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Why You Should Take Cover

Key Insurance Items to Consider

In a previous post, we discussed what to expect during due diligence. At the end of that post, we indicated that we would separately share what to prepare for related to information technology (IT) as well as key insurance items to consider.

We are tackling insurance here.

Ensuring proper insurance coverage is critical to protecting your business, which is often a business owner's largest investment. It is important to work with a reputable insurance agent who will help you determine the appropriate amount and breadth of insurance you should have in place.

When it comes to insurance, owners do often wonder how much is enough. And all of us go through the mental calculations of what we perceive to be the likelihood of an event occurring. This is normal. It's human nature. It's also extremely dangerous. We just aren't that good at doing a hypothetical cost-benefit analysis about something we don't believe is likely to happen.

An example can better illustrate this point. If you were to guess, what is the probability of dealing with a flooded office? On the second floor. In Arizona.

Here is the scenario. The CFO of a company is out and about on a Saturday when he receives a call from the property manager that there has been a small roof leak on what was an otherwise sunshiny day. Things "don't seem too bad." The CFO happened to be in the area and stopped to assess the damage for himself.

Upon arriving, he was greeted with 4-6 inches of water throughout the office, which included a skin care business on one side and a dermatology practice on the other. Oh, and their server room was also suffering from water seeping in from above (made more worrisome because this was before they started co-locating their data...see our IT post for more about that).

Multiple repairs were going to be needed, including shutting down the medical practice for a period of time. Fortunately, the company had a sufficient amount of property and casualty (P&C) and business interruption insurance (and outstanding agents) to move quickly in getting repairs done and without suffering significant losses.

The cause of the roof leak? Blockage in an air conditioner drainage line.

So, what are the key insurance items to consider? This goes for ensuring proper coverage for your business whether you plan to sell it or not.

First, how much and what type of coverage do you have? Types of coverage run the gamut and include:

  • Workers compensation: pretty much always required by the state with the right amount of coverage based on a specific calculation

  • P&C: make sure this covers all of your property, including any vehicles used specifically for conducting your business

  • Malpractice and errors and omissions (E&O): to cover you in the event a patient or a client claims to have been harmed for something you did or failed to do in the normal course of your business

  • Directors and officers (D&O): this can protect your business's directors and officers against lawsuits that may be filed against them directly for either their actions or the business's related to how those actions directly impact the business itself, its investors or its customers

  • Cyber: also covered in our IT post, this insurance protects you in the event of a data breach or certain other cyber threats

  • Business interruption: pays for a portion of lost revenue in the event of some occurrence that prevents you from operating your business for a period of time

  • Kidnap and ransom (K&R): could be potentially useful if members of your team travel overseas, especially to areas where they could be susceptible to kidnapping

  • Terrorism: can provide benefits if your business suffers from an act of terrorism

  • General umbrella: when available, can fill some gaps in coverage, especially related to P&C

Second, it is important to understand what insurance claims have been made and what the impact has been and will be on insurance rates and your ability to continue receiving coverage. Again, a good insurance agent will take the time to make sure that you have a firm handle on this and will recommend what they believe to be the best options for you going forward.

Finally, when you are selling your business, the buyer, depending on the size, may invest in representations and warranties (also referred to as reps & warranties) insurance. This protects the buyer in the event they suffer a loss due to a misrepresentation made by the seller. Some buyers are doing this in lieu of an indemnity escrow. Most others, however, are getting this insurance in addition to the escrow, although they may lower the escrow amount. Buyers may also require sellers to pay the premium for this insurance.

As we have emphasized previously in this post, it is absolutely vital to work with good, trusted insurance agents. They will work to get you the best coverage at the best rates and, when they really are doing their job, will make sure you don't pay for coverage you really don't need.

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