Insurance Basics

If you're just starting out in business, the whole subject of insurance can be rather confusing. To put things into context, here's an overview of the various players and what it is that they provide. Let's start with the insurance companies themselves.

Insurance Companies

Insurers issue insurance policies and are often referred to as carriers because they carry (assume) risk for you, the policyholder. A carrier accepts responsibility for the financial consequences of loss or liability in exchange for your payment of a premium. The dollar amount of that premium will reflect the probability of the specified loss ever taking place. If a covered economic loss does take place, the insurance company has promised to pay up to a specified sum of money. In the meantime, insurance companies invest the premiums that they receive. This generates significant investment income for them.

So, what types and what levels of insurance should you buy for your business? The insurance payments that you make will be an overhead expense for your company, so of course you'll want to proceed cautiously. As a business owner, you must weigh the ongoing expense of the insurance against the potential cost of a one-time uninsured loss. Most businesses buy different kinds of coverage from several different providers. This is because there are three different types of insurance companies and your needs span all three categories: property-casualty, life and disability, and health insurance.

In the U.S., the government closely regulates the insurance industry. Property-casualty companies and life and disability companies are largely regulated by the fifty states. Health insurance must follow basic federal government regulations, but states can and do impose additional regulations. Every state has a Department of Insurance that monitors and regulates every insurer operating within the state's borders. In addition to licensing insurers, approving rates and setting minimum levels of coverage for each type of policy, the state's insurance department issues operating licenses to agents based on their ability to meet requirements for conduct and knowledge about insurance issues. For a list of these state departments of insurance, visit the site of the National Association of Insurance Commissioners at www.naic.org. The site has a map of the U.S. with links to all of the state websites. Since legal requirements vary, the exact policy options available to you will depend upon your location. This is why some large insurers actually consist of multiple companies. They may share an overall brand, but each business unit is separately organized in order to conform to different state insurance codes and regulations.

The financial strength of each insurance company is monitored closely by the investment community. As a purchaser of insurance, you'll want to be aware of this as well. If you're going to sign a policy with an insurer, their stability and long-term financial strength are very important factors for you to consider. You may need to file a claim at some point in the future and you must have confidence that the company is going to be there. For example, if you ever become disabled, your own cash flow will be dependent on the insurance company that you selected. Several independent rating services track the financial strength of insurers, including Standard & Poor's, Moody's and A.M. Best. Each insurance company is assigned a financial strength rating on a thirteen-step scale. The scale ranges from a high rating of A++ (superior) all the way down to the lowest rating of D (poor). More information about the rating process can be found at www.ambest.com.

Insurance Agents

So how do you go about shopping for a policy? In general, insurance companies use two major marketing channels. Most insurance sales are done through outside agents. However, some companies choose to do their own direct marketing and sales. For example, if you contact GEICO or USAA, you'll be speaking with a salaried employee. As a business customer, it's much better for you to use an outside agent who can provide you with guidance and advice. The services of an agent will be free to you. Agents receive their income in the form of commissions from the insurance companies. The commissions are calculated as a percentage of the premium for each policy that they sell. Many agents distinguish themselves from their competitors by going through professional training programs that qualify them to use professional designations on their marketing materials. Perhaps the most prestigious one is CPCU, which stands for Chartered Property Casualty Underwriter. It indicates that the agent has successfully completed a series of college-level professional courses and passed a rigorous national exam.

There are two main types of agents: captive agents and independent agents. A captive agent is a representative of a single insurer. For example, State Farm and Allstate primarily use captive agents. A captive agent is obliged to submit business only to the company that he or she works for. In exchange, the insurer provides the agent with an expense allowance that covers some of the costs of maintaining an office, and may provide other benefits such as a pension. In contrast, an independent agent is a contractor who represents several different insurance companies. The typical independent agent has ongoing relationships with about eight companies. This means that he or she can obtain competing quotes. An independent agent will analyze your needs, then put together a combination of policies from the different carriers that they represent. Independent agents pay all of their own agency expenses out of the commissions that they earn from policy sales. To find an independent agent, visit the Independent Insurance Agents of America at www.independentagent.com. The site has a searchable database of local listings.

