Essential coverages to protect your business.
We often think of family businesses as small mom and pop operations, but some of the biggest corporations in the world are family controlled, including Walmart, Volkswagen, Berkshire Hathaway, Ford and Cargill. In fact, 90 % of U.S. businesses are owned or controlled by families, according to the Census Bureau.
Maybe your family owns a restaurant. Or your grandfather started the furniture company where you work. Or you’re a software engineer and you and your spouse want to start a company.
A family-owned business is one in which two or more family members are involved and the majority of the ownership or control lies in the family. Whether large or small, all family-owned businesses need insurance protection. Among the coverages you should have are commercial general liability, property, commercial auto, and directors and officers liability. Even if you run a business out of your home, you still need insurance.
No matter the size, family businesses have insurance needs — the same needs as any small business or corporation. But there also can be special considerations, since members of the family work for the business. You may need insurance to protect the directors and officers from liability. You may need professional or employment practices liability insurance (EPLI), too.
Let’s take a look at some of the basic insurance coverages you’ll need for your family business. The law doesn’t require all of these protections, but if you want to sustain your business well into the future, you’ll want to consider each. You should talk to an insurance professional about your needs and how an insurance program can be tailored to your business.
Commercial general liability coverage
Unfortunately, every company runs the risk of being sued. Even home-based businesses may need liability protection if they are selling items, like food, that could cause injury or illness.
Commercial general liability (CGL) insurance covers injuries or damages caused by your company, including the products and services you sell. Typical examples include a customer slipping and falling on your property, an employee causing damage to someone’s home, or a claim that your advertising was false or misleading. CGL would cover the cost of your legal defense and pay damages up to the limits in your policy if you are found liable.
The Insurance Information Institute says that CGL insurance “is one of the most important insurance products, due to the negative impact that a lawsuit can have on a business and because such liability suits happen so frequently.”
CGL policies are composed of three parts:
- Part A covers bodily injury and property damage.
- Part B covers personal and advertising injury such as libel, slander, copyright infringement, use of another’s advertising idea, wrongful eviction or invasion of privacy.
- Part C covers medical payments for injuries to nonemployees that occur on your premises or as a result of your operations.
It’s important to note that CGL doesn’t cover negligent professional acts. These would be covered by a separate professional liability policy. You’ll need to purchase workers’ compensation and EPLI separately as well. We’ll cover those types of coverages later in this white paper.
Commercial property insurance
Nearly every company needs some type of property insurance to protect the premises and the contents of the business. Commercial property insurance will pay to repair or replace physical assets that are damaged or destroyed due to a fire, theft or other covered loss. These policies typically cover buildings, equipment, furniture, personal property, inventory, and tools.
Home-based businesses may need commercial property insurance as well, because homeowners insurance offers only limited coverage for business property. For example, most homeowners policies limit protection for business equipment to $2,500.
If you have special equipment, such as a commercial kitchen or woodworking or shop tools, or you store equipment and tools for your business in your home, you should talk to an insurance professional about commercial property insurance. If you transport tools and equipment to job sites, you may need inland marine insurance as well.
Commercial auto insurance
If you use a car or truck in your business, you’ll need an auto policy that insures vehicles for commercial use. Commercial use of a vehicle included picking up clients, visiting job sites, transporting goods for sale or running business errands. While many insurers offer these types of policies, and it’s easy to get quotes, you may benefit under- and uninsured motorist protection, hired auto (if you pick up passengers or make deliveries), and whether the policy covers employees and non-owners.
Coverage and prices will vary by the type of vehicle, such as car versus truck. If a family member or one of your employees is making deliveries with a personal vehicle, you’ll need to check to see if they’re covered under their personal auto policy. Your business could be help liable if an employee causes an accident while traveling on company time.
Business owner policy
You may have heard the term business owners policy (BOP) and wondered what this type of insurance covers and whether you should get it for your family business. A BOP is a bundled approach to commercial coverage.
