Friday, December 30, 2011

For Your Protection (by Karl Wiegers and Gary K. Evans)

As an independent consultant, you must provide for yourself and your family the health, life, and disability insurance that W-2 employees get from their employers. You must also obtain coverage to protect your business practice. Insurance is a significant expense, but it's mandatory—you're conducting a business, not playing a game of chance. Coverage and exclusions vary widely, so shop around and make detailed comparisons of the coverage of each type of policy. You're tempting fate and gambling with your home, livelihood, and future if you don't consider at least the six types of insurance described in this post. Remember, nothing posted in this blog constitutes legal advice; check with your insurance agent to understand your coverage needs.

Business Liability: This affords protection against liability if you cause harm or damage while engaged in business activities. You should never even consider walking onto a client's location if you do not have liability coverage. If you hit a client's employee with your car in the parking lot, or if you trip over a power cord and send a workstation crashing to the floor, you'll want some financial protection. Your personal automotive or umbrella liability insurance might not cover you in such a case. Even it provides coverage, the limits might not be adequate to protect your business. Consider coverage of at least $1 million per incident, with $2 million general aggregate coverage.

Clients sometimes request to be listed as a named insured on your liability insurance policy. This is easily accomplished with a phone call to your insurance agent. It's a minor nuisance. I'm willing to do this because it's easy and it lets me throw the client a bone while I'm negotiating other contract terms that I care more about.

Business Property: This type of policy covers losses you might suffer to your business property, such as electrical damage, a dropped laptop, theft, and so on. If you operate your business from your home, your homeowner's insurance policy may or may not provide coverage if equipment or materials that you use in your business are destroyed, say, in a fire. I (Karl) obtain both business liability and business property coverages through State Farm, where I also have my automobile, homeowners, and other personal insurance policies. Depending on what coverage limits and deductibles you have for business liability and property insurance, the premiums should be in the range of two or three hundred dollars per year.

I did have to file a claim under my business property policy once. My laptop experienced a static discharge that killed the mouse buttons. The computer couldn't be repaired. My State Farm agent said to buy a new computer and send him the bill. They immediately reimbursed me for the cost of the replacement computer, less my $100 deductible. That one incident made up for many years paying premiums for these coverages.

Professional Liability: This category of coverage is also called errors and omissions insurance. This is basically malpractice insurance to protect you against liability caused by negligence or a mistake on your part that causes financial or bodily harm or loss to a client or customer. Certain types of consulting services are more likely to need E&O coverage than others. You might consider an E&O policy if your business includes designing, developing, testing, or certifying products for your clients. Talk with a lawyer about this one.

I (Karl) have never carried E&O insurance. I do not directly create software or software-containing products that my clients use themselves or sell to their clients. I primarily provide advisory and training services, although for certain clients I have also created process-related documents such as templates for key project deliverables, process descriptions, and the like. My consulting and training agreements include a limitation of liability clause, which indicates that I am not responsible if the client experiences any loss or lack of benefit from the services or products I deliver. My intent here is to avoid having the client sue me if the client complains that a class was no good just because, say, the students didn't apply any of the practices I taught them. So far, no client has ever asked for a refund and I haven't been sued. I'm keeping my fingers crossed.

Life: If you're single, make sure you have enough life insurance to bury yourself. If you have a family, carry enough to protect them for the years you would have provided for them if you had survived. Too little insurance means your spouse may have to go to work or get a second job to provide replacement income for your children's education or other necessities. To determine how much you really need, explore available commercial and shareware programs and insurance calculators on the Internet. Term policies are cheapest for younger workers, but a whole-life policy may be more appropriate if you have trouble saving money on your own, as it builds up cash value over time.

Health: Though it's a necessity, health insurance frightens many people contemplating the move to independence. But it may not be such a scary proposition. It can be prohibitively expensive or even unavailable if you (or your family members) have a history of medical problems. But if you're healthy, have few pre-existing conditions, and are able to self-insure by carrying a large deductible, the premiums might not be outrageous. Again, costs and coverage plans vary widely. If you're self-employed, your health insurance premiums are generally tax-deductible, subject to certain limitations.

You skip this one at your peril. Nasty things can happen even if you’re young and healthy, and being a road warrior increases the chance of an accident. I (Karl) slipped on some ice-covered steps in Dallas (!) in December of 2000 and fell, tearing two of the rotator cuff muscles in my right shoulder. I’m very dominantly right-handed—my left arm exists mainly for visual symmetry—so this was not a fun injury. Fortunately, I didn’t need surgery, but had quite a bit of physical therapy. Had I not had health insurance, this could have been an even more unpleasant experience.