A broker is different from an agent. A broker is not working for the insurer—he or she is working for you. Because brokers represent the buyer rather than the insurer, they can conduct a wider search of the market to identify the best sources for each of your insurance needs. They can investigate competitive alternatives from a broader range of reputable carriers. In essence, a broker is an intermediary who can help you to prepare applications to multiple insurers. However, some insurance companies will only accept applications from brokers with whom they have an ongoing relationship. When a policy is sold, the insurance company will pay the broker a commission called a brokerage fee. You should also be aware of a legal limitation: because brokers are not formal representatives of insurers, any wrongful act of a broker is not the legal responsibility of the insurance company.

Employee Benefits

OK, so what exactly are you shopping for? Let's start by discussing health-related issues. Employee benefits, even for a one-person company, should include health insurance (plus dental and vision coverage if possible), life insurance, and long-term disability coverage. The purpose here is to protect the individual worker. If you are a freelancer, you'll be shopping around for an individual health insurance policy like those available from Blue Cross. Lots of information about health insurance is available on the Internet. Commercial sites such as www.insure.com and www.insurancetracker.com are online databases of medical insurance providers. By filling in a form you can get comparative quotes. Unfortunately, premiums for individual policies are much higher than premiums for group policies. If you're a freelancer, it's smart to look around for an existing group plan that you may be eligible to join. Many university alumni associations, as well as professional membership organizations like the Graphic Artists Guild, offer their members access to group health plans on a state-by-state basis. Many local chambers of commerce offer group health plans as well. The cost of your membership is usually much smaller than the savings you enjoy on insurance purchases.

So how does a group plan work? Most insurance companies define a group as five enrolled employees or more, but the best rates are only available to very big groups. If you are an employer with a large staff, your company will serve as the policyholder for the group insurance. It will be purchased in the name of the company and offered to employees. However, a different approach is often used for small businesses. An insurer can pool several businesses together in a multiple-employer trust. The trust itself, rather than any single employer, is the policyholder. This is the approach taken by many industry associations. It enables smaller businesses to benefit from the lower premiums and other services enjoyed by large groups. At the individual employee level, eligibility is usually limited to workers who are regularly scheduled for at least thirty hours a week. Group employee benefits typically include health coverage, life insurance and long-term disability coverage. Let's look at each of these insurance categories individually.

Health Insurance

There are several different models for health insurance, but the market in the U.S. is dominated by managed health care plans. These include health maintenance organizations (HMOs) and preferred provider organizations (PPOs). An HMO requires you to get all of your services from one specific provider, using their facilities and personnel. This is different from a PPO, which is a broad network of health care providers who have agreed to provide services to the organization at a discount. It's common for a PPO to offer several tiers of coverage with varying benefit levels. The more generous the coverage, the higher the price of the policy will be. Many variables will affect the premium:

• The ages of the group participants
  If you have a large staff, there may be different premiums for different age groups. 

• The amount of the annual deductible
  A deductible is the initial part of the expense that you must pay out-of-pocket before any insurer payments can begin. 

• The amount of co-pay required
  Often referred to as coinsurance, the co-pay is the percentage of the medical bills that the insured individual is responsible to pay after the annual deductible is met. For example, many policies state that the insurance company will pay 80 percent of the covered medical bills. 

• The range of health services included
  The policy may or may not include such things as dental, vision, hospital stays, psychological counseling, or chiropractic. 

• How much flexibility you have in the choice of providers and specialists
  Oftentimes, a formal referral is required from your primary care giver. If you go to a provider who is outside of the plan, the co-pay will be different. 

Many policies also place standard limitations on certain pre-existing conditions. Federal law regulates these limitations. If you received care within the six months preceding your enrollment date, certain expenses will not be covered when the policy first goes into effect. However, as soon as you pass the twelve-month anniversary of your enrollment date, the exclusions for pre-existing conditions will no longer be valid.

Most group health insurance premiums are billed monthly. Essentially, you prepay for each period. Your payment must be received for coverage to remain in effect. Some policies provide a grace period for overdue premiums, but don't count on it. Some employers pay the full amount of the premium for each worker while others split the expense with the covered employees, in which case the employee portion of the premium is handled as a payroll deduction. If the plan allows an employee to add dependents, it's common for the additional expense to be paid entirely by the employee.

One final note about health insurance: if you are an employer, you need to be aware of COBRA, which is an acronym for the Consolidated Omnibus Budget Reconciliation Act of 1985. This is a federal law that applies to all companies that employ twenty or more people. When employees lose health or dental coverage due to certain qualifying events, such as termination or layoff, they have the legal right to continuation of their group coverage for eighteen months if they pay the full cost of the premium. In certain special circumstances, it is possible to extend coverage beyond eighteen months.

