Insuring your nontraditional business requires a few nontraditional steps.
Any entrepreneur starting a new business has a lengthy to-do list, from top-level, strategic decisions such as creating a business plan and devising a marketing strategy, to myriad logistical details such as locating a facility, putting a distribution system into place, hiring employees and, of course, purchasing insurance. For many firms, this last item requires a few straightforward phone calls and online inquiries to compare rate quotes before writing a check. For others, however, this task becomes more complicated, as they quickly realize their business doesn’t fit into a typical online application or inquiry form.
And if a company’s day-to-day operations carry a greater risk than a traditional service or retail operation, finding the right insurance can be a tricky proposition. For companies that already have connections in their industry, referrals to insurance companies willing to work with a higher-risk venture can be key to finding appropriate coverage. For others, simply tapping into industry information like trade journals or industry-specific conventions can lead the way.
“We do a lot of advertising in trade publications, we do public speaking and we’re sponsored by many of the major associations in the industries we target,” says Susan Preston, president of Professional Program Insurance Brokerage (PPIB), which was formed in 1993 to insure cutting-edge industries such as permanent cosmetics, tattoo and body piercing shops, laser centers, med-spas and tanning centers. “We’ve just done a lot of things to support [those industries]. Consequently, those industries have been very supportive of us.”
One reason for the support has been PPIB’s thoroughness in studying the industries it covers, including understanding the risks and any extra coverages needed—and, simply, the nature of the businesses. It seems to be working, as PPIB is known as the insurance broker for the tattoo industry, for example.
“I managed two shops in Santa Rosa before I came here, so I already knew the ins and outs of insurance,” says Jon Gerhard, owner of Lucky Drive Tattoos in San Rafael, which employs two additional tattoo artists. “It’s a funny industry—a lot of word-of-mouth. We all know each other. If we don’t know each other first-hand, we know each other’s names just because it’s such a small industry.”
Know your market
If going through referrals, trade publications or conventions doesn’t yield results, coordinating with a trusted broker can be the best bet. Generally, business insurance falls into one of two categories or “markets”: admitted and non-admitted.
By law, an insurance agent must first attempt to “sell” the risk (that is, the business’ insurance liability) within the admitted market, which is the range of insurance available through admitted companies (State Farm, Farmer’s, Fireman’s Fund, Safeco, Hartford and Traveler’s, just to name a few). For a broker to perform legal due diligence, he or she needs to attempt to obtain coverage through a minimum of three carriers that are directly regulated by the state in which the business exists.
The non-admitted market, sometimes called the excess or surplus market, covers companies that cannot be insured through the admitted market, either because of an unusual amount of risk or simply because the type of coverage needed isn’t currently written by California’s admitted market. Some examples of coverage currently served by the non-admitted market include motorsports, athletic events, and certain camps and tour companies. Perhaps a bit more surprisingly, non-admitted policies are required for many professional liability exposures (errors and omissions), product liability for smaller to mid-size manufacturers, and even directors and officers of for-profit companies that potentially face lawsuits regarding improper use of funds. (This last one has recently turned into a hot topic.) Even within the non-admitted market, though, California brokers are required to choose companies that are off the “LESLIE” list (List of Eligible Surplus Line Insurers), an approved list of excess and surplus insurance companies.
“[The non-admitted market] is typically serviced through a surplus broker who has a relationship with the non-admitted carrier,” explains Kent Schaum of San Rafael-based McNamara Insurance Services Inc., which has agents across five Western states writing property/casualty, life insurance, bonds and disability products for both personal and commercial lines. “Those risks are actually placed through an intermediary wholesale market. The surplus broker typically doesn’t have direct communication with the end risk. The business contacts the retail broker, the retail broker shops through the surplus broker, and those surplus brokers then shop the risk to various markets they have relationships with.”
Some of the hundreds of companies in the non-admitted market include Lloyds of London, United States Liability Insurance Company, Colony and Scottsdale Insurance Company. These companies have specialized programs for each type of risk they cover. A particular type of risk may not come up frequently enough to justify a rate filing in each state, from an actuarial standpoint. However, there may be enough of that same risk across the country to give these non-admitted companies an idea of how much to charge and let them run a program on a national basis.
Insurance companies that cover non-traditional industries also need to remain flexible and open to the continual changes that are often the hallmark of these types of businesses.
“There are constant changes—constant new products coming in and new services being considered [in the med-spa and beauty industries, for example]—and so we have to be willing to look at everything new and determine if it’s something we think we should insure,” says Preston. “Most insurance companies and brokers aren’t able to respond when something new comes up.”
Know where you stand
No matter what market a company’s risk will fall under, brokers warn against several false assumptions that business owners typically make when purchasing insurance. First, many believe that, if they have insurance coverage, they can’t be sued. In reality, the fact a business has coverage has absolutely no bearing on whether or not a suit can be brought. Second, some believe that liability waivers or a business entity, such as a corporation or LLC, will protect or prevent against any legal action.
“It’s been my experience over the last 20 years working with claims that, typically, when some entity has suffered an economic loss such as bodily injury or property damage, or a contract fell apart, for example, that person will seek legal remedy to see what sort of economic recovery they can get to minimize the loss,” says Schaum. “Rarely do I see plaintiffs pursuing their case strictly for a profit motive. They’re typically looking to recover some mounting cost or obligation. As a result, they’re using these remedies to either collect for something that could be very straightforward, like a tort, or they’re trying to bring suit just for the cost of defense, which can be quite formidable. If you’re facing the certainty of paying $100,000 defending it, maybe you’ll be willing to pay $10,000, $20,000 or even $40,000 to have it resolved.”
