Insurance 101 for Startups and Small Businesses: Policies, Tender, and an Insurer's Duty to Defend and/or Indemnify

This week, our firm is excited to collaborate with guest blogger, Sheena Fitzpatrick of Walsh Carter & Associates, LLC, based in San Francisco.  Sheena is an insurance broker who routinely procures insurance for her startup and small business clients.

We met Sheena at a BNI meeting in San Francisco and instantly connected.  We were so grateful when she generously agreed to contribute to our firm’s blog.  In this blog article, Sheena discusses the types of insurance that business owners may want to purchase when starting their business.  Below Sheena’s discussion regarding policies, we generally discuss the process of tendering a claim or lawsuit to your insurers, and an insurer's duty to defend and indemnify your business.  

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Typical Insurance Policies for Emerging and/or Small Businesses
By: Sheena Fitzpatrick of Walsh Carter & Associates, LLC

There are many things to consider when deciding to open a new business.  Whether you are deciding to open a new construction company, an accounting firm, or a vegan bakery, one thing is certain --  you should know your industry, the types of typical risks your industry typically encounters, and how to go about limiting those risks for your business.

The entire premise of insurance is to protect you against the uncertainty of life.  Running a business is no different, as the complexity of your company becomes more enriched so does the need for your protection.  Know the "must-haves" of insurance policies to help set your business up for success: what they cover; who they cover; and why you may need it, generally speaking.

Employment Practices Liability Insurance ("EPLI")

• What’s covered: Employment practices liability insurance, also known as EPLI, covers your business against a variety of different scenarios that can develop as your company grows. This type of policy can also be thought of as your HR protection. This policy may cover your possible defense costs, and help rebuild reputation if an employee was to take legal action.
• Who’s covered: EPLI may cover your managers and supervisors against different types claims related to but not limited to: sexual harassment; wrongful termination; discrimination; FMLA violations, etc.
• Why you need it: The typical claim where a settlement is reached can average $250,000. This can occur from something as innocent as your manager not documenting hiring practices correctly. There was one case we know of where an employee felt he was being retaliated against by his employer when he was offered a promotion.  He filed a lawsuit, and the lawsuit ended up costing the business $1.7 million because they didn’t have insurance.

Cyber Liability

• What’s covered: Cyber liability insurance protects your business in today’s world of e-commerce and instant product verification. This type of policy can also be known as data breach protection. This policy may cover the costs of notifying customers of the breach, public relations, protection solutions, revenue loss and any legal fees correlated to the breach.
• Who’s covered: Whether you are utilizing cloud technology to store employee information or your customers are using your website to input their information when purchasing your product; these actions may be covered under a cyber liability liability policy.
• Why you need it:  Personally identifiable information can be stolen for many different reasons ,and it is your duty as the business owner to tell your employees or customers as quickly as possible. It can cost you up to $6.5 million to rectify a single cyber breach, which can result from something as simple as a stolen laptop.

Professional Liability

• What’s covered: Professional liability covers what is also known as “errors and omissions” on a broader scale.  This type of coverage will help rectify a situation where either the product/service didn’t have the anticipated result or didn’t match the client’s expectation. This protection generally covers time and money lost, repetitional injury, and any losses the customer faced in the process.
• Who’s covered: Professional liability coverage can range from covering accountants, real estate agents, business consultants, and attorneys.  Whether there was a clerical error or an inadvertent oversight of information, both you and your customer may be covered under this type of policy and prevented from facing additional hardship.
• Why you need it:  Mistakes happen, and client’s expectations can often be set to a bar that no one can meet.  Many contracts require this coverage because of the acknowledgement of human error in every industry.

Directors & Officers ("D&O")

• What’s covered: D&O insurance protects the board members of your business from being held financially accountable for their decisions while on the board.  Many people (vendors, customers, employees, competitors, and government regulators) might want to take legal action against the board members of a company both professionally and personally.  This policy may cover the defense costs and monetary damages associated with an error made by the board.
• Who’s covered: The board members of your organization can rest soundly at night knowing their personal assets are protected with D&O insurance.  
• Why you need it:  When operating at a level with directors and officers it is imperative to be able to retain a good team of board members.  Over 40% of directors and officers that work for private companies hope for higher levels of protection, and would be willing to move to an organization that has higher built-in safeguard such as D&O insurance.

Commercial Property

• What’s covered: Commercial property coverage protects the physical place where your business is located, whether it’s leased or owned. It also protects the property within the physical space, such as products, laptops, tools, or other equipment.  Commercial property insurance may ensure against any loss of income and property damage.
• Who’s covered: This insurance may cover the physical property and any personal business property located at the site.  This includes inventory of your businesses’ products.
• Why you need it:  Many commercial businesses are underinsured when it comes to their commercial property.  Having the right protection in place will ensure that your business will be back up and running in no time.

Commercial General Liability ("CGL")

• What’s covered: Commercial general liability, CGL, is the net for catching many things not protected by the above policies.  The protection includes bodily injury, damages, libel, and advertising injury.
• Who’s covered: This policy will cover customers, and guests who come in contact with your business and business products.  Whether a customer slips and falls on their way to the bathroom or if a product causes them to get sick; their expenses associated with that injury may be covered under a CGL policy.  
• Why you need it:  Having a CGL policy is imperative to having a smooth running business. If you are selling a product or service and the advertised price mistakenly says $1 instead of $100, your CGL policy may cover you for that error and make sure you don’t have to close your doors because of a typographical advertising error.  The above policies focus on the errors of employees at different levels of the organization, but CGL covers for customer error and the everyday “accident.”

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Tendering a Claim or Lawsuit and the Insurer's Duty to Defend and Indemnify
By: Smith Shapourian Mignano LLP

Tendering a Claim or Lawsuit

Having insurance in place is especially crucial in case your business is ever sued.  Subject to coverage concerns, your insurance carrier may cover your defense costs in a lawsuit and/or indemnify your business for any losses arising from a lawsuit.  For this reason, it is important to let your carrier know when your business is has been sued.  The most efficient way to do this is to tender the claim or lawsuit directly to your carrier(s).  If you’re uncertain how to go about doing this, you may choose to send the claim or lawsuit to your insurance broker and ask the broker for assistance in tendering the claim to the appropriate carrier(s).

The Insurer’s Duty to Defend and Indemnify

As a general rule of law, liability insurance usually imposes two separate obligations on the insurer:

1. To defend claims or lawsuits against its insured by furnishing competent counsel and paying attorney fees and costs; and
2. To indemnify its insured against third-party claims that are covered by the policy by paying for the settlement or judgment rendered against the insured.

The insurer’s duty to defend is generally determined from all of the information available to the insurer at the time of the tender of the defense, although later developments may impact the insurer's duty to defend.  The insurer’s duty to defend is broader than the duty to indemnify, and a bare "potential" or "possibility" of coverage is all that is necessary to trigger the duty to defend.
The duty to defend arises when the insured tenders defense to the insurer either: (1) formally, when the business delivers a copy of the claim or lawsuit to the insurer; or (2) constructively, when the business may not have actually provided the insurer with a copy of the claim or lawsuit, but the insurer had reason to know of the claim or lawsuit against the insured anyway.  

​Smith Shapourian & Mignano, LLP has acted as both insurance defense counsel and coverage counsel in the past, and is familiar with the process of tendering a claim or lawsuit to your insurance carrier(s).  We are available to assist your business during this process and/or with disputing or litigating a denial of coverage under your business’ insurance policies.  Feel free to contact us to learn more.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.