Every year, millions of Americans start their own businesses. They come up with new ideas, buy some equipment, run advertisements, line up some customers, and they think they’re all set. However, if they forget one extremely important item – insurance – they are far from ready.
Some entrepreneurs may assume that their personal insurance policies will take care of anything that might happen. It is vital for them to know that this is probably not the case.
Exhibit A is the story of two people who found out the hard way that personal auto insurance does not apply to a car-towing operation. According to the California Department of Insurance, the pair signed a contract to tow a 2007 Lamborghini Gallardo. A collision occurred during the move, and the car suffered damages worth $292,000. Unfortunately, the couple had not purchased automobile insurance for their towing business. Facing a six-figure uninsured loss, they compounded their mistake by submitting a claim to their personal auto insurance company and lying about the circumstances. They both told the insurance company that the Lamborghini was damaged during a personal trip, unrelated to the towing business.
Insurers tend to investigate claims for large amounts of money very thoroughly; it didn’t take long for the truth to come out. When it found evidence of possible fraud, the insurer contacted the California Insurance Department, which conducted its own investigation. The result? In addition to personally owing almost $300,000, both people are facing criminal fraud charges that carry penalties of up to five years in prison and $50,000 in fines.
A more innocent mistake but one with potentially serious consequences involves someone who has business records stored on a laptop computer. She might assume that her Homeowners insurance policy will cover the cost of recovering those records should anything happen to the laptop. Unfortunately, this isn’t so. If the laptop were to be destroyed or stolen, the insurance would pay for the purchase of a replacement (if personally owned), but it would not cover the loss of business data. A Business Owners Policy in many cases includes coverage for this type of loss. With this coverage, she may suffer a significant financial loss from which her business might not recover.
Even more serious would be a situation where someone starts a home business making soaps, jewelry, baked goods, or any other items that a customer might ingest or apply to the skin. Suppose a few people who ate the food items became physically ill, or they broke out in rashes after using the soap or wearing the bracelets. These customers might sue the business owner to recover their medical costs and to seek damages for discomfort, pain, embarrassment, or other hardships. However, most policies specifically state that they do not cover liability for injuries arising out of a business engaged in by someone insured under the policy. Therefore, if this person relied on the Homeowners policy to protect him, it would not be covered. Furthermore legal fees and damages would need to be paid out of pocket.
A discussion with a professional insurance agent should always accompany the start of a new business. She can help identify the coverage that is right for the new business operations. Extra insurance does cost money, but allows you to keep running your business and may help prevent serious financial or personal setbacks.