Life Insurance

There may be some life insurance included in your general medical plan. If so, it's usually a small amount (like $5K or $10K). You may want to shop separately for a larger amount. As you probably know, life insurance is money that will be paid to your designated beneficiary upon your death. Many financial advisors recommend that you carry an amount equal to at least five times your normal annual income. Keep in mind that there are two general categories of life insurance. With term life policies, the premiums that you pay purchase coverage just for the term of the policy. This means that you must reapply when you reach the end of the term, and higher rates will be charged as you enter older age brackets. In contrast, a whole life policy provides lifetime protection as long as regular premiums are paid.

Long-Term Disability

This is also called disability income insurance. It's a form of health insurance that provides periodic payments to you if you're unable to work for a long period of time as a result of sickness or injury. It is not the same as short-term disability coverage, which is provided by some states (New York, New Jersey and California, among others) and paid for by payroll taxes. Depending on the state, temporary disability may be covered for up to 26 weeks. Long-term disability insurance is also separate from workers compensation, which we'll discuss in a moment.

Long-term disability insurance is optional coverage designed to replace a portion of your income if you become temporarily or permanently disabled as the result of sickness, accident or injury. Disability means a physical or mental inability to perform the major duties of your occupation. Employers are not required to provide this kind of coverage, but most creative firms do because a generous benefits package is a competitive advantage when trying to attract job candidates. Long-term disability coverage tends to be expensive, but there are many variables that will affect the premium, such as:

• How broadly the term disability is defined
  It could be an inability to reasonably perform the duties of your own specific job in the design profession, or it could be an inability to perform any job in any category of occupation. 

• The length of the waiting period
  This is the amount of time that you must wait after the disability commences before you can start collecting benefits. It might range from a low of 30 days to a much longer period such as 180 days, but it is usually set at the upper end of the range so that benefits kick in after the state limit on short-term disability has been reached. The purpose of the waiting period is to avoid claims for minor injuries and illnesses. 

• The length of time that benefits are payable
  The shortest term might be two years, but the longest might be until you reach the traditional retirement age of 65. 

• The amount of benefits payable
  Total benefits are calculated as a percentage of your net income; 60 percent is typical. 

If you do become disabled, the benefit payments that you receive from the plan will be reduced to take into account certain types of other disability benefits that you may be entitled to, such as Social Security, workers compensation or retirement benefits. When setting up the policy, you will also have to decide who is responsible for paying the premiums. Generally, if the employer pays the premium, any long-term disability benefits that are eventually received will be considered taxable personal income to the disabled employee. This is called a non-contributory plan because the employee does not contribute to the premium. In contrast, a contributory plan is one in which the employee pays the premium. If the premium is paid by the employee (usually this is set up as a payroll deduction), any eventual benefits would be tax-free for the disabled employee.

Basic Business Insurance

Now that the individuals in your firm are taken care of, what about the needs of the business itself? You need to protect the company against possible loss of critical tools and property as well as potential liability to others. An unfortunate occurrence such as a fire or a lawsuit could have a huge impact on your company, causing a significant loss of income or even forcing you to close your doors. You don't want that to happen. Other companies that you deal with don't want that to happen, either. In fact, it's common for business insurance requirements to be written into office leases and important client contracts.

Depending on the type of work that you do, some business insurance may be available to you through industry organizations, where similar businesses have grouped together to qualify for broader coverage at better rates. One such organization is the Printing Industries of America (PIA). Their website is www.printing.org. PIA offers members access to group programs through local affiliates, state-by-state. If you don't have access to an industry group, you should meet with an independent insurance agent. He or she will discuss your business activities with you and prepare a list of the type, value and location of all reasonably foreseeable property loss and liability events. With this assessment, you'll be ready to shop for policies that will minimize each risk to an acceptable level. The agent will offer assistance in identifying insurance options including carriers, policy types, deductible limits, coverage limits, exclusions and policy costs. The agent will obtain all necessary application forms for you. (Sometimes specimen policies are available. A specimen policy is a sample document that allows you to see the full text of the standard policy. Not all insurers are willing to provide them.) Each completed application that you file will be reviewed carefully by the insurer. If your application is approved, a formal policy will be prepared for you to sign.

