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For anyone going out on their own to start a small business, having appropriate business insurance is critical. Even more so is knowing the rules of fair competition.
“Mr. Beaver, my husband, Jerry, has learned the landscaping trade since graduating from high school, by working for a landscaping company in town. He plans to open his own business, offer jobs to several of the people he has worked with and then advertise that he now has his own company. Jerry and his boss never signed any type of an employment contract.
“I am worried. Jerry doesn’t care about having business insurance and said it would be too expensive for us now. Would you please do a story on why skipping business insurance can be a huge mistake?
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“I think it would wake up my snoring husband, and in addition to obtaining insurance, he needs to discuss his business plans with an attorney. Thanks, ‘Caroline.'”
‘We can’t afford it right now’ often proves to be a false economy
I ran Caroline’s question by veteran insurance agency principal Karl Susman, president of Susman Insurance Agency in California and a regular contributor to Kiplinger’s Adviser Intel.
I asked, “Why does someone like Jerry, who is going out on his own for the first time, need business insurance?”
“Jerry might be a great landscaper,” Susman noted, “but when insurance people hear, ‘We can’t afford it,’ as the reason for not obtaining small-business coverage, especially a new business owner, they know the reality is that anyone in Jerry’s situation can’t afford not to have it.”
He outlined the basic coverages that most small-business owners need. (Later in this article, I cover the risks Jerry faces if he tries to establish his landscaping firm the wrong way.)
Basic small-business insurance coverages
All it takes to seriously damage Jerry’s financial security is a personal injury claim from someone who says they tripped over a hose negligently left in the wrong place, Susman noted. Business insurance would protect Jerry. Without it, he would be facing potentially expensive litigation and medical bills.
Other coverages that protect small-business owners:
General liability insurance covers third-party claims of bodily injury, property damage and personal/advertising injury (such as libel) due to marketing activities.
Commercial property insurance protects rented/owned buildings, equipment, inventory and tools from damage or theft.
Workers’ compensation insurance is required in most states if you have employees. It covers medical expenses and lost wages for work‑related injuries.
If the employer does not have workers’ comp insurance, the employer would be personally liable for medical bills and could face criminal prosecution.
Business income/interruption insurance kicks in when a disaster interrupts operations and leads to lost income. Lacking insurance to cover ongoing expenses can result in permanent closure.
Professional liability insurance (errors and omissions) is extremely important for service‑based businesses and will handle claims of negligence or mistakes made during the performance of professional services.
For example, if Jerry’s employee damages a customer’s irrigation system, resulting in a flood that destroys property, errors and omissions coverage could save Jerry’s business from a costly lawsuit.
Commercial auto insurance is required for vehicles used for business purposes to cover accidents, damage or injuries. Personal vehicles used for business purposes are generally not covered by the owner’s insurance.
Cyber liability insurance is critical for businesses that handle customer data — for example, credit card numbers or driver’s license numbers. It protects in the event of data breaches or cyberattacks.
Why skipping insurance is a false economy
So, why would a business owner not have insurance? Susman said that insurance agents hear the following excuses, “often after it is too late”:
It’s too expensive. This argument is false economy. When you compare the cost of litigation, property damage or employee injury, to list a few, with the expense of business insurance, the insurance premiums would cost far less.
It’s not going to happen to us. That type of thinking is fine, until it isn’t. The cost of not having insurance is almost always higher than the cost of having it.
Legal issues facing anyone in Jerry’s situation
I ran the issue of Jerry competing against a former employer by a friend of this column, Southern California labor and employment attorney Jay Rosenlieb, who “sees these kinds of situations fairly often,” and underscored that, “yes, Jerry is free to open his own landscaping company, but he may not engage in unfair competition.”
Rosenlieb set out what that means:
- Even though Jerry has a right to compete in the landscaping field, he may not use his employer’s confidential information — such as a marketing plan, pricing, confidential employee information — customer lists, compensation and benefits information, internal operational guidelines.
- While they are still employed by his former employer, Jerry should not recruit coworkers or discuss plans that encourage them to leave, as even casual conversations could be viewed as solicitation if there is a suggestion to “come and work for me at my company.”
- Jerry should not use company time, phones or email to plan his business.
After leaving a former employer
Rosenlieb stresses the importance that, once he leaves his employer, “Jerry (should) not give the impression that he is raiding his former employer’s people.” He can, however, “announce his new business with ads, a website and on social media, and then former coworkers can reach out on their own. Directly contacting them could be seen as unfair competition.”
I asked Rosenlieb if Jerry should simply open up and discuss his plans with his employer. What would be the risk of that?
“Dennis, as Jerry has worked since high school for the employer, feelings could be very, very touchy, winding up with Jerry fired on the spot. It is a huge risk.”
The takeaway
To attorney Rosenlieb, “American business thrives on competition — on fair competition. Jerry is one fortunate husband, as his wife sees her husband’s need for business insurance.
“Before doing anything, (he should) arrange a consultation with a business attorney to help save him from costly mistakes that I have, unfortunately, seen impact marriages far too often.”
Dennis Beaver practices law in Bakersfield, Calif., and welcomes comments and questions from readers, which may be faxed to (661) 323-7993, or e-mailed to Lagombeaver1@gmail.com. And be sure to visit dennisbeaver.com.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.