Today, many small businesses operate without liability insurance – with the exception of the workers’ compensation insurance, which is required by law. In many cases, business owners simply want to cut down on operating costs, but in today’s climate in which worker compensation claims have skyrocketed, operating without any liability coverage is a highly volatile practice.
With just one claim, what took years to build can be wiped out. Without liability insurance, the business can take a major hit from the litigation process and the owner’s personal assets can become vulnerable. Consider that in 2007, according to the Bureau of Labor Statistics, there were more than 335,000 cases of employees injured on the job due to contact with objects and equipment.
Workers’ compensation, which is required by law in all 50 states, protects employers from liability for an accident involving an employee. This coverage will pay medical expenses and lost wages on injured employees. In cases of disability, it will provide a lump sum or annuities.
It is increasingly important employers review their general liability insurance policies to ensure the coverage protects the business against claims made for bodily injury or property damage. Coverage should include medical expenses, defending the lawsuit, settlements and in appeal procedures, bonds or judgments.
Premiums on General and Professional Liability insurance can be costly, and often the cost alone dissuades businesses from purchasing it. The cost, however, of operating without liability insurance can prove to be much more extreme.
The out-of-pocket costs of filing a claim alone can escalate quickly and the number of damages that can occur such as fire or theft could nudge a business towards severe debt. If a worker is harmed on the job, the employer will face medical and legal fees. Workman’s comp insurance, which is required at varying levels by state, will provide a safeguard to the company.
Cost of no insurance
In September 2007, the Bureau of Labor Statistics issued a report detailing employee compensation. On average employers paid $28.03 per employee per hour. Of these costs, approximately $2.35 (8.4 percent) of total compensation went towards life, health and disability insurance – a nominal expenditure when compared to the cost of disputing or paying on a claim.
Lawsuit expenses alone can vary radically depending on several variables such as the type of claim and whether it was filed by a customer or an employee. Employers can count on spending a significant amount to defend the case. Typically costs and procedures include:
A summons and complaint filed against the company, which results in several meetings and attorney fees, including consultation, transcript and research costs, all billed at an hourly rate.
The claim will then progress to the deposition phase, which entails a settlement conference and a trial date. In addition to the billable hours and other various fees, the attorney will also bill for the deposition paperwork.
During the trial, the attorney charges hourly and there’s no telling how long the trial could last. It could go from several days to several weeks. In addition to the hourly fees, the defendant is also being billed for various legal fees.
Legal fees can include transcript fees, witness fees, court reporter fees, consultation and deposition fees, research fees and mailing fees.
In the event the employee wins the case, the defendant – the employer – will brunt the burden of not only paying the settlement, but also any medical, attorney and other expenses the prosecuting party has incurred. For those organizations operating without insurance, this can put them at risk of going into major debt or bankruptcy.
In one 2004 workers’ compensation case in California, a wood products company was ordered not only to pay its employees medical expenses, but also entitled the employee to, “…medical treatment as is reasonably required to “relieve” from the effects of his industrial injury, even if such treatment will not “cure” that injury…” In effect, the company will be paying for medical treatments indefinitely. The company did, however, have insurance coverage and did not have to foot the bill.
In a separate case, in 2006, an employee who suffered industrial injuries to the neck in the form of fibromyalgia was awarded payment of medical costs, in excess of $14,000, disability reaching nearly $100,000, plus life pension, which paid just over $45 per week.
Insurance protects businesses against more than just worker-related claims. It can also cover disasters such as fires, natural disasters and theft.
According to a recent article in the Los Angeles Times, compensation awards to victims are now being determined for the recent Metrolink train crash in Chatsworth, Calif. and it’s expected the awards could easily exceed the $200-million cap Congress implemented on railroad liability in any one accident. If the cap is removed, Metrolink will be in an extremely vulnerable position.
While most businesses will never experience a disaster of this magnitude, insurance coverage beyond workers’ comp insurance may be necessary in ensuring the organization’s assets are protected. A workers’ compensation insurance quote should outline what coverage will include. From there the business owner can determine whether additional liability insurance is needed.
Typically, liability insurance coverage includes:
Legal costs – general liability insurance will cover litigation costs such as attorney and witness fees, as well as settlement payments.
Medical costs – insurance will cover medical costs for individuals who may have been injured on company property, this includes employees as well as customers.
Property damage – insurance will cover fire, theft or other incidents that damage the assets of the business. It insures the company from physical damage to the property as well as the customer’s property.
Business interruption – insurance will cover the business in cases of major disasters, such as a fire, that render the business inoperable. If the business is unable to operate, the insurance would reimburse the company for its losses and the profits that would have been made during that time.
Business operators should shop recognized, established insurance providers to find the best coverage for their needs and the best price for their budget. All companies can provide general liability and workers’ compensation insurance quotes to help businesses budget for the expense.
By Robert Oldman