A policy is a written agreement that puts specified insurance coverage into effect. It describes the term, coverage, exclusions, premiums and deductibles. Agreeing to the terms of an insurance policy creates a binding contract. In most instances, the process starts with a standard policy document that can then be modified to fit your particular situation. This is done with endorsements. An endorsement (sometimes called a rider) is a written agreement attached to an insurance policy that modifies the clauses and provisions, adding or subtracting specific elements and conditions of coverage. Each business insurance policy will have a specified policy term, meaning the effective dates of coverage—the period for which premiums are paid. The term of most business policies is twelve months. This sets you up for an annual review and renewal cycle. You'll find that, over time, your rates will change to reflect shifts in the nature and scope of your business activities, but also in response to any claims that you may have filed.

You can shop for each type of business coverage separately, but for your basic needs you may want a package policy. A package policy includes multiple lines or types of insurance within one policy document. Package deals are often cheaper than buying several individual policies. The most common type of package is called a business owner's policy.

Business Owner's Policy

A business owner's policy (BOP) combines property coverage and general liability insurance in a single package. A BOP is usually the most economical way to protect your company against a broad range of risks, but not every business is eligible for BOP coverage. These packages are intended for small to medium-sized firms that are operating in a low-risk business category, such as professional offices. Those who operate a business in a higher-risk category such as manufacturing would need what is known as a commercial policy. A commercial policy is more complex and more expensive. Designers should note, however, that BOP liability coverage does not protect against professional errors or negligence. These must be covered by professional liability insurance, which is discussed later in this article. Each BOP contains three essential components: basic business liability insurance, property insurance and business interruption. Let's look at each of these categories individually.

Basic Business Liability Insurance

This is often called general liability or casualty insurance. It provides basic coverage for personal accidents or bodily injury to a third party or damage to their property. (The most common type of accident in this category is often referred to as a “slip-and-fall.”) It covers the medical expenses of individuals other than employees (such as customers, suppliers, or business associates) injured on your premises or as a direct result of the operations of the business. It covers legal costs to defend you against claims, and it covers any damages that your business is ordered to pay.

Property Insurance

Property insurance provides you with coverage for business property that is damaged or destroyed. For insurance purposes, property is divided into two general categories: real property and personal property. The term real property refers to land and attachments to the land, such as buildings. Insurance coverage for a building includes the structure itself and any permanently installed fixtures, machinery or equipment. (If you are renting, you should ask to see your landlord's insurance policy so that your coverage can be coordinated with what is already in place.) Personal property includes furniture, any fixtures that are not permanently installed, and similar items—if they are not specifically excluded from coverage. Check to see how your policy treats computers and telephone equipment—sometimes they are considered to be special property and they may require extra coverage. Most business property insurance will also protect you against loss or damage to the personal property of others while it is in your care, custody or control.

Basic policies generally cover loss or damage that is caused by fire or lightning, as well as any expenses related to removing property if necessary to protect it from further damage (such as removing computers from a damaged building in order to prevent them from being stolen). Many standard policies also cover “extended perils” such as windstorm, hail, explosion, riot and civil commotion, and damage caused by aircraft, automobiles or vandalism. Other important perils such as earthquake and flood damage are often not covered in standard policies.

For insurance purposes, your property can be valued in several different ways. The two most common approaches are the replacement cost method and the actual cash value method. The replacement cost of an item is the amount of money that you would need to replace it with new property of like kind. In contrast, actual cash value is the replacement cost minus accumulated depreciation to reflect the age and condition of the original that was damaged or destroyed. Clearly, you will want your property to be valued at full replacement cost so that if you receive an insurance settlement it will be enough to purchase replacements at current prices. However, there is always an overall limit to the policy. The limit of insurance stated in the policy declarations is the most that the insurer will pay for loss or damage in any one occurrence.

Business Interruption

This is often called business income insurance. If your business is severely damaged or destroyed, business interruption insurance provides indemnification for ongoing fixed expenses and for loss of normal profits. For example, if a fire temporarily shut down your business, you would be reimbursed for salaries to key employees, rents, taxes, interest, depreciation, utilities and other expenses during the repair period plus the net profits that would have been earned. You may also be able to negotiate for broader coverage to include any extra expenses incurred during the period of restoration. Extra expense insurance would cover the costs of renting a temporary location, fitting it out for use, and moving expenses. The policy will probably establish a maximum length of time (such as one year) allowed for the recovery period. Apart from business interruption insurance, you'll also want to develop an advance plan for disaster recovery. A good disaster recovery plan can help you to minimize losses and get back to normal operations much more quickly.