BOPs include the coverage already described above, such as liability, property and vehicle, and sometimes a few other protections that we’ll see below, such as cyber, EPLI and business interruption insurance.
While BOPs may offer everything your family business needs to get started, they usually don’t provide as much coverage as stand-alone policies. Your insurance professional can help you weigh the advantages and disadvantages of a bundled approach.
Larger businesses or firms that operate in a specialized field may be better off with a commercial package policy (CPP), which allows you to tailor the coverage to your needs. Like a BOP, the core of a CPP is protection against property and liability exposures.
But you can also add commercial auto and many other types of insurance such as umbrella liability, business interruption, EPLI, builders risk, inland marine, crime protection, cybersecurity, professional liability and pollution liability. Your coverage limits may be higher with the CPP approach.
Many family businesses rely on the internet for their business operations and the sale of services and products. This makes your company even more vulnerable to cyber crime and data breaches. Cyber criminals are always looking for new ways to exploit system vulnerabilities, and they target small businesses to a much greater degree than large companies.
Ask an insurance professional about cyber and data breach coverage to protect against electronic theft, loss of data, disruption of your company’s networks, loss of income due to a temporary suspension of business operations, and damage to your reputation. Many insurers offer privacy and network security coverage as a part of a BOP or professional liability insurance policy.
It’s a good idea to engage a cybersecurity professional to help protect your internet connections and Wi-Fi-enabled devices, such as computers, tablets and smartphones, from hackers. You’ll also need to protect customers’ personal data while being transferred or stored. You could be held liable for a data breach if you fail to protect your clients’ information.
Most cyber policies will cover breach notifications, anti-fraud protection and credit monitoring for customers, as well as costs associated with security incident investigations, cyber extortion and ransomware.
There are also cyber risk policies that cover network business interruption. These help if your system fails for reasons other than cyber invasion, such as human error, failure to install updates or third-party network problems. Network business interruption may be bundled in an overall cyber package, so talk to your insurance professional about how to integrate this important protection into your coverage.
Directors and officers liability insurance
Directors and officers (D&O) liability insurance protects your company’s leaders from personal financial exposure in the event investors, employees, vendors, competitors, customers or other parties sue them for breach of duty.
Some of the more common exposures include failure to comply with regulations or laws, failure to provide a safe and secure workplace, operational failures and mismanagement, employment practices and human resources (HR) issues, cyber liability and bankruptcy.
If your family controls a company, has representation on the board or is in the C-suite, D&O coverage is critical. You may think D&O is only for larger, publicly traded companies or assume that your commercial general liability policy will cover your exposure, but that’s not the case.
In fact, lack of D&O coverage can be a deal-breaker for investors and potential directors. Most venture capital and private equity firms won’t invest in a company that doesn’t have D&O coverage. Remember, your directors and officers are putting their personal assets at risk if you don’t have coverage.
That’s of increased concern in family businesses, where the founders tend be more involved in operations and may have a large amount of their personal wealth tied up in the company. It’s best to talk to an insurance professional about tailoring a policy to your family business.
D&O policies have four separate parts: side A, side B, side C and side A DIC (difference in conditions).
Each of these sides covers different aspects of liability, such as defense expenses and settlements, reimbursement to the company for indemnification, entity coverage if more than one director is named in a lawsuit, and additional coverage not included in sides A, B and C.
You can purchase D&O coverage separately or as part of a bundled package that may include D&O, EPLI, fiduciary liability, crime and cyber insurance.
Employment practices liability insurance
Employment lawsuits can be a huge exposure for your company, with defense costs in the tens or even hundreds of thousands of dollars. EPLI will cover your court costs and attorney fees in these cases, subject to the limits in the policy.
EPLI policies cover a range of exposures, including wrongful termination, discrimination, sexual harassment, retaliation, defamation or libel, breach of employment contract and mismanagement of benefits.
