I love meeting entrepreneurs at various networking events around Silicon Valley because inevitably you run into some folks who obviously have a certain fire in their soul. You talk to them and they are visibly excited about their idea. They're loaded with confidence and a sense of purpose. They believe in how their company or idea can help a group of people, and they're making moves to ensure some level of success.
Unfortunately, a lot of these people don't quite know what they're getting themselves into. Their startup venture may be headed for a crash and burn if they don't spend enough time hammering out certain details. In particular, startup founders who fail to recognize and acknowledge their business liabilities are more likely to fail. You can avoid this scenario by knowing which kind of business insurance you need for your venture.
Why Businesses Skip Insurance - And Why You Shouldn't
Businesses may choose sub par insurance for any number of reasons. For some, it's a simple matter of oversight, not knowing what their true liabilities are, or how to address them. In other cases, it's a matter of cost-cutting. This is never a good approach, because a failure to patent your idea or recognize inherent dangers around that could send your dream off the rails, or worse yet, straight into a lawsuit. On the other hand, business owners who insure their businesses may escape potential legal quagmires.
Consider, for example, an entrepreneur I met who runs a mobile personal training service. His company brings all the equipment and expertise to wherever you are. Knowing he was providing a service in which clients could potentially be injured, he refused to begin business until he was insured. Despite his caution, he missed one key thing. He never decided to insure his fleet of vehicles and equipment. When one of his vans full of expensive exercise gear was stolen in 2012, he learned his lesson. He's had his fleet insured ever since.
This shows how important it is to invest in several types of business insurance depending on your company needs.
Types of Business Insurance
There are several types of insurance entrepreneurs may want to consider before opening their doors for the first time:
- General liability insurance: This is a must-have for all businesses and covers legal liabilities resulting from accidents, injuries, or other claims of negligence. They include damages from medical expenses, property damage, legal defense, settlements, libel, slander, and more.
- Product liability insurance: This specifically covers companies that may distribute, manufacture, or sell products as part of their business operations. Your insurance premiums are commensurate with your degree of risk. For example, a company that sells mops will have a lower degree of risk than one that sells electronics.
- Errors and omissions insurance: This covers businesses that provide services instead of sell products. Some states require proof of errors and omission insurance before start of business. One of the most recognizable forms of errors and omissions insurance is malpractice insurance for physicians.
- Commercial property insurance: This covers the cost of your equipment and buildings as a result of vandalism, theft, or natural disaster. Commercial property insurance will cover business interruption and lost income, among other damages.
Other Forms of Protection
Entrepreneurs can elect to purchase as much or as little coverage as they deem necessary, but consider protecting your intellectual property with a patent. A patent doesn't protect the physical aspects of your business, but the idea of it. When you're issued a patent, competitors are excluded from making or selling the product in the United States. Keep in mind there are two different types of patents. Utility patents protect processes and machines, while design patents cover the ornamental design of your product.
As an example, the CEO of Skyzone patented his idea of the "trampoline court," or an interconnected web of trampolines that allow jumpers to move between them. Without this patent, anyone would be able to copy the idea.
Entrepreneurs also have the option of copyrighting, trademarking, or creating a registered trademark for their brand. The most legally rigorous of the three is the registered trademark, which requires you to file an application with the U.S. Patent and Trademark Office. Upon approval, you'll be issued a federal registration certificate.
Copyrights and Trademarks don't require any notification or paperwork. When you create intellectual property, you assume copyright under the law. The problem with copyright is it can become a "he said/she said" legal battle in the event of copyright infringement.
A Final Word
All companies must take realistic inventory of their assets and liabilities before opening for business. The risks are too great to ignore. While an insurance agent may be able to help you navigate the process, many businesses find it beneficial to consult with a business attorney.