What's Out There and How to Pick.
With such a vast range of insurance policies available and only a limited pool of resources from which to pull from, emerging businesses often have a difficult time determining the ideal policy. This post examines different types of insurance and what early stage business should consider when selecting insurance policies.
The list of risks that businesses can insure against is extensive and there is no simple formula for determining which insurance policy is right for a business. Some insurance is generally advisable for all businesses, such as general liability insurance, while the applicability of other types of insurance may depend on the characteristics of the business. External circumstances, like physical location and market characteristics, may also warrant unique types of insurance.
Finally, different forms of insurance are typically not stand-alone options. Various policies can often be combined into a more comprehensive policy, which may also include bulk discounting.
Let's dive in! This post address the following types of insurance:
Commercial general liability insurance;
Commercial property insurance;
Professional liability insurance;
Workers' compensation insurance;
Equipment breakdown insurance;
Product liability insurance;
Commercial vehicle insurance;
Data breach insurance;
Business interruption insurance; and
Directors' and officers' insurance.
Commercial General Liability Insurance
Commercial general liability ("CGL") insurance typically protects the insured from liability for personal injury and property damage sustained by third parties as a result of the insured’s business operations. CGL insurance typically protects against financial losses stemming from lawsuits relating to such damages and is often required for contractors or for participation in tradeshows and markets.
What it covers: typically, personal injury and property damage of third parties caused by services provided by the business, including its employees, whether on or off its premises, and the legal costs associated with defending such claims. Damages relating to libel, slander, or defamation (i.e. advertising liability) are also typically covered.
Who should get it: your business should acquire CGL insurance if operations are undertaken on business premises, or services that have the potential to injure people or property are provided.
Other considerations: coverage limits for CLG insurance typically start at $1,000,000 or $2,000,000.
Commercial Property Insurance
Commercial property insurance, which is often bundled with CGL insurance in a business owner’s policy, typically covers commercial or business property from the risk of disasters. It can potentially protect a business whether it operates out of a home or commercial space.
What it covers: typically loss or damage to property inside of the building – such as equipment, inventory, furniture, electronics – and outside of the building – like signs and landscaping – from perils such as fire, theft, and natural disaster. Both repair and replacement can be covered.
Who should get it: any business that depends on property, such as building premises, inventory, or equipment, to operate, should have commercial property insurance. If operating in a region particularly susceptible to natural disasters or property crime, commercial property insurance may be of greater value to a business.
Other considerations: the value of the assets to be covered is often the primary factor when determining coverage limits.
Professional Liability Insurance
Professional liability insurance, or errors and omissions insurance, protects against a professional’s liability for damages sustained by a client as a result of errors in the professional’s work. Clients often require a professional to have professional liability insurance prior to commencing work.
What it covers: typically, liability for damages caused by negligence, malpractice, or misrepresentation on the part of the professional. Usually, professional liability insurance covers financial losses whereas CGL insurance covers physical damages. It often contemplates scenarios where a client may blame the professional for financial losses sustained as a result of missed deadlines or a faulty product or service.
Who should get it: businesses performing a service or providing advice in exchange for financial compensation should have professional liability insurance.
Other considerations: the industry standard coverage limit for professional liability insurance for consultants in Ontario is usually $1,000,000.
Workers' Compensation Insurance
Workers’ compensation insurance protects a business from liability for damages sustained by workers as a result of workplace accidents. Employees have a statutory right to workers’ compensation in Canada. In general, provincial employers are required to pay into their provincial Workers’ Compensation Board. Federally regulated employers do not have the same requirements.
What it covers: wage replacement and medical benefits for employees who are injured in the course of employment, as well as any lawsuits arising from such injuries.
Who should get it: Workers’ compensation insurance is generally required if a business has employees or is incorporated. Some provinces exempt particular industries from mandatory Workers’ Compensation Insurance. Businesses must determine which jurisdiction applies and whether or not their industry requires mandatory Workers’ Compensation Insurance.
Other considerations: workers’ compensation rules and regulations are managed by the provinces in Canada and therefore requirements may differ province to province.
Equipment Breakdown Insurance
Equipment breakdown insurance typically protects against loss due to mechanical or electrical breakdown of any type of equipment, including computers. This type of insurance may be necessary if property insurance does not cover loss suffered by internal sources.
What it covers: typically cost to repair or replace damaged equipment and the resulting loss of business income or extra expenses incurred. Such costs and resultant losses may be caused by explosion damages, mechanical or electrical breakdown, power outages, and operator error. Coverage may include communications systems and HVAC systems.
Who should get it: if your business depends on equipment to operate successfully and such equipment has the potential to break down and stall operations, equipment breakdown insurance might be a good idea. A business that operates in a region particularly susceptible to power outages, or in an industry where equipment failures are more common, may also find value in this type of insurance.
