Starting a business can be challenging. The “hurry up and wait” in working with local municipalities, settling the lease terms with uncooperative landlords, and securing financing with an over scrupulous lender can be frustrating for even the most patient of business owners. Too often, when these frustrated entrepreneurs get to the insurance step in the process, the collective goal is to get through it as quickly as possible make up for lost time. As a result, mistakes are made, and policies are written carelessly. The following are five common oversights we see when we review policies our prospective start-up customers:
1. Inadequate Inventory Coverage
When the economy was booming, it was not unusual for an emerging company owner to fax us a lease or a lender sheet and tell us, “just get me what I need to start work tomorrow,” rebuffing our requests for inventory limits, computer limits, and other important property coverages. A common mistake made by agents with poor diary systems is to let that policy renew over the years without readdressing the inadequate limits.
2. No Coverage for Tenant’s Improvements/ Betterments
Most businesses need to make alterations to the rental space to accommodate their specific needs. Depending on the lease, those improvements need to be insured by the tenant, not the landlord. If there is a devastating fire, the landlord’s responsibility would be to rebuild to the condition it was in prior to the tenant’s moving in. The tenant entity needs to include that coverage on its own property policy. Some carriers include the tenant’s leasehold improvements as part of the contents limit (known as Business Personal Property), whereas other carriers only cover the improvements if they are listed separately. The TIB coverage can quickly become lost if agents quote off of previous year’s policies and are unfamiliar with how the competing carrier handled the TIB limit.
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3. No Coverage for Building Glass
After the business owner signs the lease, he forgets to communicate to his insurance agent that there’s a clause in the lease which requires the tenant to replace glass if broken as a result of tenant’s operations, for instance, a cabinet tipping over when they are moving furniture and shatters the window. Unfortunately, there’s no coverage. The reverse of this can be equally as difficult. Let’s say that the agent does include “Tenant’s Glass” limit in the policy, just to be safe. The landlord agrees to let the tenant install a large plate window in the front of the space but forgets to add an addendum in the lease. Without lease language specifying tenant responsibility, many carriers could deny the claim based on the fact that the glass is “building” coverage and therefore the default responsibility of the landlord.4. Inadequate Tenant’s Legal Liability
There have been numerous papers written on Tenant’s Legal Liability, but the basic point to understand is that a tenant can be held liable for tenant’s damage to a building. Many tenants think that their landlord would never sue them, but, generous nature of the landlord aside, the landlord’s insurance company has every right to subrogate against responsible parties after a loss, including the tenant. Many policies offer Tenant’s Legal Liability as an optional coverage, or it’s included automatically but at a very low limit and it is likely not enough. Even in the case of the “net-net” lease, where the tenant is responsible for insuring the entire building, there can still be a need for Tenant’s Legal Liability.
5. Inadequate Coverage For Growth
Sally starts a consulting firm and plans on not hiring employees until she’s well-established, probably in 2-3 years. She lands a large contract in eight months and quickly hires an assistant and another consultant. She knows to call her agent to add them to the workers compensation policy, but she doesn’t have the time to consider the optional coverage limits, such as Employment Practices Liability. A year later, Sally’s assistant sues her because the client made inappropriate advances and said inappropriate things, and Sally wasn’t willing to take appropriate action against her biggest client. Sally then wishes she had listened more to her agent when he recommended EPLI coverage.
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Understandably, start-up businesses have limited time and financial resources. A good insurance agent will set up an insurance plan that shows options that are prudent for the different stages of the start-up’s growth plan. An uncovered loss could in a moment ruin years of sweat equity. If you are thinking about starting a business, rely on your insurance agent to give you insight on the coverage you will need at the different stages of your business.
If you would like to discuss any of these ideas or other concerns you may have about your emerging company, please give me a call or email me jgreene@hwphillips.com.
This post originally appeared on the Howard W. Phillips Company Insurance blog.
