How a Business Owners Policy Could Have Saved This Small Business

The estimated reading time for this post is 8 minutes

Jake* is an experienced home remodeling contractor who has a small business employing five others and providing work for several independent subcontractors. His dream is to become a successful real estate investor like those he sees in his suburban region.

In the meantime, he’s had a steady stream of local clients for which he does large home remodeling projects. As a result, Jake generated over $450k in revenue last year, which is pretty average for a small general remodeling contractor in his region.

Because of the size of some of those remodeling jobs, Jake’s work requires a lot of business tools and equipment, including a few pieces machinery costing several thousand dollars each. He keeps construction materials and inventory as well. During the five years he’s been in business, he’s accumulated about $60K in business personal property.

But, Jake’s not a wealthy REI yet so runs his business lean and mean. He works from an office in his small home, and his employees are virtual, too. That means he has to store his construction tools and equipment elsewhere.

He saves money on a large commercial storage unit by storing his business property on a friend’s nearby farm in an enormous steel frame storage building. He pays a much smaller monthly fee, does repairs for him at cost, and he also can repair his equipment in the space and charge tools there overnight. He picks up what equipment he needs for each project daily and returns it at night.

News No Small Business Owner Wants to Hear

One night a call from his friend that startled Jake out of deep sleep. It was bad news. There had been a fire in the structure where he stored his construction business property. The fire destroyed all Jake’s tools, equipment, and inventory stored at his farm or damaged it beyond use.

Worse, while waiting for the fire department to arrive, one of the friend’s farm hands had attempted to extinguish the fire and was severely injured. Later, the fire department quickly determined the source of the fire. It was electrical. One of Jake’s used power tools had shorted and caused the fire.  

The next day Jake got more bad news that the farmhand was suing him for tens of thousands of dollars for his injuries and associated pain and suffering. Jake had lost his business and was facing a lawsuit all within days. He quickly retained a local attorney and called his insurance agent.

He asked the agent if his insurance would cover this lawsuit and my lost business personal property. The agent told Jake that she’d check his insurance coverage and get back to him within a few hours. Jake called his employees and clients with the bad news while he waited.

Small Business Lawsuits Are a Fact of Business Life

Jake is one of the 28 million small businesses in the US, where small companies, according to 2012 Census data, make up 99.7% of employer businesses. Though the SBA defines a small business as one with fewer than 500 employees, about 90% of small businesses, like Jake’s, have fewer than 20 employees.

Naturally, their size doesn’t stave off lawsuits. A 2005 SBA study showed that between 36-53% of small businesses are involved in litigation during a given year. Moreover, a study conducted the same year by the law firm of Fulbright & Jaworski found that during any period, 90% of all US businesses are in litigation. While Jake didn’t see it coming, he’d just become one of them.

Litigation could happen to any business, including yours. That’s because, these days, as Jake learned, it’s not a matter of if you’ll be sued but when. You’ll want to take any steps you can to avoid litigation because it’s quite damaging to small businesses.

Lawsuits Are Destructive to Small Businesses

Whether they’re personal or business lawsuits, their impact on small businesses often is particularly devastating. This graphic shows some of the critical findings of the 2005 SBA report:

Of course, there are cases where small business owners don’t have enough business assets to sell or use as collateral for loans, like in Jake’s situation where fire destroyed most of his. When they also don’t have enough cash on hand or insurance, lawsuits their businesses.

These outcomes make it imperative that small business owners understand the legal risks to their enterprise and put the right insurance coverage in place. Unfortunately, Jake didn’t.

More Bad News: Jake’s Insurance Coverage Wasn’t Enough

When Jake’s insurance agent called him back a few hours later, she said his only coverage was commercial general liability insurance which, because of the fire, it was not enough to cover his losses. She explained that while it may cover the farmhand’s lawsuit, it wouldn’t cover the lost business property or the disruption to his business while he replaces it and rebuilds.

The news stunned Jake. He knew he had coverage for a lawsuit but thought that was all he needed. The last thing he’d expected was this fire. He was aware that his friend’s property insurance wouldn’t cover his business personal property nor would his own homeowner’s coverage, but he thought his commercial general liability did.

