Does my LLC or S corporation need insurance?

There are two sobering facts that work against every business owner in America:

1. Despite your best intentions, something bad is going to happen sooner or later.
2. We live in a litigious country.

If you have an S corporation that pays you a salary, then
the business is likely paying certain types of insurance, like unemployment insurance. In some states (we’re looking at you New Jersey), there are a host of other insurances that are applied to wages, like Family Leave Insurance and Disability. However, these government-mandated insurances do not cover lawsuits. Yikes! That’s where general liability, errors and omissions (E&O), commercial auto, and a host of other insurances step in.

Does your business need any of these other insurance policies? Let’s first define need.

In some cases, the need is spelled out to you in your client’s contract—they require you to have E&O or other liability coverage in the amount of $1,000,000, etc. It is perfectly legal for a potential client to require your business to prove insurance coverage. In such cases, it’s worth considering the value of the contract and the cost of obtaining the insurance policy required. If it’s a $100,000 contract and the policy costs $500, that’s pretty reasonable. However, if it’s a 2-month contract worth $5,000 and they demand that you have a policy that costs $1,000, it’s probably not worth it, unless it opens up other opportunities.

In addition to client-required insurance, you ought to consider if the types of services that you and your business provide are risky enough to warrant insurance coverage. If you are an IT consultant who builds apps for mom and pop businesses, your risks are probably quite low. If you’re an IT developer who builds automation for nuclear facilities.. well, you get the idea.

Since our clients are exclusively independent contractors, freelancers, and solopreneurs, most do not have any additional type of insurance. Those who do, usually purchase it because it’s a stipulation of their contract. If you do purchase business insurance coverage, the premiums are deductible and should be paid through the business account.

Insurance is one of those things that you hope to never need, but when you do need it, it’s a lifesaver (or business saver). If you have any doubt, it’s probably best to contact an insurance broker.

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