Business Insurance: Part One
As I write this, locales throughout the world are in varying degrees of “stay-at-home” orders to combat the COVID-19 pandemic. Some of us are able to continue working, at least in a limited capacity, while others have found ourselves with time to catch up on housekeeping items like bookkeeping and copyright registrations. One frequently overlooked aspect of your business, however, could have serious implications on the future viability of your business, and now is the time to make sure you are not placing yourself at risk. I’m referring to business insurance.
In this two-part series, we’ll cover some basics of insurance, anatomy of a typical business insurance policy, understanding the different types of coverage, questions to ask your insurance agent, and potential issues that are often overlooked. Part One will focus on the basics of insurance—what it is, why we need it. Part Two will include an in-depth explanation of insurance terms and coverage types to help you when consulting with your agent. There’s a lot to cover here, but it’s worth your time to understand how to best protect your business.
DISCLAIMER: I am not an attorney or a licensed insurance agent. This article is not legal or financial advice and should not be treated as such. You will see words like “typically” and “generally” used throughout, because some or all of the topics discussed here may not apply to your specific situation. This article is meant only to provide helpful talking points for a conversation between you and your insurance agent and/or attorney. It’s also worth noting that the topics discussed here are based on U.S.-issued insurance policies and may not translate to policies issued in every U.S. state or other countries.
What Is Insurance?
In the simplest terms, insurance is the sharing of risk to protect against financial loss. Premiums are collected according to the individual’s financial risk to the carrier and the funds are pooled in a reserve to pay claims when they arise. Roughly 80 cents of every premium dollar collected goes to pay someone’s claim, with the remainder used for administrative and other operating expenses. The insurance company can make money by paying out less in claims and expenses than it earns in premium (underwriting profit), and/or by investing the available funds and earning a return (investment profit). Many large companies actually pay out more in claims than they earn in premium (underwriting loss), but due to large cash reserves, their investment profit keeps them in a strong financial position. There are some variations depending on how the company is organized, but the underlying concept is the same.
If and when a covered cause of loss, or “peril,” happens, the insurance company indemnifies you against that loss, meaning they will pay the expenses associated with shielding you from financial injury. Depending on the type of insurance, that could mean repairing/replacing your damaged property, defending or settling a legal dispute on your behalf, providing you with money to live off of while you are unable to work, or a number of other protections.
Let’s take home insurance as an example. Most people could not afford to buy a new house if theirs burned down; even if they could, the financial loss would be catastrophic. Because the risk of any one person’s house burning down is fairly low, a large number of people each contribute a smaller amount of money (their premium) to a central pool of funds that is used to cover the expense of repairing or rebuilding each person’s house in the event of a fire. Without home insurance, mortgages would likely not be possible, since lenders would be unable to assume the risk of losing both the mortgage repayment and the house that secures it.
Fun fact: The reason home insurance is casually called “fire insurance” is from the olden days before fire departments were paid through taxes. Homeowners would buy a fire policy that would give them a shield to display in their front window. This told the then-private fire department that if your home was on fire, they were authorized to put it out. Without that shield, they would drive right past your house as it burned to the ground. This went on until locales eventually figured out that letting one house burn to the ground tends to affect the houses next door as well. Thus, fire departments became public services.
An important concept to understand is that your cost of insurance (premium) is always relative to the insurer’s calculated risk. Continuing with our home insurance example, as wildfires become more frequent and severe in certain parts of the country, the risk of a given house catching fire becomes greater. This causes insurance companies to take rate increases, which can even affect people who’ve never filed a claim in their life. It’s not that they did anything wrong; it’s that the risk to the company simply increased, whether that is driven by the likelihood of a future claim occurring, costs of labor and materials involved in repairing/replacing the property, medical costs, or any other factor that affects what the insurance company might have to pay out.
When I worked in insurance, people would often call to ask why their premium increased, telling me they had never “used” the insurance. What they meant was that they never filed a claim; however, we use insurance every day the policy is in effect. Your insurance policy is a promise from the insurer that if a claim happens, they will be the ones on the hook, potentially to the tune of hundreds of thousands or even millions of dollars. The risk they assume is what you’re paying for, and when that risk increases in value, your premium will increase.
A business insurance policy is much different than a home policy, but the end goal is the same: to protect you from financial injury associated with sudden and accidental losses arising from the operation of your business.
Why Do We Need Business Insurance?
Insurance can be a very dry topic, especially for creatives. Most of us know we should have it, but our eyes glaze over when we get to the details. It’s almost comical that we will spend hours scouring user forums obsessing over every feature rumored to be included in the next big camera release, yet won’t give a second thought to making sure that a simple accident won’t ruin what for most of us has taken years to build.
Here are some of the many reasons why a proper business policy is critical to the success of your business:
Without insurance, there are countless scenarios that could ruin both your finances and your reputation in one fell swoop. What would you do in these situations?
- A client trips over a power cord from your flash, causing them to fall down a flight of stairs and suffer injury
- Your assistant knocks into a light stand, causing your strobe to shatter the homeowner’s expensive vase
- You leave a door unlocked when leaving a shoot; as a result, a burglar enters the property and steals the homeowner’s jewelry collection
- Your client spends $20,000 on models, prop styling, and other expenses for a shoot, but your memory card becomes corrupted and the images are unsalvageable
- Your equipment is stolen from your locked vehicle
Innocence doesn’t pay your attorney fees.
