Mistake #4 in Starting a Small Business in Canada: Not Being Adequately Insured

Mistake #4 in Starting a Small Business: Not Being Adequately Insured

Continued from Mistake #3: The Contents of Leases

Mistake #4. Not Being Adequately Insured

New businesses often have insufficient insurance. In deciding what kind and how much insurance to secure, a new business owner should carefully examine the needs of the business. Here is a summary of the most common forms of insurance coverage.

Property Insurance

It is always a good idea to purchase enough property insurance to cover your business’ assets. Even if you form a corporation, which protects your personal assets from business liabilities, you still risk losing your business if disaster strikes. A good business property insurance policy should cover matters such as equipment and machinery; office furniture (including computers and accessories); inventory and supplies; company cars; and employees’ personal property kept at the business site.

You also need to understand which types of losses are covered. The kinds of things to look for include fire, explosions, storms, smoke, riots, vandalism, theft, sprinkler leaks, floods, broken windows, falling objects, water damage, and loss of business income. If you have a lease, check for leasehold insurance. This protects you if your lease is cancelled and you have to rent elsewhere at a higher rent. Many of these things are not covered under a basic policy – a fact that surprises many business owners.

Also note that some items are specifically excluded. This, too, can be surprising. For example, in some areas where earthquakes are common, damage from earthquakes is specifically excluded from basic policies. If you want to have that kind of coverage you must obtain separate coverage. While the premiums for such additional policies are more expensive, they may be worth it if your business faces multiple or unusual risks.

Be sure you understand the limits of your policy. These include maximum coverage in certain circumstances, any deductibles or co-payments required, and how the insurance company pays claims. For example, “guaranteed replacement cost” insurance will reimburse you what it costs you to replace the property. If your computer equipment is destroyed, this type of coverage will pay you as much as you’ll need to replace it. This is very different from insurance that only provides the “actual cash value” (which is often depreciated) of the damaged property.

Lastly, keep in mind that the location of your business may affect your insurance needs. If you have a business lease, your lease may require that you obtain a specific amount or type of property coverage. Be sure to check your lease before you purchase a policy. If, on the other hand, you have a home-based business, your home-owner’s policy may be voided entirely if you run a business from home. If that is the case, you will need to upgrade your insurance policy. If, on the other hand, you have a home-based business, your home-owner’s policy may be voided entirely if you run a business from home. If that is the case, you will need to upgrade your insurance policy.

Liability Insurance

Liability insurance covers your legal liability resulting from injuries to, or property damage of, a third party.

There are several types to consider, for example:

  • general liability, which covers damages that your business must pay to someone who is injured on your property;
  • product liability, which protects you from lawsuits by customers who claim to be hurt by a product you produced and/or provided; and
  • auto liability, which covers damage to vehicles in a business-related accident. This, however, may not include damage which occurs when your employee was using his or her personal vehicle for business purposes. You may need to have your employees change their personal auto insurance policies.

Not all policies cover all of these kinds of liability insurance. Be sure to consider your needs and read carefully!

Professional Liability

This kind of insurance protects you from liability arising from negligence committed while rendering professional services. This is also known as Errors & Omissions insurance. It is not available for all professional activities. As a business owner, you should ensure you know whether such insurance is available (or required) for your employees.

Workers’ Compensation Board (WCB)

Most business operations are required to have workers’ compensation coverage. If a worker is injured or contracts an occupational disease while on the job, the WCB covers the worker’s medical and wage-loss costs. Employers who are uncertain about their need to register for compensation coverage should contact their provincial WCB for information.

Directors and Officers (D&O) Insurance

This kind of insurance is for businesses that are incorporated. In general, the recovery of any damages incurred by the corporation will be limited to corporate resources, but this is not always the case. Sometimes, courts will allow plaintiffs to receive damages directly from corporate officers or directors. In general, D&O insurance provides coverage against the wrongful acts committed by directors and officers (but it can also include officers and senior management staff ). Specifically, if such an insured person is found to have committed a wrongful act and, as a result, must pay damages to an injured party, those damages will be covered by the insurance (this is known as “indemnification”).

So what is a “wrongful act”? Generally, the term “wrongful act” includes actual or alleged errors, mistakes, or omissions that occur in the discharge of duties; misleading statements; and neglect or breach of fiduciary duty. However, wrongful acts generally do not include criminal activities such as false arrest, or civil matters such as libel, slander, and infringement of a copyright or trademark.

It is important to carefully read and understand exactly who is insured (and who is not), deductibles and exclusions, and any coverage limits. For example, there are often limits on general coverage (both per claim and the total allowed annually) and defence costs (a promise to indemnify may not be a promise to defend).

Continue reading: Mistake 5: Not Getting a Lawyer for your Business

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Authors:

Carole Aippersbach
Carole Aippersbach is a lawyer with the Centre for Public Legal Education in Edmonton, Alberta.
 


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