auto policy.The other option is to buy a business auto policy in the corporation's name. That is the safer way and the way I would recommend.Q: Any other concerns?A: Yes–a major exposure that's often overlooked. I recommend you include in your business insurance program–even if you don't have a business auto–a coverage called "non-owned and hired auto liability coverage," which is available for less than $200 a year. It will protect your company when you rent or borrow a car for business use, as well as protect the company for accidents caused by others while using their own personal vehicles on company business (e.g., employees or contractors running errands, picking up supplies, etc.).Q: Do I need to buy the optional insurance from rental car agencies when I or my employees rent cars for business purposes?A: You or your employee can decline the optional liability coverage if you purchased the "hired and non-owned" automobile liability coverage previously recommended. However, since the car contract makes you absolutely responsible for any damage to the rental car while it's in your custody, even if it's not caused by you, it's a good idea to buy the optional collision damage waiver coverage from the rental agency. There are ways of avoiding that expense, but they all pose some dangers if not handled correctly. I recommend you discuss other options specific to your needs with your insurance agent.Q: I run my business from home. Any special concerns?A: The biggest potential gap (which also exists for all business owners who occasionally work at home) is that neither your homeowners nor your umbrella liability coverage will defend or pay any judgment against you for business-related premises injuries. The injured person could be a customer dropping off a project, or even a courier or delivery person. You have zero insurance.Q: How can I best protect myself?A: If your exclusive office is at home, then your best bet is to buy a small-business policy for about $500 a year. It will cover those home injuries and much more. It can and should include property coverage for business equipment at and away from home (e.g., laptops). It will cover your liability for injuries and property damage away from home and, as an option I'd recommend, can be endorsed to include the earlier-mentioned non-owned and hired auto coverage. You can even have the policy cover customer-owned property in your possession.Q: What if my office is in another location, but I occasionally work at home?A: You should then buy–in addition to a business policy on your off-premises business office–a homeowners endorsement that will cover your liability for home deliveries and can cover the home business equipment, also. The cost for both is only about $25 a year. And (important) be sure to add a home office liability endorsement to your personal umbrella policy too.Q: What about liability insurance for professional errors? Do I need it?A: Possibly. If you use the aforementioned customer agreement, in which the customer has limited your liability to your fees and you've incorporated, your exposure will be greatly reduced. However, the problem with professional liability/errors and omissions liability is that the injured party can go after your personal assets and avoid the corporate shield. Because of that fact, if you offer a professional service, I strongly recommend you buy professional liability coverage. Or close your business.Q: What does professional liability/errors and omissions liability coverage cost?A: If you buy it on your own, probably $750 to $2,500 a year for a typical consultant. But first check with your professional association. With association sponsorship and mass purchasing power, you probably could reduce this cost by 50% or more.Q: My business depends on volumes of data–both mine and my client's. What insurance should I buy?A: None. You can buy insurance for loss of data. It pays for the labor to re-create what was lost, but what a nightmare of a job. So save your money. Invest in a great backup system. And most important, take the backups off-site daily. Insurance is a smart idea only if cash fixes the problem. For this risk, cash is a poor solution.Q: What is the most important thing to know about buying small-business insurance?A: Before you do anything else, interview and select the most knowledgeable insurance agent you can find. You want someone who specializes in small-business insurance and risk management. Usually, your agent's expertise (or lack thereof) will determine whether any claim made against you is covered in full or at all. Pick your agent before you get a single quote for the insurance.Because each business is unique, this article doesn't address all risks you may face. But I hope it gives you basic information about the types of insurance you need and the business contracts you should use.