Additional Business Insurance

In addition to the three types of basic protection included in your BOP, you need to consider several additional types of coverage.

Umbrella Liability Insurance

The purpose of this is to extend the limits of your coverage above the maximum amounts of the basic business liability insurance policy. You will receive payments under the umbrella coverage only after the basic policy limits have been exceeded.

Business Automobile Policy

Auto liability coverage is not included in general liability policies, but it is legally required for drivers in all but four states. As you probably know from personal automobile policies that you've purchased over the years, automobile coverage should include the following components:

• Collision insurance for loss or damage to the vehicle itself

• Comprehensive insurance for any loss or damage from causes other than a collision

• Liability insurance for damages that the insured might cause to third parties, including property damage and bodily injury

• Medical payments coverage for authorized drivers and for passengers

• You may also purchase uninsured motorist coverage for the driver and passengers if they are injured by an uninsured motorist or a hit-and-run driver

So how is a business automobile insurance policy different from a personal policy? In addition to providing coverage to any vehicles owned by the business, it also covers hired and non-owned autos. This means that the business is protected if you or an employee rents a vehicle in the company name and an accident occurs. It also means that the company is protected if an employee has an accident in his or her own vehicle while on company business. Remember that all drivers must have a valid driver's license. Remember also that any personal property stored inside an automobile (such as project-related materials being delivered to a client) will not be covered under a standard automobile policy.

Workers Compensation

If you have employees, workers compensation insurance is required by law in most states. It covers employees for work-related sickness and for injuries that occur within the scope of their employment. (This is different from the short-term disability coverage discussed earlier. Short-term state disability benefits are intended to cover non-job-related sickness or injury.)

Four types of benefits are included in workers compensation: medical care, death, disability and rehabilitation. The specific levels for coverage are defined by each state. Premiums vary widely for different types of businesses because the rates are determined by the nature of the working environment. Rates are lower for office work environments and higher for industrial work environments (such as factories or construction sites). Large companies with workers in several different categories will have multiple rates—perhaps as low as 0.1 percent of the payroll for employees in safe occupations all the way up to 25 percent or more of the payroll for employees in very hazardous occupations.

Unemployment Insurance

Unemployment insurance is not something that you will be shopping for. It's a state benefit that is paid for by payroll taxes. More information about unemployment insurance is available from your state employment office.

Valuable Papers & Records

If important business records are destroyed, it may take a lot of time and effort to recreate them. The standard property policy will reimburse you for lost office supplies, but it will not include coverage for the labor costs of researching, repairing, restoring or reconstructing the information contained in valuable papers, records and electronic data files. Specialized coverage can usually be purchased as an endorsement to a standard policy. Your valuable papers and records might include such things as personnel files, contracts, leases archival material such as the company's original incorporating documents, or rare books and manuscripts. Coverage can also be amended to include valuable records belonging to others, while that property is in your care, custody and control. Even though you're carrying this specialized insurance, you will of course want to do everything possible to protect your valuable business records. Make duplicate copies of important documents and clearly labeled backups of important data and store them at an offsite location.

Fidelity Insurance

Fidelity insurance covers loss of business property due to employee dishonesty. It also covers any suspicious loss of property that cannot be directly attributed to a particular employee. The coverage may be added as an option to your business policy. The typical fidelity policy covers losses of property due to theft, embezzlement, forgery or similar criminal acts performed by your employees. Most design firms are small and the employees feel that they know each other quite well. However, small companies are not immune to fidelity crimes. Losses can take a variety of forms. Many companies are victims of theft of property for the personal gain of an employee. The stolen property might include money, financial securities, computers or other valuable equipment. Losses could also involve the destruction of property by an employee. Most fidelity policies cover the loss of assets on your business premises as well as property in transit or temporarily in another location. First party fidelity covers your property. Third party fidelity extends coverage to your client's property. Be sure to read your policy carefully to understand any exclusions.

