When everything is going right for your business and things feel like smooth sailing, it’s easy to overlook the things that could go wrong…until the unexpected happens. Your customers’ confidential information was stolen from your systems, your employee was injured on the job, or a shareholder sues your CFO for mismanagement. These scenarios may seem like they’ll never happen to your business – until they do. Without the proper business insurance to protect your business, your employees, and your assets, a simple mistake could lead to a devastating loss.
Many business owners think that deciding to form an entity for their business, whether it’s a corporation, an LLC (limited liability company), or another entity, guarantees your business is protected at all cost, but this is not always true. Forming a business entity only protects your personal assets from liabilities that the business faces, it does not protect your business’s assets.
Read these common scenarios where business insurance policies can protect you, your business, and your assets.
1. Your systems are compromised and data is stolen
In 2015 alone, approximately 42% of small business owners were victims of a cyber attack. In the last few years, this number has increased and is expected to grow as cyber threats become more advanced. Not opting for data breach insurance could become a costly mistake for your business, should your business or customer data be compromised or stolen.
There are worse consequences than having to recover your systems or your customers’ trust in the event of a data breach. In Texas, businesses are imposed with stiff legal penalties ranging from $2,000 to $50,000 for each violation – depending upon where you live in Texas, each piece of information could be a separate violation as opposed to the one occurrence so penalties can add up quick. Penalties can be imposed for data breaches, incorrectly disposing of or maintaining data collected, failing to inform consumers when their information has been compromised, or even if a business provides reassurances regarding the safeguarding of their information. Depending on the situation, these costly legal penalties can amass to high amounts which can result in devastating financial loss for a business.
Beyond the penalties imposed by the state, a data breach or stolen information can also open the door for lawsuits from clients or other parties, which can, in turn, cost a pretty penny to your business if it’s not sufficiently protected by data breach insurance.
If that is not bad enough, with the new standards being touted by the European Union concerning data privacy – commonly referred to as GDPR – even though your business is located in the heart of Texas, if your website sells to an EU citizen, even though they are in the U.S., you could find yourself in trouble under these new standards. While the breadth and scope of the GDPR are beyond this article, suffice it to say that non-EU countries are adopting the GDPR standards, and larger businesses are ensuring compliance because it looks like these could become the new industry standard no matter where you are located.
2. An employee is injured on the job
Although the state of Texas does not mandate that employers carry employee compensation insurance (also known as workers compensation), any business that has employees is encouraged to consider how this type of coverage can benefit and protect the business.
While you may not think employee compensation insurance is necessary in a quiet office setting, it only takes a single incident or illness to put an employee on leave for several days, which alone, can become costly for a business. Additionally, employees can skip claiming workers compensation and file a personal injury lawsuit, regardless of whether an employer offers workers compensation or not, which can end up causing a business to cover not only medical expenses and disability, but also loss of wages and potentially other noneconomic damages – including damages sought for inflicted pain, suffering, or inconvenience.
Employees may claim workers compensation for any injury or illness caused or exacerbated by their job…even for work performed outside of the typical workplace and even if they’re performing work duties “off the clock.”
Businesses that frequently or occasionally use employees to deliver goods and services or drive non-commercial vehicles should consider adding employee compensation insurance. This policy can cover employees if they’re involved in a motor vehicle accident while on the job – including delivery of goods and services.
3. If your business must award a plaintiff punitive or exemplary damages
Many insurance policies do not cover gross negligence claims, including the aforementioned employee compensation insurance. This means businesses could become tangled in a lawsuit alleging gross negligence if an injury, illness, or death are caused by or exacerbated by a job. Under these circumstances, gross negligence means an employer was aware of an unsafe working environment and had yet taken action to fix the situation. As such, ensuring that your insurance carries a gross negligence rider is paramount.
Unlike an overwhelming majority of states, Texas is one of the few states that allows business owners to obtain business insurance to cover punitive or exemplary damages for these types of situations.
4. A shareholder sues for mismanagement
For businesses thinking about raising money through equity funding, purchasing Directors and Officers liability insurance is valuable for protecting your business and its executives if a shareholder sues for mismanagement.
A Directors and Officers liability insurance policy can protect the personal assets of corporate directors and officers, as well as their spouses, in the event they have to defend against a personal lawsuit. Those in corporate directors or officer positions may think they can’t or won’t be the subject of lawsuit – until it happens. They can be sued by any relative party, including – employees, vendors, competitors, investors, customers, or other parties.
This type of liability insurance is important for any business with a corporate board or advisory committee, including non-profit organizations, because these lawsuits are all too common and become costly long before it’s over. There’s an incredibly high risk of being sued and many executives mistakenly believe the company’s general liability insurance policies will cover them in the event of a lawsuit. General liability policies are not designed to protect against mismanagement.
5. An unhappy client sues your business
As a business owner, you’ve likely dealt with an unhappy customer – but you probably never imagined an unhappy or disgruntled customer would sue. This scenario isn’t usually covered by your general liability insurance, but additional policies can help cover costs in this event – such as professional liability insurance.
Professional liability insurance (commonly known as errors and omissions insurance) helps protect individuals and companies that provide advice and services from costly defense against negligence claims made by disgruntled clients. The coverage focuses on alleged “failure” to perform on the part of, financial loss caused by, and error or omission in the service or product sold by the person who holds the policy.
Accidents and mistakes can and will happen – and it’s important to remember that your general liability insurance won’t cover a costly claim made against your company.
As an entrepreneur or business owner, you’ll likely face your fair share of failure before you find success. If you don’t have the right business insurance policies in place to protect you, a simple misstep or mistake can lead to devastating loss of finances or business. As your company grows, it’s also important to consider updating your insurance policies to ensure all the bases are covered – and covered well.
Still wondering what general liability insurance covers? Read our guest blog post: Is general liability insurance enough to cover my small business?
If your business is facing a lawsuit or if you need advisement on properly protecting your business, contact my office.