So, the bottom line is, a business owner should purchase insurance coverage as a tool of risk management, with an understanding that it won’t provide absolute protection from litigation, but that it will provide some money to offset the cost of defense and indemnification.
Another mistake some people make when choosing business insurance is making the assumption that the carrier will act as their attorney.
“Your attorney is strictly an advocate for your position,” explains Schaum. “The insurance carrier has to look at it a little bit differently. They conduct an independent investigation, and if they feel there’s merit to the allegations being presented—and that there’s coverage—they may enter into settlement negotiations against your wishes. [Settlement is usually made with no admission of wrongdoing on behalf of the insured; the exception to this is some professional liability policies, like malpractice, which requires the insured’s consent to settle.]
“Someone may think, ‘It’s my insurance company; why aren’t they defending me? Why aren’t they protecting me? They just rolled over.’ But the insurance company is making an independent economic decision. Its duty to defend is greater than its duty to indemnify, and it’s basing its decision on what’s being alleged. The company will hear both sides of what’s at issue and then make a decision of whether it’s defensible.”
Sometimes, cases simply have to be settled. Take the case of a tattoo of the Mexican flag that was accidentally put on backward. Given the difficulty of lasering tattoos off of dark skin, PPIB had to settle the claim for $35,000 simply to resolve it.
“Another thing we’re seeing a lot of lately is, for some unknown reason, a lot of women like to wear stiletto heels in tattoo shops,” says Preston. “I’ve had two stiletto heel claims in the last year and a half. It’s the strangest thing—they tripped on something, because they were wearing stiletto heels, and they blamed it on the tattoo shop. [The plaintiffs] almost never win those, because once you wear those heels, it’s already presumed that you could trip—but they sued my shops twice. One time it cost us $50,000 to defend it.”
Go your own way
So what happens when an entirely new business or industry simply can’t find a company that can provide insurance coverage? The answer might be to contact a company that specializes in unusual businesses and have a new policy designed specifically for your venture.
“That’s exactly what we do,” says Preston. “We design and write insurance policies. While other people may do art or write music, in terms of what makes them special as far as a talent, I write insurance policies!
“Interested businesses can certainly contact us, and we can steer them in the right direction. If an insurance broker wanted to put a group together or had a special industry they knew needed insurance, we could probably help with that, too. If insurance becomes really hard to find, that’s when we like to step in and help.”
Sometimes it’s not the newness of the business or industry that makes obtaining insurance difficult, but simply the nature of the laws surrounding the industry.
“In recent years, our biggest challenge has been the public utilities commission, which instituted some rules that the insurance companies really couldn’t comply with,” says Scott van der Horst, owner and chief pilot of Santa Rosa-based WineCountryBalloons.com, which offers hot air balloon tours over the Sonoma Wine Country.
“Commercial hot air balloon operations became subject to the same types of insurance requirements that commercial airlines were mandated to have—and there were hoops that were almost impossible to jump through. So there was a point, about three years back, where it looked like there was no possible way to get an insurance policy that would comply with California standards, and our whole industry in this state was at risk. We had to go to the state and have some laws changed a little bit to take certain responsibilities off the public utilities commission. We had to lobby and get a bill passed, and that was somewhat successful.”
(van der Horst is referring to AB2430, which successfully resolved the unintended regulatory consequence on a longstanding—but previously unenforced and largely unknown—provision of the CPUC code that put commercial balloon operators in the same category as all other commercial air operators with regard to liability insurance. However, unless a statute is enacted to extend the bill, it’s scheduled to expire in January 2009.)
The going rate
Should someone entering an entirely new industry or starting a business in a non-traditional, perhaps higher-risk industry, expect their rates to be a lot higher? “Not necessarily,” says Preston, who says she can get insurance for a one-artist tattoo shop, for example, for not much more than $1,000 per year.
“I’ve actually asked friends of mine who have auto body businesses, and I think it’s about the same [as a tattoo parlor],” says Gerhard. “It’s about $700 to $800 per year [per additional tattoo artist].”
Schaum agrees that premiums in nontraditional businesses may not be much different from premiums in traditional industries, but warns there may be additional fees and charges that can make one’s overall insurance costs higher. “You almost always have a deductible or retention [for liability coverage in non-admitted policies], whereas liability for the admitted market rarely has a deductible,” he explains.
“The defense costs may be within the limit, whereas, in the admitted market, the defense costs typically are outside the limit. This means, if you have $1 million in coverage and spend $500,000 on a defensible lawsuit, you only have $500,000 left to pay the other party. There are also certain fees and taxes associated with the surplus market, and typically you have broker’s fees. There are also more creative fees; I’ve seen policy fees and inspection fees [to verify what you’re doing and as an opportunity for the carrier to make some recommendations]. So the additional fees in the non-admitted market, when added in, tend to make it more expensive. But the base premium isn’t necessarily higher.”
On the bright side, it appears that whatever new business an entrepreneur can devise, there will be insurance companies working to create new policies to support the venture.
“You have to keep reinventing yourself in the insurance business to stay ahead of the game,” says Preston. “And that’s what we’re always trying to do.”