Consider setting up a Health Savings Account if you have a high-deductible health insurance policy. The HSA allows you to set aside several thousand tax-deductible dollars per year in a special bank account. You can use this account to pay out-of-pocket medical expenses, such as deductibles, prescriptions, and even over-the-counter medications. The HSA makes those out-of-pocket expenses tax deductible as well.

Disability Income: Everybody knows that carrying life insurance to protect your family when you die is worth considering. However, you have a much higher probability of becoming disabled than of dying in any given year. Statistically speaking, a healthy 35-year-old who works in an office has a greater than twenty percent chance of becoming disabled for three months or longer during his or her working career. Disability income insurance provides you with some income if you become disabled and are unable to work. Shop around and talk with many different agents and providers, because many insurers no longer offer this type of insurance, and the coverage that is available comes in various flavors. Disability insurance policies obtained through professional organizations, such as the IEEE, are likely to be cheaper than buying an individual policy directly from an insurance company, but may not offer as many options. It's always a trade-off.

Becoming disabled without having disability insurance means that you'll have no life insurance payoff (you're still alive) and you're a cost liability (you still have to be fed, bathed, cared for, rehabilitated and so on). Coverage is based on your current income, so plan to review your coverage once a year as your income changes. Note that in the United States, your disability insurance payments typically stop when you reach the age of eligibility for full Social Security retirement benefits—but your disability remains.

As with all insurance, you hope you never have to cash in, because that means something bad happened. But bad things do happen. Karl has a close friend who was a highly regarded software consultant. At age 47 he suffered a traumatic brain injury in a car accident while driving home from a consulting gig, thanks to an idiot talking on a cell phone (please don't talk on your cell phone or text while driving). Now 60, Norm has not worked since that accident and will never work again. He told me that having private disability insurance has made the difference between him being able to continue living in his house and living under a bridge.

By the way, if you are finding these blog posts useful, please consider making a donation to the Norm Kerth Benefit Fund. Click here for more information about Norm's situation. Every dollar helps. Thanks!

A Useful Tip: Client contracts often require you to carry certain insurance coverages. These are nearly always negotiable, though; see the post titled ”Everything’s Negotiable”. A fellow consultant once gave Gary some great advice on insurance in general. Whenever a client insisted that he carry some obscure type of insurance, he would negotiate that the client pay for it for the duration of the project. Then it would be factored into the overall cost structure.

(If you found this article helpful, please consider making a donation to the Norm Kerth Benefit Fund to help a consultant who has been disabled since 1999 with a traumatic brain injury from a car accident. You can read Norm's story or donate here. Thanks!)

3 comments:

  1. I have spent a lot of time pondering my own insurance requirements. I hope my insights here help your readers.

    As to E&O insurance, I minimize the need for it with a good engineering agreement that manages the clients' expectations sharply downwards, and makes it clear that I'm not willing to assume the risks and problems that result from using the software I develop.

    In addition to that, I do the work extra diligently with a careful approach to business and professional practices. My business functions as a C corporation that has essentially a negligible amount of net assets ... and most importantly, I avoid clients who seem sloppy in their thought processes. These measures have made me an unlikely entity to want to sue, which is how I like it.

    As to health insurance, I have been amazed at the amount of fraud I've observed first-hand, such as suggested by sleazy health care providers. So, given that insurance is ultimately a pool, I would categorize the health care risk & cost pool as a cesspool so I tend to take my chances outside of it. When a health care provider asks me what insurance I have, I take out my VISA card. Meanwhile, I live my life on the no-afterlife premise and as if I'm made out of rolled gold ... very, very carefully. I often slow down at green lights and actively look for red-light runners. I tend to drive with a "what if that oncoming car came into my lane" premise -- and once that actually happened, while I was anticipating it. My car has seven air bags and its brand is one of the safest on the road. I manage what I eat, I exercise carefully, etc. I'm the sort of person you'd want in your health care risk and cost pool, which is why I'm not in any such pool.

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  2. Andre: I like your "cesspool" viewpoint :-). Not carrying any health insurance can be risky, though. Accidents and illnesses do happen, and they can wipe you out if you don't have even a catastrophic coverage type of plan. Carrying health insurance also reduces your out-of-pocket costs for medical services because of negotiated rates (about 25-30% reduction in my experience). It does seem that to reach my giant deductible in a year, either my wife or I needs to have at least one major organ removed, so I usually don't get my bait back from the high premiums I pay. Some years, though, I do. And I'm glad to have the coverage should either of us incur a really serious health situation.

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  3. Very interesting article indeed, Thanks for posting.

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