Chapter 11: Managing Risk
We went back and forth on whether to include this chapter. Why? Because all kinds of business planning can be considered forms of risk management, and we don't want to promote the idea that managing risk is an isolated activity. After all, the reason most business owners seek advice about how to operate is to prevent business failure, and 90 percent of businesses that fail do so because of cash flow problems .
Translation: managing your finances to reduce the risk of insolvency is perhaps the most important risk management activity you can do. One way to manage your finances is to plan for worst-case scenarios. That's where business insurance comes in.
Here's an overview of the two business insurance policies you should consider when you're just starting out as a business. (Note: "business" insurance doesn't include health insurance. If you don't have health insurance through an employer, read about Affordable Care Act coverage requirements for small businesses and sole proprietors.)
The Benefits of Business Insurance for IT Professionals
As we mentioned in Chapter 2, business insurance adds a layer of protection to your business. If you're operating as a sole proprietor, that protection is essential because all of your business risks pass through to you, the owner. In other words, if an angry client sues you for failing to do your job as agreed, your personal assets (car, home, savings account, etc.) could be seized to pay any judgment against you.
The main benefit of business insurance is that it provides money to cover settlements and judgments. So if you're found liable for $500,000 in a professional negligence lawsuit, your Professional Liability policy can cover the entire amount (minus your deductible), and all your assets remain intact.
Beyond protection in a worst-case scenario, though, business insurance can help your bottom line in other ways. One major benefit of carrying insurance is that it boosts your credibility with potential clients. Think about it: if you were going to hire a one-person contractor to do a project for you, would you choose one who could offer proof of insurance coverage or one who couldn't?
We all know that things go wrong unexpectedly, even when you do your work perfectly. Having business insurance means that if and when something goes wrong, your client can recover enough money to make up for their losses. In other words: your client doesn't have to worry about the court putting a lien on your house and car and draining your bank account to cover the $500,000 it decides you owe. When a client sees that you're insured, they know that the insurance carrier will pay the whole bill.
Which Business Insurance Policies to Buy
Realistically, if you're operating as a sole proprietor, a freelancer, or a 1099 contractor in a technology field, you'll probably only need two insurance policies:
- A Business Owner' Policy (BOP): This policy actually combines two types of insurance, General Liability and Commercial Property, and through the magic of bundling, offers a slight discount on both. The General Liability portion of the coverage protects you against third-party injuries and property damage that happen on your business premises (e.g., if the UPS delivery person slips on ice and breaks a leg while delivering a business package to your home office). The Commercial Property portion protects your business equipment (computers, printers, office space, furniture, etc.) from theft and certain kinds of damage. Note that if you have a home office, your homeowner's policy likely won't cover business-related damages.
- Professional Liability Insurance (also called Errors & Omissions Insurance): This policy covers you when clients sue you over financial losses caused by your professional work or negligence (or by something they perceive as your work or negligence — remember, not all lawsuits are valid, but they all cost money). For IT professionals, most E&O policies include third-party Cyber Liability Insurance, which protects you when one of your clients experiences a data breach and tries to get damages from you because they believe your work caused, enabled, or failed to prevent the breach.
What Does Small Business Insurance Cost for IT Professionals?
As with any type of insurance, the cost of your business insurance will depend on the specifics of your business: what kind of work you do, where you do it, how much experience you have, etc. But we can offer averages based on data from current and former insureon customers:
- Yearly BOP premiums are typically about $500. This includes a coverage limit of $2 million.
- Yearly Professional Liability premiums average about $858. This includes a coverage limit of $1 million.
That means you may be able to cover your business for about $1,358 per year (which is less than $4.00 per day).
To put that cost into perspective, here's what it costs to get sued:
- $2,000 to $5,000 for frivolous lawsuits [PDF]. If a client sues you without good cause and the court dismisses the case, you can still expect to pay thousands in legal fees.
- $475,000 for a technology dispute that goes to court. While that's probably far more than you could afford out of pocket, it's well within the $1 million limit of the typical Professional Liability policy sold to IT freelancers and small businesses.
So… How Likely Is a Lawsuit?
It's true that your chances of being sued aren't high. Lawsuits are rare even when things go wrong, and maintaining open lines of communication with clients throughout the life of a project can help ensure that a botched performance doesn't lead to charges filed.
But for $4 a day, we hardly think being sued is worth the risk, especially in the age of data breaches. Here's why: we've mentioned in this guide that many of your clients will likely be less tech-savvy than you are. That's a good thing because it's why you're able to do business. But it's also a dangerous thing. When one of your clients suffers a data breach, for example, they will have tremendous expenses on their hands: the cost of investigating the breach, revamping their security, notifying customers, paying for credit monitoring, and rebuilding their reputation. If they don't have Cyber Liability Insurance, they may have very few options for covering those expenses. One option, of course, is to push the liability to someone else. Someone, say, who helped set up the system that was breached or recommended the cloud software that was hacked.
While you may not actually be responsible for the breach, your client's lawyers will likely try to sue "everyone in the room," so to speak. It's a common strategy: sue everyone involved and you're sure to have sued the person who's liable and will have to pay for damages. But even if the case against you is eventually dismissed, you can expect to pay up to $5,000 to establish your innocence.
If you've been forking over that $4 per day, your insurance policy will take care of that cost. If not… well, let's just hope you've got some cash in the bank.
Next: Chapter 12: Scaling Up