The business of freelancing: Insurances

This article on insurance is Part 1 of a short series of articles on running a freelance business. In it, I’ll try to answer the questions other technical writers have asked me about business insurances and what cover I have.

First, a disclaimer:

• I am not an accountant, financial planner, insurance adviser, business adviser, lawyer, or any other sort of financial or legal professional in ANY jurisdiction—nor do I pretend to be. Please consult your relevant financial and legal professionals before using any information in this article.
• All opinions are my own and based on the experiences of running my small (micro) business since 1999. I have never run anyone else’s business.
• The information in this article assumes you are working as an independent contractor, freelancer, etc. and not through an agency. If you work through an agency, check which insurances they carry on your behalf.
• The terminology in this series of articles is specific to Australia and/or Western Australia. Other states and countries may have similar options available but under different names.

When it all goes pear-shaped, what do you do? Panic? Well, depending on your insurance cover, the disaster you’re facing may not be as critical or terminal as you think.

One of the ongoing expenses in running your own business is insurance. Like me, you probably resent paying out lots of money for the ‘it might happen’ situation and wonder what else you could do with that money as you watch it disappear into the insurance black hole each year. However, without adequate insurance you could be up for hundreds, thousands, even hundreds of thousands of dollars either in claims against you or your company, or in lost income.

Instead of thinking of insurance as a black hole, think of it as ‘risk protection’ – you’re protecting your assets (your business and your ability to continue earning an income) from unforeseen circumstances.

What insurances might I need?

You’ll probably need the first five in this list as a minimum:

1. Workers Compensation

Every company that employs staff has to have Workers Compensation cover. This includes your company even if you are its only employee.

In Western Australia, your annual Workers Compensation premium is calculated on the total expected combined salary for you, your employees, and any subcontractors in the following year. If you employ subcontractors later in the year, or your salary increases or decreases from the projected amount, the following year’s premium is adjusted up or down accordingly.

2. Business Equipment

Similar to personal Contents insurance. Equipment insurance covers any equipment owned by your business. Examples include: laptops, printers, digital cameras, PDAs, mobile phones, fax machines, office furniture, etc.

If you travel with any of this equipment, declare it so that it is adequately covered away from your premises, including overseas. The premium may be a little higher, but you have the satisfaction of knowing that you have coverage for your laptop on the road or in the air.

One thing to consider if the equipment rarely leaves its home base: Take out standard cover for the year, then contact your insurance company or broker to get special cover for the time the equipment is away from its home base. The charge for that cover may be less than covering off site situations for the whole year.

3. Professional Indemnity

Typically, you will need $1m to $10m cover. The premiums on this insurance policy are by far the biggest insurance cost I have each year. One reason is that very few insurers in Australia provide this coverage for professionals like us. In fact, I have to go under a ‘computer professionals’ category.

You may decide you don’t need this insurance, but be aware that your client may require your business to have it. I won’t get into a discussion of should you/shouldn’t you. Supposedly this insurance protects you in case the client sues your company for a really big amount where it can be proved that you, as an employee of your company, did something (in the past 7 years) that caused the company damage or resulted in an injury or fatality to the client’s employees. If you don’t have this insurance and were in that situation, their lawyers could go after your company assets, followed by the assets of the company’s directors (you!). I recently found out from my broker that you can’t just cancel this insurance without considering the consequences—unlike most other insurances, this one covers you for up to the previous 7 years (statute of limitations), which means that if you’ve taken it out at any stage in that time, you probably need to continue it for 7 years since you were last required to have it. However, the broker did say that if you’ve sold your business or folded it there’s a special premium to maintain the cover (presumably this premium isn’t anywhere near as expensive as the standard annual premium).

According to one website:

“Even where a director or executive of a small business … has acted at all times in an honest manner and with appropriate diligence in the performance of his or her duties, an allegation of misconduct or negligence can be made which must be defended in court. Anybody involved in the management of your business … whether it is a paid position or not, may have duties and obligations which arise from a multitude of statutes…”

Make sure you let the insurer know if you need PI coverage outside Australia too; if you regularly do work on-site in North America, expect the premium to increase dramatically.

In other places this insurance may be known as Errors & Omissions insurance (EOI).

4. Public Liability

Another one that may be required by your clients. You should have it if suppliers, employees, or subcontractors come to your work premises (including your home office) at any time—that includes accountants, bookkeepers, cleaners, etc.