You may be able to add EPLI to your BOP as an endorsement, or you may want to buy a stand-alone policy with higher limits.
Insurers will ask to see detailed information about your business when underwriting your risks for D&O and EPLI coverage. Family businesses don’t always have a formal business structure or well-defined HR policies. Take a look at this checklist to make sure you have these safeguards in place:
- Written HR policies banning discrimination and sexual harassment
- Regular, consistent and fair performance reviews, with policies for addressing and documenting unacceptable performance
- Safe, confidential reporting procedures for employee feedback
- A written policy regarding social media in the workplace
- A business continuity plan
- A corporate governance program
- Written procedures to address fiduciary duties
- Written guidelines for performance reviews and policies for addressing unacceptable performance
Other coverages you may need
- Professional liability/errors and omissions — If your family business provides professional advice or services, you’ll need professional liability insurance to protect against the cost of lawsuits. Ask your insurance professional about the various policies available.
- Business interruption — Also known as business income insurance, this type of policy cover loss of income after a disaster, whether it’s due to the closing of your business or the rebuilding process afterward. Business interruption insurance is designed to put your business in the same financial position it would have been in if no loss had occurred. It may be offered as a rider or endorsement to a commercial property policy or a BOP. Coverage is limited to defined events in the policy.
- Commercial umbrella — When claims against your business exceed your regular coverage limits, an umbrella policy provides additional protection. Your insurance professional can discuss your policies’ limits and suggest where you might need additional coverage.
- Pollution — Pollution insurance was created specifically to manage the cost of pollution cleanups and cover liability claims for related injuries, illnesses and deaths. It’s a separate policy from your regular business insurance. Hair salons, dry-cleaning services, junkyards and service stations are just a few family businesses that might need pollution insurance.
- Catastrophe — Your property insurance may cover some catastrophes, but you can also add a rider or purchase a separate policy just for catastrophes. Insurable disasters include hurricanes, earthquakes, tornados, windstorms, hail, fires, floods, volcanoes and acts of terrorism.
- Workers’ compensation — Workers’ comp insurance, which is required in nearly every state, compensates employees for injuries sustained on the job. Family members who are employees are not always exempt from this requirement; the requirements vary by state and are based on the number of employees you have and the job role of the person in question. If your business is in construction or another type of hazardous work, workers’ comp is a must. Find out more from an insurance professional who specializes in the workers’ comp market in all states where you operate.
- Key person insurance — One way to ensure your family business survives from one generation to the next is to purchase key-person life insurance on the lives of the top people in your company. The named insureds can be the owners or key executives — anyone whose premature death might jeopardize the future of the business. The premiums are paid by your business, and the business itself is named as the beneficiary of the policy’s proceeds, which can be used to fund an executive search or for another company-sustaining purpose. Life insurance can also fund a buy-sell agreement, which is a way to transfer ownership when an owner or partner dies. The policy’s death benefits can also be used to pay for the sale of shares to the surviving owners of the company, thereby keeping the business in the family.
Get the insurance you need to stay in business
If your family owns a business or hopes to start one, you’re in good company. There are 5.5 million family businesses in the United States. From the Small Business Administration to local business centers, there are many resources to help you start or expand a business. Your insurance professional can help, too, by designing an insurance program that grows with your company.
According to the Family Business Alliance, more than 30% of family-owned businesses survive into the second generation. By the third generation, 12% will be viable. For the fourth generation and beyond, that number dwindles to 3%. Make sure you’ve got the longevity you need to survive by getting the right insurance protection.
For more information please contact us here.
This content is for informational purposes only and not for the purpose of providing professional, financial, medical or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem. Please refer to your policy contract for any specific information or questions on applicability of coverage.
Please note coverage can not be bound or a claim reported without written acknowledgment from a OneGroup Representative.
Written content in blog post: Copyright © 2022 Applied Systems, Inc. All rights reserved.