Law Dragon: Insurance Comes in Handy When You Get Sued
Business insurance is important. Unfortunately, many small business operators fail to think about it until it is too late. That is especially true for startups.
Businesses — especially new ones — sometimes overlook what can go wrong. Accordingly, there are some disaster-prevention activities that are necessary for any business.
The first item is to operate the business as a corporation or limited liability company. (“Corporation” here subsumes corporations and limited liability companies.) That gives protection to the owner against many disasters where all goes wrong. This protection is limited; but it does much if the business crashes or an employee gets out of line.
Resist the temptation to engage one of these “legal whiz” companies to set up your corporation. Those outfits prominently disclose that they do not give legal advice — and they don’t. An attorney can create your corporation in most states for little more than what the legal whiz companies charge (including fees for being registered agent); and your lawyer can give you legal advice, which is protected by the lawyer’s professional liability insurance policy.
The next level of protection is insurance against liability. The first thing you need to know about that is the difference between an insurance agent and an insurance broker. An insurance agent is nothing more than part of the sales force for one particular insurance company. A broker, on the other hand, is an independent company that finds insurance policies for you from whatever company appears best for you. A broker will have errors and omissions insurance; so, if you fully disclose to the broker what your business does, the broker can be on the hook if there is a screw-up. Agents may well not offer you that protection.
The process starts with general business insurance. Typically, that covers the most obvious risks — a burglar empties out your office; someone sues you who has tripped over a lump in the rug; and so on. The component of this that protects you from getting sued — called commercial general liability (CGL) insurance — often is required by your lease.
The problem with CGL policies is that they typically exclude many risks that readers of this column might encounter.
The first one is advertising injury. Advertising injury coverage most commonly covered, as an example, a claim that your advertising infringed someone’s trademark. Years ago, CGL policies routinely included coverage for advertising injury. However, over the last two or three decades, one of the fastest growing area of litigation has been about trademark infringement. After all, with the Internet, there are a zillion trademarks. In response, insurance carriers first excluded advertising injury claims where the insured was a media company. Now, most policies expressly exclude advertising injury; and, if you want coverage, you need a rider, which comes with an extra premium.
Another insurance issue is embezzlement. Most business insurance policies include or can include coverage for embezzlement. Know this: Embezzlement means an employee who walks off with your money. If you have an independent-contractor bookkeeper, insurance for embezzlement is a bond. It is amazing how many bookkeepers syphon off amazing amounts of money before being detected. (Here in Las Vegas, addiction to video poker is a particular problem.)
The latest wrinkle is hacking insurance. Think about this: Assume that you are paid for whatever service you provide with credit cards. Who doesn’t? Suppose that someone in Eastern Europe hacks your computer and sells your secret credit card information on one of those Web sites that is in the seedy business of swapping stolen credit card information. So, you get sued because you were negligent in failing to adequately protect credit card information — it could be a class action. Oh, and does your IT professional have errors and omissions insurance? Probably not.
The parlance for insurance to protect against this is “cyber insurance.” With all of the huge companies (not to mention the government) getting hacked, this has become a big issue. And think about AshleyMadison.com getting hacked, which punctuates the vulnerability of adult sites. Although some readers of this piece do little credit card business, it doesn’t take much to create huge exposure.
Other types of insurance you need to look at include workers compensation if you have one or more employees. Also, of course, automobile liability coverage is mandatory if you have one of those used in your business. Also, it would be prudent to look at what is called an “umbrella policy” to cover you against larger losses, like if your delivery truck crashes into a new Rolls Royce.
If anything, your take-away from this should be the following: Point One, use a lawyer to create your corporation. Point Two, get in touch with a good business insurance broker to procure your business insurance.
Some caveats: There are insurance brokers — and lawyers, for that matter — who want nothing to do with adult businesses. However, there are both who cater to clients who are in that space. (If you don’t know one or the other or both, contact the author, who can give you a referral.) You certainly don’t want to be your broker’s or lawyer’s first adult-business client, either.
Another one, is a classic caveat: There are two people to whom you tell all, your lawyer and your doctor. Add to that your insurance broker. You need to tell your broker exactly what your business does. Your insurance broker cannot evaluate your insurance needs without knowing in detail what your business does.
Lastly, you may have heard the term, “insurance poor.” There is something to that. Think about how insurance works. Take as an example life insurance. The insurance company is betting that you are going to live; and you are betting that you are going to die. Insurance is nothing more than a matter of transferring risk.
So, for example, on your car insurance, you might want to have a higher deductible, say $1,000, in favor of a lower deductible, say $250, to achieve a lower premium. That works in business insurance, too. However, remember that business insurance is different from personal insurance based upon tax rules (as absurd as they are). That needs to figure into your insurance decision. (Remember, your agent/broker probably works on commission.)
Clyde DeWitt is a Las Vegas attorney, whose practice has been focused on adult entertainment since 1980. He can be reached at firstname.lastname@example.org. Readers are considered a valuable source of court decisions, legal gossip and information from around the country, all of which is received with interest. This column does not constitute legal advice but, rather, serves to inform readers of legal news, developments in cases and editorial comment about legal developments and trends. Readers who believe anything reported in this column might impact them should contact their personal attorneys.