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What Coverages Are Needed & When

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Insurance is a necessary function for organizations, although not all view this coverage as strategically as they should. As an organization navigates its growth cycle, from start up to multinational corporation, insurance needs will vary. Early stage companies often are driven by compliance when purchasing coverage, yet leveraging insurance and risk transfer solutions more strategically can help younger organizations become more resilient, transfer financial risk, and withstand many of the uncertainties companies of all sizes will face throughout their operating years.

As organizations evaluate their insurance needs, they can compartmentalize key coverages for consideration into phases that match their current size and operational requirements.

The procurement of basic insurance coverages for businesses can be broken down into four phases.

Phase I: Basic Operating Coverages

Organizations that are commencing operations with a few employees should consider these following coverages:

Business Owners Policy (BOP)

A business owner’s policy, or BOP, combines the most common types of property and general liability insurance into one convenient, comprehensive package at a competitive rate. BOP insurance is generally purchased by small businesses. Mid-market and larger businesses with more complex insurance needs generally buy separate policies for each type of insurance. A BOP protects a company from a wide variety of damage, from customer falls to property damage. Since the insurance is bundled, a business owner’s policy is often less expensive than if individual coverage was purchased separately, however it also offers lower limits of protection. Hired and Non-Owned Auto (HNOA) coverage protects against lawsuits from accidents involving personal, rented, or leased vehicles used for work purposes.  HNOA can be added onto a BOP if needed.

Workers Compensation

Most states require companies to provide workers compensation insurance when there are more than a certain number of employees, varying from three to five, depending on the state. Workers comp insurance pays for medical care and replaces a portion of lost wages for an employee who is injured in the course of employment, regardless of who was at fault for the injury. Should the death of an employee occur while they are working, the insurance provides compensation to the employee’s family.

Errors & Omissions (also called Professional Liability or E&O)

Companies that provide professional services such as giving advice, making recommendations, designing things, providing physical care, or representing the needs of others should purchase errors and omissions insurance. This type of coverage protects an organization against third party lawsuits by customers, clients, or patients claiming that the business’s failure to perform a job properly has injured them. The policy will pay any judgment for which the company is legally liable, up to the policy limit. It also provides legal defense costs, even when there has been no wrongdoing. For companies in the technology industry, there is a special coverage called Tech E&O.   Click here for a detailed explanation of Tech E&O. 

Cyber Insurance

In today’s highly digitized world every company, regardless of size, is exposed to cyber risks. From ransomware attacks compromising systems, to compliance-related expenses for personal data exposure, a cyber breach can be very costly and often put younger, cash strapped organizations at the brink of bankruptcy. A stand-alone cyber insurance policy provides protection to a company if a cyber or data breach occurs. This type of policies provides several different components of coverage including:

  • Liability protection against third party lawsuits in the event employee or customer data is compromised.
  • Breach response coverage for the costs to bring in experts that can identify any intruders to a company’s systems.
  • Breach response coverage to mitigate the breach so systems can be fully restored to normal operating standards.
  • Ransomware protection in the event that a company’s systems are hacked or held hostage by a cybercriminal.
  • Notification and credit monitoring services in the event of a breach to notify any affected individuals.
  • Business interruption costs incurred as a result of a potential cyber-attack.

All businesses that use computer systems, the internet, or hold data are vulnerable to cyberattacks and should have a cyber insurance policy in place. This type of policy can provide the funds to react quickly to restore customer confidence and mitigate further damage. Some insurance companies include consulting services to help you put software and systems in place to avoid such attacks in the first place. However, organizations must also be aware of common exclusions.

