Every business owner knows that his or her company needs insurance. While all businesses have insurance, it’s also important to take the time to identify the right types of policies that will respond to the different types of claims a business may face.
“At the end of the day, you want to be overinclusive when it comes to insurance,” says Steven J. Ciszewski, a partner with Novack and Macey LLP. “Try to cover anything and everything. It’s a lot easier to narrow down your coverage later on than it is to expand it.”
Smart Business spoke with Ciszewski about business liability insurance, how to ensure that you’re properly covered and what to do in the event that you are sued.
What is the first thing a business owner needs to do with respect to insurance when the business is sued?
The most important thing to do right away is to identify the proper insurance policies that might apply to the particular situation. Let’s assume that a third party is suing your business. In that case, there are two types of liability policies that you could have: a claims-made policy or an occurrence policy.
If you have a claims-made policy and you get sued in 2010 for something that happened in 2008, the policy that is in effect for 2010 will apply, because that’s the year in which the claim was made. On the other hand, if you have an occurrence policy, the policy that was in effect in 2008 would apply, since that’s when the events or occurrence at issue took place.
What is the next step after identifying the proper policies?
Make sure you provide timely and proper notice of the event to all of your insurance companies. To make sure you get that right, you need to know and understand the policy itself and the state laws that apply to that policy.
For example, some policies require you to notify the insurance company immediately, while others say to do it ‘as soon as reasonably possible,’ or something similar to that. But, in any case, the sooner you let the insurance company know, the better.
What are the consequences of not notifying the insurance company promptly?
The worst-case scenario is that you lose coverage entirely. Even if your policy says it would otherwise apply when you provide late notice, you could be in jeopardy of losing coverage.
A big issue with notice is whether or not, under state law, the insurance company needs to show prejudice in order to avoid coverage because of late notice. A typical example of prejudice is when the underlying case against you is over with or has advanced so far along that the insurer can’t meaningfully participate in the defense of that claim.
When it gets to that point, even if you are in a state where insurance companies need to show prejudice to avoid coverage, you’re still in significant jeopardy of losing coverage.