Other considerations: product warranties may provide sufficient coverage; however, it is important to understand their terms prior to evaluating the need for equipment breakdown insurance. Another alternative is maintaining access to backup equipment.
Product Liability Insurance
Product liability insurance typically protects the insured from liability for injury or property damage to third parties as a result of an issue with a product the insured manufactures or sells. This type of insurance is often included as part of a CGL insurance policy.
What it covers: typically, injury or property damage sustained by third parties caused by an issue with a product. Issues may include faulty designs, manufacturing defects, damage in transit, faulty repair, or marketing defects such as incorrect safety warnings or instructions. Both business to customer and business to business transactions are typically covered.
Who should get it: any business that provides goods to a customer, or is involved in the design, manufacture, labelling, import, transport, supply, storage, or repair of goods, including food and beverages (e.g. a restaurant), should consider product liability insurance.
Commercial Vehicle Insurance
Commercial vehicle insurance protects a business from liability and expenses stemming from its vehicles.
What it covers: typically, liability for bodily injury resulting from an accident for which the business is at fault, property damage caused by the vehicle, damage to the vehicle whether or not caused by collision, expenses relating to injury to employed drivers and passengers including medical expenses and lost wages, loading and unloading liability when transporting goods or customers, and replacement costs during repairs.
Who should get it: if your business requires the use of a company vehicle, or if a vehicle is owned by your business and used for business needs, such as deliveries or transporting equipment, commercial vehicle insurance is necessary.
Data Breach Insurance
Data breach insurance, or cyber insurance, typically protects businesses from the costs associated with cyber-related security breaches or similar events. New businesses may be more susceptible to attack since they often do not possess the sophisticated security systems of larger companies.
What it covers: typically, expenses incurred from managing the cyberattack, including expenses relating to incident response, data recovery, notifying customers, recovering compromised information, repairing damaged computer systems, public relations services, and associated legal fees. Data breach insurance may also cover any liability for third party privacy breaches.
Who should get it: businesses that rely on technology for their services, provide services in a digital capacity, or collect any type of customer data should consider some form of data breach insurance.
Business Interruption Insurance
Business interruption insurance typically helps recover lost income and cover ongoing expenses while a business is temporarily closed due to an event such as a natural disaster, government-mandated closure of premises, or vandalism, including loss of income when the business is being repaired. This type of insurance differs from property insurance in that property insurance only covers physical damage to the business.
What it covers: typically profits, fixed costs – e.g. rent, utilities, payroll, and alarm system – temporary location, commission and training costs, and extra expenses incurred as a result of the closure.
Who should get it: every business may be subject to the closure of its operations at some point in its lifetime. Business owners should carefully consider the likelihood of such a closure and its consequences when deciding whether to obtain business interruption insurance.
Other considerations: contingent business interruption insurance is also typically available, which covers loss of income when a supplier or key customer is prevented from engaging in normal trade, thereby hurting the business.
Directors' and Officers' Insurance
Directors’ and officers’ (D&O) insurance protects the directors and officers of an organization from liability for damages arising out of lawsuits brought against such individuals for alleged wrongdoing.
What it covers: typically, damages and settlements arising out of lawsuits against an organization’s directors and/or officers alleging breach of common law duties, duties owed to shareholders, fiduciary duties, or failure to comply with rules and regulations, as well as the associated legal costs.
Who should get it: business structure is the primary factor in deciding whether D&O insurance is necessary. Organizations without directors or officers do not need D&O insurance, i.e. unincorporated businesses. Private corporations may be less susceptible to shareholder lawsuits than public companies, depending on the number and relationship of shareholders, sometimes reducing the need for D&O insurance. Customers and creditors, however, may still sue the corporation. Not-for-profit organizations should also often obtain D&O insurance due to their typically limited resources and diminished ability to defend actions and indemnify their directors and officers. This is particularly true if such a not-for-profit wants to attract and retain qualified board members.
This overview is not an exhaustive list of insurance policies available to early stage businesses. Other types of insurance such as pollution and environmental insurance, crime insurance, key-man insurance, and employment practices liability insurance may be suited, and in some cases required, for a particular business’ operations. In any event, it is important that a new business understands its operations in order to select the optimal insurance policy or policies.
If you have any further questions concerning the right insurance for your business, drop us a line!
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© 2020, Gilbert’s LLP. All rights reserved. This post is provided for general information purposes only and does not constitute legal advice or opinion of any kind. Gilbert’s LLP does not warrant or guarantee the quality, accuracy, or completeness of any information in this post. This post is current as of its date of publication. It should not be relied upon as accurate, timely, or fit for any particular purpose.