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MAY 6, 2003

PERSONAL BUSINESS
By Karen E. Klein

Risky Business? It Needn't Be
Entrepreneurs build their outfits with sweat and smarts. Why do so many make foolish decisions about insurance?

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Most entrepreneurs think little of investing long hours, serious money, and unstinting effort to nurture and market their businesses. So why do so many act like paupers when it comes to safeguarding what they have put their life's work into creating? That's a question that has long fascinated and appalled author, lecturer, and small-business consultant Frances McGuckin, who is forever urging small-business owners to take a long, hard look at the risks of not planning for the unexpected. "Some small business owners would rather insure a rusty old junker to get them from A to B than insure their business and themselves against a catastrophic event," McGuckin declares. "It's one of those areas that people don't think about and don't want to spend money on."

As McGuckin points out in the newly released third edition of her book, Business for Beginners, insurance is something no business owner can afford to ignore. She examines various kinds of insurance, starting with the best policies for the very smallest outfits.

TAKING THE FALL. "Home-based businesses never think about insurance, but they are often at risk. If somebody trips over your doorstep and breaks their back, you'll get sued and you'll need insurance protection," notes McGuckin, who is based in Vancouver. "If your house catches fire and you have to reconstruct your business space and buy new equipment, you'll need funds that are probably not going to be available in your homeowner's policy."

At the most basic level, McGuckin recommends that home-based business owners investigate getting an insurance "endorsement" -- a rider to their homeowner's policy that covers the business space as well as the home. "There's no liability protection on such endorsements, but it can be set up to cover the equipment and assets of a business in the home," she explains, adding that business owners should make a point to revamp their policies whenever they invest in new equipment, such as an upgraded computer system. If they are selling products from their homes or manufacturing goods that could involve liability problems, the only responsible course is to factor those contingencies into their coverage, she says.

Another option that may be attractive: a home-office or in-home business insurance policy, which can be structured to provide liability coverage and income-replacement. As the business grows, it will make more sense for the owner to purchase a full commercial policy. "Many small businesses are underinsured and don't know it," she notes. "If you haven't got enough coverage, your claim can be severely affected, so don't be cheap about it."

LIGHT FINGERS, HEAVY LOSSES. Full-fledged business policies cover a good range of possible claims, including property loss, income-replacement, theft, fire, and other catastrophes. "Don't forget to make sure you have coverage for employee theft," , McGuckin says. "I once worked for a temp agency that had only $5,000 in theft coverage when they had 300 temps being placed in offices all over town. I recommended that the coverage be increased and, not long after that, they had an employee embezzle $10,000 and another run off with $500. They were very glad they had revisited their policy a year earlier!"

Professional liability -- sometimes called "errors and omissions insurance" -- is important for those in service industries, especially for entrepreneurs who might someday find themselves being sued for providing information or advice that backfired on their clients. And those who hire subcontractors also need to make sure their policies are adequate.

"I knew an unincorporated contractor who hired a sub to do a roofing job on a large condominium project," McGuckin recalls. "The subcontractor didn't have insurance, so when the roof leaked because his work didn't hold up and the condo people sued, my contractor friend got stuck with the judgment. His insurance didn't cover work done by the subcontractor, so he had to sell everything he had and liquidate his retirement assets to pay the $200,000 in damages."

A SENSE OF SELF. Finally, but perhaps most important of all, no entrepreneur should ever skimp on personal insurance. None of us likes to dwell on thoughts of death or debilitating injury, but ignoring a potential catastrophe won't make the threat go away. What would happen to your spouse and children if you are not around to run your company and bring in new clients? Will they be left with little income and lots of bills? When the founder dies or becomes unable to work, inadequate insurance all too often sounds the death knell for family-run businesses, McGuckin says. If your business is a partnership, then you have twice as many reasons to purchase adequate coverage.

For more information on business insurance, insure.com has a wealth of advice and articles on its Web site, and Hartford Steam Boiler Inspection & Insurance offers information about equipment-breakdown insurance. The company makes the point that today's high-tech equipment failures can be just as costly and catastrophic to a service company as a mechanical equipment failure can be to a manufacturer. As McGuckin stresses, working for the best while planning for the worst is isn't just a good policy -- it's the only policy.

Karen E. Klein is a Los Angeles-based writer who specializes in covering covered entrepreneurship and small-business issues.

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