Consider intangible assets in
evaluating business insurance
needs
The first things most business owners worry about insuring are the physical assets of the business – the building, equipment, inventory and vehicles. Yet as many business owners have learned the hard way, the costs of a disaster are often measured as much in customer relationships, intellectual capital, and financial opportunities as in tangible structures or goods. It doesn't take a hurricane-sized catastrophe to derail a promising business – for the unprepared, a technology failure or customer lawsuit can wash away years of effort as swiftly as a rushing wall of water.
Even a physical event such as a fire, theft or storm can cause damage well beyond the direct loss of property. While a general liability policy can fix the building or replace the lost items, it may not recoup the lost income stream or the lost new business opportunities while your business is out of commission. And ongoing customers who have to turn elsewhere for supplies or services may or may not return once your business is up and running again.
Protecting yourself from intangible losses requires a thorough assessment of the risks to which your business may be subject and a combination of preventive measures and insurance to address those risks.
First, examine the risks inherent in your industry or profession, and then determine appropriate measures for each area of concern. Intangible assets can be categorized into four areas: data and information, intellectual capital, potential income and reputation.
Data and information may include your financial records, accounts receivable, product designs, proprietary software or materials, customer records, vendor contracts, even past work samples. This information is vulnerable to loss in a fire or flood – or even in a computer crash. Recovery, where possible, can be expensive and time-consuming. Data is also vulnerable to technology breaches – malicious or accidental – that can put your proprietary data or your customers' information in the wrong hands.
Protection begins with information security measures including strict employee protocols, disciplined data backup and offsite storage for both data and critical paper files. Having such measures in place will also reduce the cost of a data and information protection insurance policy. Such a policy can pay for recovery or restoration efforts or reimburse you for the value of the loss.
Intellectual capital goes beyond what is in your files – it also includes the intellectual property that is in your head or your employees' heads. What will happen to your business if you are disabled or your partner dies? What if a key employee defects to a competitor? "Piracy of ideas" by departing employees has made headlines for businesses ranging from technology companies to automakers. Risk management techniques in this area should begin with well-written and maintained partnership and employment contracts that address these eventualities. Also consider disability policies and appropriate life insurance policies, sometimes called "key man" insurance. In a partnership, funding a buy-sell agreement with life insurance can enable the business to continue if one partner dies.
Consider the potential income you would lose if you had to evacuate in advance of a hurricane, or your building lost power for several days due to an ice storm. What if you had to rebuild after a fire? Backup systems– power generators, alternate work sites, remote computer access – can help mitigate the effects, but business interruption insurance is an important safeguard for most businesses. If your business is shut down for an extended period of time, business interruption insurance can also cover the cost of employees' salaries, enabling you to maintain valuable expertise and avoid having to rehire and retrain once you are ready to resume operations.
Your reputation may be your most valuable asset. A lawsuit filed by a disgruntled customer can cost you time, money, and potential new customers. Some suits have destroyed entire businesses. It goes without saying that you strive to do quality work and resolve any small customer complaints before they become major issues, but there may occasionally be errors – or perceived errors – that cannot be easily remedied.
Doctors and lawyers depend on malpractice insurance as a layer of protection against such issues, but many other businesses, especially professional service firms, can be vulnerable to accusations of incorrect advice or other mistakes. An errors and omissions liability policy can prevent damage to your reputation by covering the cost of remedying a situation before it becomes a major public dispute or lawsuit; in the event of a suit, such insurance may cover your legal and costs.
Your business insurance agent should be a trusted advisor in managing your intangible risks as well as your general liability risks; he or she can often recommend appropriate precautions and risk reduction tactics as well as providing appropriate levels of insurance to protect your information, intellectual capital, income stream and reputation – assets that are critical to your business.