Public Liability covers the situation where they may sue you/your company if they were injured when they tripped over your front mat. Coverage is typically around $1m to $10m. It may be bundled with Professional Indemnity.

5. Income Protection

If you are the sole employee of your company, you should insure your ability to earn an income if you are temporarily or permanently incapacitated through illness or injury. You still have bills to pay whether you are earning or not, and a disability pension is unlikely to be enough even if you can get one.

Premiums for income protection insurance vary according to how long you can be off work before making a claim. For example, if you think you could survive financially without an income for three months, your premium will be less than someone who wants coverage from two weeks after the onset of the illness or injury (typically, the minimum time before income protection kicks in is two weeks).

Income protection insurance usually pays you up to 75% of your declared salary, and can last for many years (to age 65) if you are permanently unable to work.

Some policies let you include a business overheads component, which can help cover many fixed business operating expenses where you are unable to work through sickness or injury.

6. Trauma insurance

Sometimes this may be bundled with income protection or life insurance, so check carefully what’s covered in the policy. In essence, trauma insurance covers you for specified diseases or conditions, such as cancer, heart attack, stroke, etc. Usually the claim is paid out in a lump sum (e.g. $50,000) so you can pay medical bills, alter your house to accommodate a wheelchair, etc.

7. Key person insurance

If your company employs a few people, what happens if you get run over by the proverbial bus? Who takes over? Who runs the business? Who sells the business? Key person insurance provides a ‘cash cushion’ to help offset loss of profits if a key person dies, becomes disabled or suffers a major illness.

Sometimes, this insurance may be associated with business loan insurance (if your company has taken out a loan), thus allowing the loan commitments to be repaid.

8. Partnership insurance

Is your company a partnership with another person or other people? If your business partner died, would you want to buy their share in the business? Could you afford to? This type of insurance may provide you with enough funds to buy the business outright from your partner’s beneficiaries.

9. Property

Does your company own business premises? If so, there are special insurances for commercial and retail property buildings, as well as protection against theft, fire, and other external events that can affect the continual running of your business.

10. Vehicle

Does your business own a vehicle? Then you have all the usual car and third party insurances you have to pay.

11. Bundled ‘small business insurance’ packages

Some insurers offer bundled packages for small businesses that cover many of the insurances listed above. If your business is fairly typical you may find that one of these packages is suitable. The advantages of bundling is that everything is with the one company and there’s only a single premium to budget for.

12. Health

While all Australians are covered by Medicare and free public hospital services, not everyone who has their own business is willing to endure long wait times for necessary procedures, especially if waiting prevents you from earning your income or reduces your earning potential in any way. Consider private health insurance cover too.

13. Travel

Do you have to travel for work? Does the client pay your expenses? Do those expenses include travel insurance? While your client may pay for your airfares and accommodation, you’re often on your own when it comes to travel insurance.

If you travel a lot in a year, consider a multi-trip business insurance package. You pay a single premium and it covers you for all travel for 12 months. You can get these sort of packages through travel agents, especially those that deal in corporate travel, or check the deals from online insurers like http://www.1cover.com.au.

14. Life

While life insurance is a personal insurance, don’t leave it out of your considerations. In the event of your death, would your family be covered sufficiently to pay off debt and survive financially?

You can link life insurance with superannuation, and sometimes with trauma and income protection insurance.

15. Superannuation

While not insurance in the typical meaning of the word, Superannuation is nonetheless protecting you against some future event—in this case, retirement.

When you have your own business, it’s easy to pay everyone else and forget to ‘pay yourself’. Even if you pay yourself a salary, and perhaps the compulsory 9% Superannuation amount (in Australia), it won’t be enough on its own for a comfortable retirement.

If you have spare funds, consider salary sacrificing into Super. Of course, this strategy will depend on your age and circumstances, so consult your financial planner or accountant for advice. For those of you nearing or over 55 and less than 65, get some advice on the TRAP strategy (Transition to Retirement Allocated Pension) whereby you sacrifice all or most of your salary into Super, then take an income stream from your Super fund as an allocated pension. Assuming you have sufficient savings in your Super fund, you may end up earning as much as you did before, but with minimal or no tax to pay on your salary or Super earnings.