Employee Benefits

Employee benefits are additional methods of compensation offered to employees that are separate from their salaries and wages. Traditional health insurance plans (such as medical, dental, and vision) are the common foundation of an employee benefits package. Employer sponsored medical plans are designed to be more cost-effective for businesses and employees because the risk is spread across a larger number of people, and the ease of enrolling in an employer’s health plan exceeds the burden of shopping for coverage on their own. Employees are drawn to businesses that offer a robust employee benefits package, and combining ancillary benefits (such as life, short-term disability, and long-term disability) with traditional health insurance plans is a significant catalyst for recruiting and retaining a talented workforce. Offering employee benefits also creates tax advantages for businesses. Employers can typically deduct 100% of the premiums paid toward health insurance and, depending on the size of the business, may be eligible for small business tax credits.

Phase II: Strategic Liability and Risk Transfer

As an organization starts expanding its employee count beyond 10 employees, or starts generating sizeable revenues, it is important to start considering the organization’s broader liability exposure. The following coverages should be considered:

Directors & Officers (D&O)

Directors and officer’s liability insurance protects directors and officers of a firm if there is a lawsuit claiming they managed the business without proper regard for the rights of others. The policy will pay any judgment for which the firm is legally liable, up to the policy limit. It also provides for legal defense costs, even where there has been no wrongdoing.

Employment Practices Liability Insurance

Employment practices liability insurance covers (up to the policy limits) damages for which an employer is legally liable such as violating an employee’s civil or other legal rights. In addition to paying a judgment for which the employer is liable, it also provides legal defense costs, which can be substantial even when there has been no wrongdoing.

Fiduciary Liability Insurance

Provides coverage for damages caused by a breach of fiduciary duty by an employer. For example, by offering a retirement plan to employees, such as a 401(k), an employer is acting in the capacity of a fiduciary and is subject to claims for damages due to scenarios such as mismanagement of investment funds or poor performance of the retirement plan.   This coverage can also be applied to damages due to the advising of employees for an employer’s benefits plan (an employer advises an employee to select a benefits plan that results in insufficient coverage).

Keyperson Insurance

A business that relies on key employees or executives should have “Key Person” policies for employees without whom the business could not function. Key Person Insurance protects against a key employee’s unexpected death – often the benefit amount equals the expected revenue loss and costs required to find and train a suitable replacement. The business pays the premiums, and the insurance is considered a business asset.

Phase III: Building Resiliency

As your growth continues to scale past 25 employees, it is important to build resiliency and ensure busines continuity. Organizations should consider the following coverage:

Employee Benefit Liability (EBL)

This covers the liability of an employer for an error or omission in the administration of an employee benefit program.. As employee headcount grows, the chance for errors in processing employee benefits grows, for example if an employer accidentally forgets to enroll an employee in the benefit program, and that employee must pay out of pocket for a doctor visit. In many cases, EBL Coverage can be included in a BOP.  Fiduciary Liability coverage provides an employer coverage for the advising of employee benefit plans, while EBL provides coverage for the administration of employee benefits plans.

Phase IV: Specialized Risk Mitigation

As the organization continues to grow, expanding both its staff and operational geography, specialized coverages may be required. Depending on the nature of an organization’s business, unique insurance solutions should be contemplated to limit potential risks. Such specialized coverages include, but are not limited to:

Kidnap/Ransom/Extortion coverage – provides protection for employees traveling to high risk regions

Defense Base Act (DBA) coverage – specialized coverage for organizations bidding on government contracts to expand workers compensation coverage for staff performing contract work at U.S. military installations around the globe.

Business Travel Accident (BTA) provides emergency medical and evacuation coverage for organizations with employees traveling internationally.

International Property and Liability Coverage – When an organization starts working internationally, it is important to make certain the coverage in place is adequately covering international risks. Not all policies are created equal and, in some instances, it is required to take out specialized liability and property policies to cover operations overseas.

Timing of these four phases can vary based on a variety of factors such as an organization’s industry, growth trajectory, or requirements mandated by any contracts awarded to a company.   Similarly, the limits of liability for each of these coverages will vary based on these factors.  It is important that companies consult their insurance broker on a frequent basis during the year as limits of liability may change based on company growth or contraction.


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