A fidelity insurance policy protects against losses due to employee dishonesty in general. As an alternative, you might consider a fidelity bond that is limited to particular individuals. The premium for a bond will generally be lower, because protection is limited to just those individuals being bonded. Usually these will be the people directly involved in finances, with access to bank accounts and accounting records. Dishonesty by financial managers can take many forms, including such things as adding fictitious employees to the payroll or issuing payments to non-existent suppliers.

Key-Person Insurance

Key-person insurance is sometimes referred to as business life and disability insurance. It provides protection against business losses that result from the death or disability of a key person. A key person is defined as an owner, a partner or a highly skilled employee whose efforts are directly responsible for some measure of profitability to the firm. The policy is owned by the company and any benefits are payable to the company. For a design firm, loss of a key person is a very serious setback. It helps to have additional funds available to get the business back on track.

Employment Practices

More and more claims against companies are filed each year by job candidates, current employees and former employees. Their charges may include allegations of harassment, racial or gender discrimination, failure to promote, wrongful termination of employment, defamation or invasion of privacy. Employment practices insurance provides coverage in the event of legal actions resulting from such charges. In order to qualify for this coverage, however, you must be able to demonstrate that your firm already has good employment practices in place.

Directors' & Officers' Liability

If you have a large company, it's a very good idea to talk to your independent agent about directors' and officers' liability insurance. Legally, directors and officers are separate entities from the company itself. In the event of a legal action, they could face unlimited personal liability. Directors' and officers' liability insurance protects the personal assets of these individuals if they are sued over their performance of company-related duties. It covers claims related to certain “wrongful acts” such as management errors, misleading statements or neglect. Coverage includes the costs of legal defense.

Liability Issues that are Specific to Design Firms

Typical BOP coverage exclude liability related to professional services. This type of exposure must be separately insured under a policy that is particular to the services you are rendering.

Professional Malpractice Insurance

This type of policy can be called malpractice insurance, professional liability insurance, or errors and omissions insurance. Regardless of the name, the objective is the same: to help manage the risks associated with inadvertent mistakes, oversights or failures by you or your employees in the performance of your professional services. For insurance purposes, a professional is considered to be anyone involved in an activity that requires specialized skill and training. Malpractice insurance protects you against loss from claims of negligent acts, errors or omissions that result in loss to a client. It may also include claims of breach of confidentiality, non-performance of a contract, fraud, or negligent oversell. The act in question must actually be an error, however, and not merely poor judgment viewed in hindsight. It's also important to note that professional malpractice insurance does not cover intentional wrongdoing, such as causing deliberate harm to a client or a client's property.

Some professions (such as architecture, engineering, medicine, law, accounting and financial services) are required by law to carry professional liability insurance. Although claims are not filed very frequently, when they are filed they can be expensive. The legal test of whether or not negligence, errors or omissions have taken place is a comparison against the standard of care that would have been exercised by other competent professionals under similar circumstances practicing in the same jurisdiction. Some professional liability policies cover attorney costs but some do not. If you are sued, you will definitely want the policy to help defray the costs of your legal defense. As a businessperson, you can avoid many professional risks by not accepting work assignments that you are not qualified to perform and by not making any client promises that you can't keep. Even so, customers can always accuse you of doing something wrong, even if the underlying claim has no merit. Because the costs of defending even frivolous malpractice claims can be substantial, it's wise to add legal costs to your coverage if the option is available.

The term of your professional liability policy is very important. Not all errors are discovered at the time they are made. They might not become apparent until some time later. If your policy pays only for claims filed while the coverage is in effect, you'll have to maintain it for a long period of time—perhaps even after you've gone out of business. In contrast, other policies focus on the date when the alleged mistake was made. If the error occurred at a point in the past when a policy was in effect, then it would be covered. This type of coverage is often more expensive. Your policy will also state a maximum amount for the protection provided to you, on both a per-claim basis and an aggregate basis. If a significant mistake results in damages that exceed your policy limits, you would liable for the excess amount.

One final note that is important to design firms: professional malpractice insurance coverage is usually limited to the business activities of employees, meaning those who are on the company's payroll and receive a Form W-2 at the end of the year. Your policy might not include any independent contractors who receive a Form 1099 from your company. If you use a lot of freelance labor on client projects, you'll want to discuss this issue carefully with your insurance agent. As entrepreneurs, freelancers should of course maintain independent coverage appropriate to their own business activities.

