April 21, 2014

I'm Just an Individual Engineer: Do I Need the Types of Insurance Companies Buy?

Faegre Baker Daniels partner Mark Voigtmann authored the following article for the Control System Integrators Association.

As a lawyer who concentrates his practice in the industrial automation space, I am frequently asked all manner of questions about insurance. One of the most basic comes from those who work in automation not as “companies,” but as individuals. Their question is really a quite simple one. It goes like this: “I’m an individual — not a company. Do I really need to buy the same type of business insurance policies that are typically purchased by much larger companies? 

The answer is no — you don’t — so long as you can make the following statement in complete candor: I have absolutely no assets that are worth protecting. 

It’s really that simple. If, in the event something goes terribly wrong on one of your projects, you are able to tell me with a straight face that you can afford to say goodbye to your car, your real estate, your boat, your bank accounts, your rare coins, your collection of Toby mugs, your savings — and you are willing to start all over again — your question is a legitimate one and you probably do not need insurance.

If, on the other hand, there are one or more “items” you would prefer to keep in the hands of your family and away from the hands of creditors — you probably ought to take a look at procuring at least some minimal level of coverage for your business activities.

What risks are we talking about? There are two broad categories. The first risk is that your mistakes or omissions cause someone else to be injured or to suffer a loss to their property. The second risk is that your mistakes or omissions cause someone else to lose money that they otherwise would have earned. The first risk is typically covered by an insurance product called a commercial general liability (CGL or sometimes simply GL) policy. The second risk, on the other hand, is typically covered by something called a professional liability (PL or “errors and omissions” (E&O)) insurance policy. 

In each situation if you are sued and you do not have one (or both) of these policies you likely will be out to sea without the proverbial paddle.

Of course you may be asking yourself: if I work as a subcontractor, doesn’t my prime contractor’s insurance cover me? The answer here is a clear no. Yes, it is true that the prime contractor is likely protected if you make mistakes (and someone tries to hold the prime responsible for your mistakes), but that is not the same thing as saying there is coverage for you individually — typically there is none.

Nor does your car, homeowner’s or individual umbrella policy provide any help. Car insurance protects against the risk of car accidents and related losses. Home insurance protects against personal injury or property loss resulting from things happening at your home. Losses to third parties for business activities occurring nowhere near your home or car simply are not on the radar screen for home or car policies.

What about taking great care to avoid mistakes? Isn’t being a highly experienced and capable industrial engineer some protection against these types of losses? In other words, assuming that I am very good at what I do and never have caused damage, injury or loss in the past, doesn’t that say something about the odds of facing such a problem — and the need for business insurance — in the future?     

Maybe, but keep in mind that such insurance doesn’t just protect you when you have actually caused such problems; perhaps more importantly, it also pays for lawyers to defend you on those occasions where you have done nothing wrong.  

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