Thinking about insurance requires us to think about pessimistic outcomes, so it’s natural to want to avoid the topic. However, for the legal foundation of your business, insurance is critical.
What Does Insurance Do?
Buying insurance helps you manage risk; you are purchasing protection against unanticipated financial losses. The insurance company pays you if something unfortunate happens to you or your business. If you are uninsured and an accident occurs, you may be responsible for all related costs, including repairs and medical bills. Having the right insurance for the risks you or your business may face can make a big difference.
Insurance allows people to be involved in activities that could cause harm—physical or financial, to oneself or others—without having to take on all of the risk associated with that activity. It is a way of guarding against liabilities that could lead to financial distress or liquidation. An insurance policy is merely a contract between someone who wants to protect themselves against certain risks and an insurance company.
Do I Need Insurance?
The following two examples (of many) are why you need business insurance:
Example 1: Suppose you are teaching a pottery class and a student accidentally leans on what they think is a cool kiln and sustains severe burns. In this instance insurance would cover the student’s medical bills as well as your legal fees.
Example 2: A customer arrives before opening hours to pick up an order and slips on a newly mopped floor. The resulting fall leaves them badly injured and upset that you did not display a caution sign, so they threaten to sue. Insurance would cover the customer’s medical bills as well as your legal costs and any settlements from a lawsuit.
Each of these scenarios could result in significant monetary loss, either through actual payouts due to the injury or damaged property, or through legal expenses related to defending your conduct in court. Without insurance, the monetary impact could have a crippling effect on your business. With the right kind of insurance in place, damages can be controlled.
Insurance is useful in covering the costs associated with defending lawsuits. Insurance also covers damages to equipment. Additionally, a rented site—such as a space for your pottery exhibition or another facility where you are teaching a class as a guest lecturer—may require you to provide a certificate of insurance and may ask you to list the rented site as a beneficiary, loss payee, or additional insured on the policy. If the rented site gets sued as a result of your equipment on their property, your insurance will cover them. In addition, certificates of insurance are almost always required to use public property as a condition of receiving necessary permits.
- How Much Insurance: If you cannot afford complete coverage, buying as much insurance coverage as possible is better than having none. Evaluate different policies carefully and select as per your needs to manage expenses.
- Rented Studio: Artists who don’t have business insurance because they believed they are covered under their landlord’s policy are wrong. The landlord’s building is covered under his/her policy, but your equipment, tools, and inventory are not covered. You still need your own policy to cover these types of losses.
- Home Studios: Homeowners’ policies provide little (typically $2500) or no coverage for business-related assets, including equipment. You may be able to add endorsements to your homeowners’ policy, but for adequate coverage, most in-home art businesses need a separate business insurance policy.
- Gaps: Understand the scope of your coverage. If there are known gaps due to cost, understand what they are, and make an alternate plan.
- High Deductibles: Do not to be tempted into buying a policy with a high deductible in an attempt to keep costs low. Can you afford to pay a $10,000 deductible if an accident does occur?
- Exclusions: Know what they are, and ask questions if you do not understand.
- Quotes: Shop around and get at least three different quotes for business insurance; rates vary widely.
- Claims: Ask your insurance representative if any claims have been made on the type of insurance they are offering and what turn-around time you would expect in the event of a claim.
Business Insurance Coverage for Artists
Business personal property coverage can include:
- Building: Covers the physical structure of your studio.
- Business Personal Property: Covers the property of your studio such as tools, equipment, raw materials, inventory in progress, finished products, valuable papers and records, and electronic data processing.
- Business Interruption: Covers the loss of business income incurred during the period your studio is closed due to an emergency.
- Business Transit: Covers your work, booth, shelves, display cases, and so on while in transit to shows, fairs, exhibitions, or elsewhere.
- Personal Property of Others: Coverage for those who work on another person’s property for their studio.
General liability coverage can include:
- Liability Insurance: This protects you if someone is injured while on your property or if your property causes damage to others.
- Umbrella Insurance Policy: Protects beyond liability coverage, kicks in when all other liability coverage is exhausted, usually in increments of $1 million.
Basic business insurance policies cover risks to property from fire, lightning, explosion, windstorm or hail, smoke, riot, theft, water damage, vandalism, the weight of snow, and so on. It may be called all-risk coverage, but will most likely have exclusions. Flood, earthquake, and acts of terrorism are not covered in a standard insurance package, so you may want to investigate additional coverage. Understand what the exclusions in your policy are. Also, know the amount or limit of coverage (e.g., up to $25,000 for studio contents, $25,000 for work off premise, in transit, etc.) and make sure you get as much protection as you need.
Here are a few additional points of coverage you can consider adding to your policy:
- Extended Business Income: Extends payment for losses of business income beyond business-interruption coverage time limits.
- Extra Expense: Pays for relocation of your studio, if necessary, due to a significant loss.
- Employee Dishonesty: Covers losses due to dishonest acts
- Professional Liability: Covers you if you teach, write, or perform some profession-related activity that is not covered by general liability.
- Product Liability: Covers you in the event your product harms someone.
- Single Exhibit Liability: Covers liability for a single event such as a craft show or single performance. These policies can often be obtained quickly to meet show requirements.
- Event Liability: Protects you for a performance, show, or an event that is attended by the public.
- Workers Compensation: Covers lost wages and medical costs for an employee injured on the job.
If you already have insurance, then you’re one step ahead. Make sure to read and understand your policy so that there are no surprises when you need to use it. Re-evaluate your insurance needs every year or so, or whenever you make changes to your business or acquire new equipment, to make sure your coverage is still relevant and sufficient.
If you don’t have insurance, consider doing some research and purchasing a policy. There are dozens of options, and the insurance industry is relatively competitive, so be sure to shop around. That said, as with so many things, with insurance, you tend to get what you pay for, so make sure you’re buying the coverage you need to protect yourself.
It can be a little annoying spending all this time to understand something that you hope you’ll never need and having to pay for it, but if you ever need it, you’ll be enormously grateful that you took the time to buy the best policy for you.
Mamta Gholap received her MBA in finance and is passionate about handbuilding with clay.