Intellectual Property Insurance

Creating intellectual property and negotiating its ownership and use are core activities in all design firms. The major categories of intellectual property are copyrights, trademarks and patents. It's possible that work done by your firm could later become the subject of an infringement claim. Infringement is the unauthorized use of someone else's intellectual property. Even though the infringement is accidental, there may be legal liability and you may be ordered to pay damages. A growing number of disputes and lawsuits are taking place in this area. Intellectual property insurance covers the costs of legal defense and any judgments up to the policy limits. A standard business owner's policy does not provide protection from loss, damage or liability related to intellectual property, although some limited protection may be in place if you negotiated a separate commercial liability policy. Intellectual property insurance can be bundled with other things, such as the professional liability coverage discussed above. Speak with your independent agent to review your own particular situation and business needs. Design firms need to be careful in this area. When finalizing a contract with a client, be sure that you understand all of the fine print. The terms and conditions section of a contract for creative services will normally describe specific obligations and liabilities that relate to intellectual property. (For more information about terms and conditions for design contracts, see the May 2004 issue of AIGA Design:Business.)

Media Liability

Media liability insurance also deals with intellectual property, as well as risks related to privacy, publicity and defamation. This type of policy is sometimes called communications liability insurance. It protects you against claims that might arise from the gathering and communication of information. Essentially, it is coverage for errors and omissions in the written or spoken word. Claims of this nature seek to impose liability on a publisher for economic loss or personal injury allegedly caused by some error or negligence in the content of published material. Personal injury can be physical or emotional, including a damaged reputation. Media liability covers:

• Libel, slander, defamation of character

• Product defamation

• Personal disparagement

• Invasion of privacy

• Unfair competition

This type of insurance is usually referred to as media liability because it's purchased by companies involved in publishing, broadcasting and advertising. However, the rapid expansion of digital communications means that any company distributing information to the public via email or the web now faces many of the risks of a traditional publisher.

Product Liability Insurance

If you are working on the development of a product that will eventually be sold to the public, this will be an important issue. Your client may ask for proof that you are carrying this kind of insurance. Product liability refers to the legal responsibility of product designers, manufacturers, distributors and sellers to deliver products to the public that are free of any defects that could harm people. If a product is defective, the purchaser will probably sue the seller, who may then bring the distributor or manufacturer or product designer into the lawsuit. Any one of the parties may be liable for damages or may have to contribute toward a judgment. Your product liability policy will pay defense costs, whether or not a judgment is rendered against you.

What About a Home Office?

Many designers are self-employed and work from home. It's important to note that most standard homeowner's or tenant's policies exclude liability for business-related activities. You need to speak with an independent agent about putting additional coverage in place. It may be possible to add an endorsement to your existing policy. However, the coverage will be very limited. A “business pursuits” endorsement will not be enough for home-based businesses that have frequent meetings with customers or suppliers onsite or have invested in costly equipment. Loss of business property is usually reimbursed up to $2,500 in the house and up to $250 for business property damaged or lost away from the premises. For a designer, the value of your computer equipment alone will far exceed these amounts.

It is much wiser to put in place a separate policy that addresses the needs of your small business. Shop for a business owner's policy, as discussed earlier in this article. It will include property insurance, basic liability insurance and business interruption coverage. To that you can add whatever endorsements are appropriate to the particular professional services that you are selling to clients.

Certificate of Insurance

Once you have basic insurance coverage in place, you may be asked to prove it to banks and other lenders, as well as to clients. If you are asked to provide proof of insurance, just ask your agent to send the requesting party a certificate of insurance. A certificate of insurance is written evidence of the existence and terms of your property and liability policy. It's a statement summarizing the types of coverage, amounts of coverage and policy effective dates. Once it has been issued, the certificate holder will also be notified if a policy is cancelled.

Occasionally, a client will ask to be named as an additional insured on your property and liability policy. The client would then be covered under your policy in the event that they are sued for damages or expenses as a result of work that you do on their behalf. To do this, a policy endorsement is required. Speak to your insurance agent about this. An endorsement would extend to the named client the same protection as the insured. If a client is asking to be named as an additional insured, they will state that request in the terms and conditions section of the project contract. Whenever you are finalizing a contract to provide services, take care to read all of the fine print. Don't agree to take on any obligations or liabilities that you are not completely comfortable with. Have your attorney review any proposed contract language that comes to you from clients.