Many small-business owners think that as long as they buy a general liability policy, they're covered for whatever minor—or major—disaster hits. Not so. I run an insurance agency, and one of my biggest challenges is educating customers about the dangers of insurance policies that look like they're a bargain but leave them at risk of giant losses or getting sued. More than 1 in 10 small firms has been involved in a lawsuit with negative consequences, according to a recent survey by Hiscox.
Here are three types of policies that are legal but leave owners on the hook for whatever damage occurs.
1. The disappearing policy. Many small-business owners buy a professional liability policy to protect against a claim of bodily injury or property damage by another person or business. The policy says it covers "claims made" before the contract expires. That may sound reasonable. But what they don't realize is that if they submit those claims after the policy expires, they aren't covered.
Let's say a tax preparer makes a mistake on a customer's tax return and the customer ends up owing money to the IRS when he should have been entitled to a refund. The customer may want to file a claim against the tax preparer's professional liability policy. If the tax preparer's policy is written on a "claims made" form (which it usually is) and the policy has expired or lapsed, then there will be no coverage for the customer and the claim will be denied.
The remedy: Buying a policy that covers "occurrences" offers more protection than a "claims made" policy. Even if you submit a claim after it expired, it will cover you for incidents that happened when you were under contract. A policy that covers "occurrences" might run a business with two employees $760 a year vs. $560 for a policy that covers "claims made." In the end, though, the policy that covers occurrences is the only one that protects the business owner fully during the coverage period.
2. The policy you can only tap once. Entrepreneurs often think that by purchasing a general liability policy that gives them $1 million in coverage, they're insured for any incidents that take place, up to $1 million. For instance, a home-improvement contractor who works on five homes over a year might think he's covered for anything that happens in those homes for up to $1 million on each job. That's not true if he bought a policy that covers the company "per policy." He's only covered up to the total policy limit even if he has multiple claims.
The remedy: Look for a policy that covers you "per project." It will cover you on each individual project as long as the total values of the claims doesn't exceed the dollar value of the coverage you bought—giving you the maximum coverage.
3. Insurance that leaves the owner out. A carpet cleaner might think that she's covered for any damage to the rugs she works with if she has general liability coverage. Actually, she's not. Unless her policy has an endorsement that says it covers "your work," it only covers the company for damage to parts of the home unrelated to the job being performed. For instance, the carpet cleaner would be covered if she spilled cleaning solution on the couch—but not if she ruined the carpet. Still, many owners don't go for a policy that covers "your work," because it might run a very small firm $1,100 a year vs. $700 without this endorsement.
Going for the cheaper policy can backfire—with big consequences. One of our clients, who owns a flooring installation company, bought a commercial general liability policy that did not cover his work. A few days after installing brand-new wood flooring at a customer's house, his customer said she was seeing cupping in the floor that reflected water damage. When our client called the insurance company to report the claim, he got denied, on grounds he had not correctly replaced the flooring and left some gaps for water to enter and cause damage. Since the policy did not cover his own work, he had to pay $5,500 out of pocket for the repair and damage he caused.
The remedy: Getting coverage with a "your work" endorsement is the best way to make sure you're covered. Why buy insurance if it doesn't cover you for the type of incidents that happen regularly to businesses like yours?
—By Sam Meenasian. Mr. Meenasian is director of operations at USA Business Insurance in Burbank, California.