Small business insurance and E & O insurance

In a modern society, it is sad to have to protect yourself against litigation. You would always hope people would naturally become more forgiving of mistakes and accept modest compensation for the losses they have suffered. Sadly, the US is one of the most aggressively litigious societies in the world and, for a small business, even a small claim can be the difference between success and bankruptcy.

It is not just the value of any award of damages. It is the costs payable to both your own attorney and the attorney on the other side if you lose the case. Although it is an extreme example of the problem, you may remember Pearson v. Chung in which a judge sued his dry cleaner for a lost pair of pants. The amount claimed? Only $54 million. The problem was the $100,000 cost of the defense. Fortunately, public fund-raising covered those costs with the Chung’s attorney acting pro bono in the appeal hearings. Not every attorney will act without payment. The public does not often rally round to help a small business. That is why you should review your insurance portfolio.

In general terms, almost every business should carry property insurance, e.g. to cover fire damage, general liability to cover third party claims, a reasonable amount of workers’ compensation in case your employees sue you, and Errors and Omissions to protect you against the kind of mistakes you make when following your standard business routines. Suppose, for example, you write down the wrong delivery address and ship the order to the wrong place. Or the software you lovingly craft for your client crashes his PC when uploaded. The number of possibilities are infinite which is why this type of insurance has real benefits. It is so difficult to predict all the different errors and omissions that might occur. But there is one thing of which you can be certain. The majority of your customers will sue. Even though some of these cases will be vexatious and frivolous, your own costs are covered. Fending off these suits keeps you in business and makes the premiums a good investment.

E & O insurance tends to be classed as for “professionals” and it is true that lawyers, doctors, accountants and others with professional status depend on this type of insurance in their day-to-day lives. No one can afford to lose a case affecting their reputation. But that is just as true of ordinary small businesses. Everyone depends on their good name to get and keep clients. But the amount you buy will depend on the scale of the risk. Small business insurance must be affordable. To keep it so, review the way your business deals with complaints. Often, a sympathetic ear and immediate action to make good, will defuse the anger and head off the litigation. You should also look at the way you market your goods or services. Avoid anything that looks like a guarantee or warranty. If a customer has false expectations about the quality of what you sell, this will add fuel to the fire. Finally, check all your business processes and operations to reduce the chances of making a mistake. That said, small business insurance can keep you in business long enough to become a big business. It all depends on giving good service and developing your business model to match your customers’ needs and expectations.

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