16. Specialist insurance

There are all sorts of insurances available for special situations, such as trade shows and exhibitions, tax audits, legal expenses related to contracts, employee dishonesty, etc.

How much cover do I need?

It depends!

The amount of coverage depends on your business structure (Pty Ltd company, sole trader, under your own name), the work environment (city office or hazardous on-site location), if you employ others as employees or subcontractors, your age, and sometimes the clients you work for.

Some clients require all their contractor companies to produce a ‘Certificate of Currency’ for the minimum coverage that they specify. For example, some resource companies and government instrumentalities required my company to have $5m Professional Indemnity cover, $1m Public Liability, and proof of a current Workers Compensation policy. You may be able to get a clause such as this removed from your contract, but if fighting it is likely to jeopardise a lucrative multi-month contract, you have to assess whether pushing hard to get it changed is worth it. For me, it’s not. I look at the cost of the cover and compare it to the contract. In the scheme of things, the cost is very little and I don’t have to maintain that level of cover once the contract has finished.

Where do I get cover from?

You could do all the research yourself and spend countless hours on the phone, on company websites, or consumer advocate and comparison websites, and still not get a clear answer or simple comparative costs.

Other than a lot of frustration, you’ve also just cost yourself a lot of money—and you still haven’t paid the annual insurance premiums. Let’s say it takes you a very conservative two hours to research offerings for each insurance type. If you are looking for cover for ten of the insurances I’ve listed above, that’s a minimum of 20 hours of your time. For the sake of this exercise, let’s assume your chargeable rate is $50 per hour. Those 20 hours have just cost you the opportunity to earn $1000 (20 hrs x $50). Many small business people forget to factor in the cost of their time when they do a business task that doesn’t earn them income. They think it’s dead time. It’s not. It’s an opportunity lost and should be costed accordingly. Economists have a term for this: ‘opportunity cost’—the cost of doing an activity instead of doing something else.

So what’s the alternative? Pay someone to do the research and all the running around for you. There’s a whole occupation devoted to this—they’re called insurance brokers and the type you want is a business insurance broker. Yes, they take a fee and some are affiliated with large insurance companies or banks, or get kickbacks (ongoing commissions, trailling commissions) from the companies they recommend. But assuming you get the cover you require at a price you’re prepared to pay, is that a problem?

I consider their fee miniscule for the peace of mind I get for not having to deal with the companies themselves, especially when it comes to claims. As an example, my insurance broker charges around $80 on each policy I have with his brokerage. This costs my business about $300 a year in addition to the cost of the premiums. If I have any claims or problems, it’s his responsibility to do all the chasing up on my behalf. And he’s my ‘go to guy’ whenever I need a ‘Certificate of Currency’ listing the client’s name—it’s done within minutes, compared to possibly hours or days when dealing directly with the insurance company.

Good, independent business insurance brokers are hard to find. Try asking colleagues, your accountant, and professional groups first—they may recommend someone. Or check the Yellow Pages and other reference sources.

What insurances do you have and how much do they cost?

Remember, my circumstances are likely to be different from yours—for example, I have a Pty Ltd company and I do a lot of work for companies in the resources sector. I have also had an income protection policy for many years (long before I set up my own business), so some of my costs may not match yours; and I think income protection is also based on age.

As a guide, these are the approximate annual insurance premiums I pay (all approximations include stamp duty, GST, and broker fees):

• Workers Compensation: ~$600 per year
• Professional Indemnity (bundled with Public Liability): ~$3500 per year
• Income Protection: ~$3600 per year (I have the minimum 2 week option)
• Business equipment: ~$1400 per year

It’s not cheap, but nor is losing your business or your income source, or getting sued.

Finally…

Make sure you factor the cost of insurance premiums into your rate so that there are no surprises when you get your policy renewals. Simplistically, if your insurance premiums are up around the $10,000 p.a. mark (as mine are), you have to work some 400 billable hours at $25 an hour, 200 hours at $50 an hour, or 100 hours at $100 an hour before you’ve covered them.

If you don’t like receiving a really large bill, stagger the premium renewal dates over the year, or choose a ‘pay by the month’ option if it’s offered.

While most of these insurances are tax-deductible expenses for your business, I advise you to check your eligibility with your accountant or tax professional.

And don’t forget to get professional advice about the specific insurances you need for your business and the circumstances in which you work.