Unfortunately, whether or not you are ultimately liable in a given dispute has nothing to do with whether someone can sue you, and in most cases, you are unlikely to recover your attorney fees even if you are vindicated in court. Not too long ago, I observed a discussion about the buyer of a property who, upon moving in, demanded the listing photographer remove the photos from his website portfolio, citing “privacy concerns.” Most photographers would find the buyer’s demand to be ridiculous, but apparently, his attorney didn’t think so. After receiving a demand letter, the photographer elected to remove the images to avoid a legal dispute.
Though I suspect the photographer would have eventually prevailed in court, the keyword here is “eventually.” People with ego, money, and an axe to grind, particularly if they know they will ultimately not win, will make it their goal to drain you of your own financial resources by way of prolonging and obfuscating the process, barraging you with endless discovery requests and the like. Note that even if you win, the other side may be able to appeal. Not that I advocate provoking litigation, but with proper insurance, if you found yourself in this situation, and the images were important to your portfolio, you could make an informed choice, knowing that if a claim arises, you can engage your insurance company to either defend or settle the claim. Two hours of an attorney’s time will likely exceed what you would have paid annually for an insurance policy.
Your clients and vendors will often require it.
Many businesses, venues, and homeowners will not allow you onto their premises without proof of insurance, usually requiring themselves to be listed as an “additional insured.” Occasionally, this doesn’t come up until everyone has pulled up to the photo shoot. Certificates of insurance are generally easy enough to obtain in an emergency, but what if you don’t have insurance at all? Embarrassment will be the least of your problems. Even if you prefer to play fast and loose with the financial future of your business, you will find that insurance is often a prerequisite to working with professional clients. The same is often true in situations such as when you rent photo equipment. In many cases, the rental company will require proof that if the equipment is damaged, someone will be able to pay for it.
Your financial future may depend on it.
In 2011, I worked for a major property and casualty insurance carrier, which required that I obtain my insurance license in P&C. Customers frequently called with questions about their policies, including coverage questions like, “Does my policy include _?” Unfortunately, many of these questions only came up after a loss had occurred, leaving the customer exposed to serious liability or financial loss. I could often feel their mounting nausea when they learned that their claim would not likely be covered or that their policy had cancelled a few days ago due to non-payment. For many photographers, a single lawsuit would render them bankrupt. For those with a home or other significant assets, it could mean the forced sale of their home or surrender of their life savings. Don’t let yourself be placed in this situation.
Your Home or Renter’s Policy Won’t Cut It
Personal insurance policies are designed for the typical consumer’s needs, so they will exclude coverage for situations that present an abnormal risk when additional premium isn’t being collected for it. Most people don’t own a $25,000 watch (I mean, maybe you have three sitting in a drawer at home, but you would be the exception). The risk of having such a valuable item stolen or destroyed isn’t built into a typical homeowner’s policy, so there will be special limits placed on categories like jewelry. In fact, there may be as little as $1,000 in coverage for a loss related to jewelry, unless the policyholder buys additional coverage through a floater, an add-on to the policy that provides broader coverage for the agreed value of specific items. Similarly, unusually valuable items like professional cameras, lenses, and other specialty equipment would generally be limited or excluded from coverage. A camera floater is a great way for hobbyists to protect their equipment, but if photography is your business, a personal floater is simply not meant to cover the risks your equipment will encounter in the normal course of business.
Moreover, personal policies typically exclude coverage entirely for losses incurred during the course of business operations. Don’t count on the “personal liability” section of your homeowner’s policy to indemnify you in the event your light stand tips over onto an expensive crystal vase while at a shoot. If you are currently utilizing a personal insurance policy to protect your business, I implore you: make an appointment with your insurance agent right away.
Where to Begin Your Search
Now that I’ve brow-beaten you about the risks of not having a proper business policy, you’re probably wondering, how should you begin your search? In Part Two of this series, we’ll go over some considerations in getting accurate quotes, as well as questions you should ask your insurance agent to ensure a fair comparison between quotes. For now, if you don’t already have a policy, referrals from colleagues are a good way to assemble a list of companies to check out.
Many companies that offer personal auto and home policies also have commercial divisions. You can reach out to your current insurance agent to see what options might be available, but be aware that commercial policies can be a bit tricky. Unlike a personal auto policy, commercial policies are constructed in such a way that they are more customizable, but also more complicated. There are types of coverage available that are specific to car dealers, manufacturing facilities, restaurants, and other industries, so it’s important to make sure your policy includes all the coverage types that apply to you. For this reason, some companies have put together pre-assembled package policies that cater specifically to photographers. Hill & Usher, a popular agency for photographers, offers their PackageChoice policy in conjunction with the insurance companies they represent, which comes pre-configured to meet the needs of most photographers, but is further customizable.
As you build your list of companies to investigate, there are many factors to consider, including the rating and reputation of the insurance company. There are four major independent agencies that rate the financial strength of insurance companies: Moody’s, A.M. Best, Fitch, and Standard & Poor’s. Each agency has its own criteria and rating system; for example, A.M. Best’s highest designation is A++ for “superior,” whereas Fitch’s is AAA for “exceptionally strong.” The ratings are considered opinion-based and indicate the company’s ability to pay claims. Insurance companies are often put to the test when many claims arise at once, so it’s important to know how each company compares to its competitors. Note that just because the company is able to pay your claim, that doesn’t necessarily mean the issue will be resolved quickly and to your satisfaction. Check out reviews for each insurance company you’re considering to make sure they have a reputation for good customer service, as well as resolving claims quickly and fairly.
Spend some time assembling your brief list of companies and doing some basic research. That will make the process much more straightforward when you begin requesting quotes. In the meantime, stay tuned for Part Two of this series, where among other topics, we will delve into the specifics of what to look for when requesting and evaluating quotes.