Q. I am in the final stages of starting a driveway repair/replacement business. I can't seem to get a clear understanding of what types of insurance are either required by statute or others, or are needed by me for my personal benefit? Can you shed some light on this issue?
A. First let's address the question regarding which insurance is not required by statute or others but is for your personal protection. To insure or not to insure is basically a matter of evaluating the degree of risks involved in your business. Management of risk involves the control of risk, which normally involves one, or a combination, of three methods:
1. Assumption of risks (self insurance)
2. Avoidance of risks
3. Transfer of risks (business insurance)
Each method has its own good and bad points and its own place in assisting a business in managing risk. However, to manage any risk, it must first be identified.
To accomplish this first step you should obtain the counsel of a professional independent insurance agent, broker or insurance consultant for assistance. This will include an evaluation of how reasonable it is for you to assume some risks as well as the examination of what are the best ways to transfer risks (business insurance).
1. ASSUMPTION OF RISKS (Self Insurance): Assumption of risk means knowingly accepting some risks. There are some risks that are routinely assumed in the course of business. A good strategy will involve having your insurance professional assist in identifying these items/areas of risk and determining your ability to withstand potential loss from such instances. Sound strategy of risk management will include some assumption of risks simply because it is not economically feasible to insure yourself against all possible risks.
2. AVOIDANCE OF RISKS: One of the most effective ways of dealing with risks is to avoid them in the first place. In some instances when a risk cannot be entirely avoided, it can be minimized. Careful planning and sound management are key elements in avoiding risks. This may require careful selection of your location so that you minimize the chances of flooding, break-ins, or theft. It may even involve locating in a developed area to assure adequate fire and police protection. Also, prudent planning may show that installing a sprinkler system could be a wise investment due to the "break even" point of reduced fire insurance premiums. All of these are examples of how the avoidance of risks can be important to your business in terms of reducing the cost of losses.
3. TRANSFER OF RISKS:
Transfer of risk involves the shifting of the cost of loss to another party and is a common method of handling certain identifiable risks. This most common way this is done is through purchasing some levels of various business insurance. Unfortunately, a transfer of risk can be made to you, the business owner, when you have no desire to assume such risks. A common place for this type of a transfer of risk to take place is by contract between parties to a lease. A lease typically contains agreements as to who is responsible for the maintenance of the premises, who is responsible for loss or damage to the premises and who is to maintain insurance for the premises. Because the "who is responsible" part of leases can be confusing or easily misunderstood, you should have your insurance professional or a lawyer examine the lease and make certain you understand all facets of it before you agree to its terms.
In addition to the foregoing there are some insurance coverages required by statue; by lenders; by customers or suppliers; or by common sense.
1. REQUIRED BY STATUE
A. Workers Compensation: In Texas, Workers Compensation insurance is not required by law, as you can be self-insure this risk. In any event, you will be held responsible for income, medical and rehabilitation costs for injured workers.
B. Automobile Liability: Provides coverage for liability for bodily injury or property damage to another party resulting from the use of your motor vehicle.
C. Surety Bonds: Required by state and local governments for certain products or services sold.
D. Crime Insurance: Fidelity insurance required by the federal government to insure the assets of certain employee benefit plans.
2. REQUIRED BY LENDERS
A. Property and/or Life Insurance: Depending on the type of loan and the collateral, certain insurance may be required to cover the lender's interest.
3. REQUIRED BY CUSTOMERS OR SUPPLIERS
A. Property Insurance required to cover customer's or supplier's items left in your custody. Examples, (1) customer's auto left in a garage or (2) inventory left by supplier on a consignment basis.
B. Liability Insurance often required before allowing a business to perform its services on the customer's premises.
C. Workers Compensation Insurance. Most General Contractors require their subcontractors to show proof of having this coverage.
There are other insurances you may want to consider after consultation with your insurance professional. Some are Cargo Insurance, Crime Insurance, Business Interruption, and Professional Liability, also called "Malpractice" insurance.
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JWB Interest, LLC 2012 All Rights Reserve
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