He was sure he’d get an insurance settlement from that policy and would be able to get some needed tools and equipment to keep working while he rebuilt. When Jake asked why his general liability insurance didn’t cover this catastrophe, his agent told him that commercial general liability coverage typically only protects what the graphic below shows:

In Jake’s case, she said, the farmhand’s lawsuit might be classified as a third-party injury suit. If so, his general liability policy would cover lawyer’s fees, court expenses, settlement, and judgments.

But, she said, “General liability insurance does not cover your lost business property or the revenue lost while you rebuild.” 

Jake asked what insurance would have covered him. She responded carefully, “Remember that BOP or business owner’s policy I tried to get you to buy?” Rubbing his head, he acknowledged he did remember. But, he also recalled telling her when he first launched that he wanted to start with general liability coverage alone to save money. However, as his business grew, he never made time to revisit his coverage even though his insurance agent asked each year at renewal and sent him several reminders throughout the year.

“In addition to the lawsuit,” she continued, “BOP would have covered your lost property.” After a pregnant pause, she told him, “The right BOP could have helped you while you rebuilt your business, too.”

Jake’s head spun. The lawsuit had already cost him money in upfront legal fees. He may recoup some of those costs if his general liability insurance covered the suit but that could take a while. In the meantime, he didn’t have nearly enough left to fund replacing his equipment, paying his employees and covering other business expenses. He couldn’t stay working. Jake was in serious trouble.

How a BOP Would Have Helped Jake

While a BOP or business owner’s policies have been around since 1985, the insurance industry created them specifically to cover small businesses, too many companies are operating without its essential benefits. Coverage under this policy combines general liability and property insurance, which could have covered Jake’s legal expenses and business property.

That’s especially important when what the SBA study showed occurs in many small businesses happened with Jake’s; the farmhand refused to settle his lawsuit with him. While Jake’s general liability policy would have covered up to a total of $1 million related to the farmhand’s injuries and legal costs, the typical BOP offers $1 to $2 million in lawsuit coverage alone.

Also, according to the Insurance Information Institute, most BOPs include business interruption insurance or BI. Business interruption insurance covers business income, including profits, after an event covered by your property insurance causes you to reduce substantially or end business operations. How much the BOP pays out depends on your business’ previous years’ revenue and business expenses and the limits established at policy issue.

While property insurance could have covered replacement of his primary business tools and equipment, BI could have helped Jake for up to a year as he rebuilt his business. It could have covered Jake’s employee payroll, taxes, licensing fees, rental of more business equipment and other ongoing expenses of running a business during rebuilding. This video by Insureon does an excellent job of explaining what BOPs cover.

Not only can a BOP help keep most small businesses from being forced into bankruptcy, but the BI protection under a BOP would also keep enterprises like Jake’s going while any lawsuits proceeded. As critical to small business owners, the BOP’s cost is reasonable for most. Keeping its costs down is possible, too.

One of the ways to do that is by developing a business continuity or disaster recovery plan for his business. In the process of obtaining a BOP, Jake probably could have received help creating a plan. These plans help prevent disasters like this and manage them if they do occur.

Is BOP Coverage Available for Your Small Business?

Whether your business qualifies for a BOP and how much it would protect depends on multiple factors like its size, location, past revenue and expenses and how it conducts operations. So, don’t just go by what you read here. Do your research and talk to your insurance agent about whether you can get a BOP, what it will cover and what it won’t.

Also, make sure your BOP provides BI coverage and ask if there are any other types of business insurance you need. By protecting your assets with the right insurance before a major catastrophe or a lawsuit, you could stay in business and out of financial disaster.

(c) 2016-2018. Dahna M. Chandler for Get Money Moxie, Inc., a division of Thrive Media, Inc. All rights reserved. This article may not be reproduced in whole or in part without express written permission of the author.

* Disclaimer: Jake is a fictional character, and this post is based on an entirely fictional account to illustrate the points made in this blog post. Please carefully review this site’s Content Disclaimer on the use of fictional characters and accounts and the application of this information.

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