The Real Value of Risk Coverage in This Litigious Age

I can understand why investing in liability insurance often represents money business owners would prefer not to spend. It’s easy to talk yourself into believing you get nothing tangible for your money and that by doing the right things, you wouldn’t need it.

But the reality of today’s business world doesn’t support that belief. In fact, it’s trending farther in the other direction than ever before.

The argument for basic forms of coverage – like general liability, auto liability, employment practices liability, crime and theft and directors and officers insurance– really comes down to the level of risk to which you’re exposing yourself. This doesn’t mean you consider it OK to face a wrongful termination suit or have one embezzle from your company. It means you don’t want to have to worry about losing everything if you face one of these unforeseen circumstances. This becomes especially true when you realize that you can only do so much to prevent these things from happening, especially in the current environment.

Let’s face it, those lawyers you see on TV are always looking for someone to sue, and the deeper the target’s pockets, the better. They’re speaking to a blue-collar audience, telling them stories of the hundreds of thousands of dollars they’ve “won” for their clients. These are people whose wages may never get anywhere near six figures and the message of the lawyers is clear: “We’ll go after the fat cats for you, and you don’t have to pay us unless we collect.”

The laws and courts allow this to go on. In this litigious environment, you may well be doing all the right things: You may be documenting your policies and making sure everyone understands them. You may have employment agreements that you’re convinced are air tight, and you might consistently hold up your end of these agreements.

But if you’re like most companies, at some point you’re going to have an employee who comes after you anyway. Or you’ll deal with a customer or vendor who claims you did them wrong, even if you didn’t. The plaintiff and his or her lawyers aren’t going to help you make your case, which means you have to protect yourself.

Here’s where having the right insurance policies in place can play a critical role in your business. Most decent liability policies will cover the cost of your legal counsel, as well as any judgment or settlement if the courts rule against you. The cost of these premiums are likely minimal compared to the hourly fees of the good lawyer needed to defend you when you’re being sued. That makes a big difference because even if you win and the plaintiffs don’t get paid a cent, your lawyer still needs to get paid.

Why should you be the one stuck with that bill if you didn’t do anything wrong? Liability coverage can protect you.

So what kinds of insurance are most essential for business owners?

A standard auto policy and general liability are starting points. A small business owner should also have personal liability coverage in the range of $3 million and $5 million. You’d be surprised how inexpensively you can obtain this kind of policy if you don’t have too much financial or legal baggage.

Officers and directors liability coverage is crucial for anyone you might invite to join your board, or that serves in a high-ranking executive capacity. These positions can get sued as individuals, and if they don’t have protection and indemnification, it may not be in their best interest to accept the risk of serving.

Theft coverage will not only cover your loss, it will also pay for a forensic accountant to come in and document the extent of the loss. That alone can cost tens of thousands of dollars, so it should hardly be considered an incidental cost.

And as for employment practices liability, you’re simply taking your company’s future in your hands if you don’t think an employee of yours will ever turn on you.

It’s nasty out there. There are way too many aggressive litigants looking for a big payday. I’ve seen far too many companies taken down because they weren’t protected against a threat they just couldn’t believe would ever really materialize. I’ve seen companies that were doing perfectly well end up in bankruptcy because of a judgement against them for a lawsuit that was too expensive for them to defend.

That should never happen. Insurance premiums are an investment and I understand that many businesses are facing tight margins. But it seems to me that one of your top spending priorities should be to eliminate threats to your very existence. After all, you can’t make a profit if you can’t remain in operation because an aggressive trial lawyer and a pliable jury awarded someone hundreds of thousands of your dollars.

You also want to make sure you update your coverage as the circumstances of your business change. I’ve seen companies that started out small with minimal coverage at the outset, only to grow and expand while overlooking the need to bolster their protection.

You may not realize the extent of your risk, but believe me, there’s a plaintiff or a lawyer out there, or maybe an unethical employee, who recognizes what a goldmine you could be for them.

Don’t leave yourself unprotected. If you need to reprioritize your costs to find room for the premiums in your budget, then do it. And these premiums can be financed throughout the policy period. It’s more than just peace of mind. It’s also the freedom to run your business on your terms, rather than on the terms of someone looking to take everything from you.

Ask yourself: What is that worth?

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