Insurance: Boring But Fairly Necessary

Insurance is dull to think about, a pain to locate and get in place, and seems to perpetually have an invoice in your inbox. Yet people and businesses that “go bare” are taking quite the risk. While “going bare” may discourage some lawsuits, it also has the potential of wiping out significant assets. (Also, be aware that some forms of insurance to protect employees are required by the government.) For those less inclined to take risks, read on.

Let’s take a look at the insurance needs of a small business like a law firm. Almost all professional services firm are small businesses, even if they have quite a few employees. When a business starts, insurance may be the last thing on the entrepreneur’s mind. For one thing, there’s not usually any extra cash for insurance, and for another thing, there’s not much to insure.

At this stage, hopefully the business gets set up as an LLC or other entity that limits liability for the owner. This is critical, because if you run the business properly at arm's length and don’t mingle business and personal finances, lawsuits against the business are limited in recovery to the assets held by the business itself. Without some kind of fraud or mingling, plaintiffs can’t go after the personal assets of the owners. As the business grows, owners should carefully consider how many assets to leave in the business, versus taking out as profits. Businesses that choose to “go bare” on insurance will be even more careful about this.

As the business grows and becomes more successful, you should consider a number of types of insurance, which we’ll cover briefly. The first set of insurance policies covers the legal practice and the business itself.

Professional Liability Insurance

For an attorney and a law firm, professional liability insurance is important. If you commit malpractice, or get accused of malpractice, it provides a defense for that. State bars often require that you disclose if you are insured, and sophisticated clients may check on this. If you work with co-counsel and contracted counsel, make sure all of that is covered. The carrier will check on all this as well as your practice areas—every year. Oh joy. Malpractice lawsuits aren’t that common, but they can be pretty serious to defend. You don’t want to defend yourself, as it’s a specialty area. Not to mention the proverb, “Only a fool has himself for a lawyer.”

General Liability Insurance

This is a general business coverage policy and covers a wide range of business liability—possibly everything from the drains to terrorism to auto liability to illness to fraud. It usually includes damage to your equipment and similar property. It may also include business income insurance, which replaces the costs and losses if the business has to close because of a natural disaster.

Commercial Property Insurance

If you own the building, this coverage insures the building and any other property involved from fire and other natural disasters. If you rent the building, you’ll want a similar renter’s insurance to cover damage to the building, to your own property, and any injuries. But the renter’s policy will likely be part of the general liability policy.

Cybersecurity Insurance

Law firms handle a lot of confidential information, and in today’s world, it’s wise to have cybersecurity insurance. This handles the cost of the clean-up after a security breach, and the damages and liability caused by any relevant losses. This type of insurance will also force you to up your game on the security of information (such a multi-factor authentication) and training, because the insurer is going to require it. It can be fairly expensive to get, though.

Commercial Auto Insurance

This one is useful if you have company vehicles or a need to insure personal vehicles while doing business. Businesses that do a lot of driving around may consider this.

Employment Practices Liability Insurance

This type of insurance is typically separate from general liability, but defends the business from an employee who files a discrimination claim. Since it’s very common for employees who are fired or otherwise leaving angry to file a claim, it’s wise to consider carrying this type of insurance once the business has a few employees.

Additional Insurance

Other types of insurance are umbrella insurance (that adds coverage over and above everything else), or key person insurance (that replaces the income lost if a key person, such as the owner, can no longer work). These are expensive and less common.

The next set of policies covers the people in the business, once you have employees.

Unemployment Insurance

Unemployment insurance is required by the state. You pay the state (perhaps quarterly) based on how much you are paying people. If people leave the firm, under many conditions, they can collect unemployment insurance. Practically speaking, the state agencies interpret the standards pretty broadly, so ex-employees often can collect it even if you think they got fired for cause. It provides a safety net for people between jobs.

Workers Compensation Insurance

Here’s another insurance that the state requires, but it protects the business owner too. If the business owner has a valid workers' comp policy in place, the employee is not allowed to sue the business owner for injuries. Workers' comp is the exclusive remedy. Workers' compensation insurance takes care of employees who are injured on the job, providing medical care and also some salary replacement while they can’t work.

Health Insurance

Health insurance comes in all kinds of sizes, packages, and costs. It’s required for some small businesses (those over 50 employees). It’s a benefit that’s much appreciated by employees. One option for very small businesses is the Health Reimbursement Account (HRA). An HRA allows employees to purchase their own insurance and to be reimbursed for the costs by the employer. The statute sets these amounts, which is in the range of $1,000 a month for each employee. You have to use an external manager (one example is People Keep), to preserve medical confidentiality. Usually, this is not taxable income to the employee.

A law firm that’s just starting out will not likely get all these insurance coverages in place. But as it grows, and as it tries to make sure its people are taken care of, many of these types of insurance can be added to better protect both the firm and its people.