In this lesson, we're going to talk about insurance. We'll talk about risk and the risk that your business may be facing and ways to approach managing those risk. Then we'll talk about the importance of obtaining insurance and particularly adequate insurance for the risk that your business may be facing. We'll spend a few minutes talking about the primary types of insurance and then give some tips on best practices when dealing with insurance companies. Now as a business, there's several legal and regulatory risk that your business will face and will continue to face. Torts, which is a very broad area of the law that encompasses everything from negligence to products liability, to personal injury, even to things like defamation or invasion of privacy. There's a huge amount of potential legal exposure your business may have for torts. Crimes, crimes that your employees may be engaging in within the scope of their employment. Torts and crimes are very big legal exposure for you as a business owner, because as a business, an employer may be liable for the tort, or the crimes of its employees, if those employees are engaging in that within the scope of their employment. That opens up a big window of risk for your business. In addition to those types of risk, there's statutory and regulatory compliance issues. You have to know all of the laws and regulations that apply to the type of business you're engaging in and making sure that you complying with all of those laws. Then there are contract laws. You have agreement with your employees, you have an agreement with your vendors, suppliers, and other third parties. If those agreements are breached either by your company or by the third parties, then there are damages that may ensue. There are equitable remedies that a court may impose upon your business. All of these legal and regulatory risk present a big challenge for you as a business owner. Getting your head around how to manage that challenge is very important for the success of your business. Here's how I like to think about risk. You want to think about the potential consequences for the risk and the likelihood that these types of risk will occur. Once you have a good idea of that framework, then there are typically three ways that you can manage the risk. You can either accept the risk or ignore it. You can transfer the risk or you can mitigate the risk. Usually worse that you will accept to ignore are risk that have low impact with a company. This is not going to take the company. An example of this is the printer at your company going down. That's not going to take the company. It can happen. It's not going to happen that often. That's a risk that you can ignore. If it goes down, you can either replace the printer cartridge or replace the printer. Everything's okay. Then there are risks that have a very high impact on the company. These are risks that can take the company down. Think about big stakes litigation, employment discrimination, or personal injury case. That can really cost the company millions of dollars in order to resolve. Those types of risks are risk, they may not occur that often but when they do occur, they can have a huge impact on a company. Those are the types of risks that you may want to consider transferring to a third party. That's where insurance comes in. What is insurance? Insurance is a risk-management scheme where the insured, that's you and your business, transfers the risk to an insurance company in exchange for the payment of a monetary premium. You essentially pay an insurance company to bear the risk of the occurrence, of an accident, or a product liability case, or an employment discrimination mitigation. The insurance company bears the risk up to a particular cap in exchange for you making a monthly or an annual premium. There are two primary types of insurance. First, we'll start with first-party insurance. First-party insurance is usually designed to protect you and your business. For example, you may have property insurance, which covers things like theft, or fire, or natural disasters, that's protecting your business property. You may also get business interruption insurance. This allows you to protect your business against loss profits or loss revenue as a result of a natural disaster or some other interruption in your business. Life insurance on you and your co-founders and your co-partners. That's a way of protecting your business from any type of accidental death or something happening with the founders. These are types of first-party insurance. The next type of assurance is liability insurance or third-party insurance. These types of insurance schemes are meant to protect against things that may happen to third-parties. For example, you may have liability insurance on your vehicles so that when the driver is in an accident or a third-party and that person is injured, the insurance will cover that person's medical bills and injury related things. You may also want to have a mitigation insurance in place for things like employment discrimination or IP infringement. These types of third-party insurance schemes are meant to ensure that the business can continue to operate when a third-party may bring a claim against the business. In summary and best practices for dealing with insurance companies. Keep in mind that insurance companies while they allow you to transfer the risk from your business to their insurance company, they may not always have the same interests. A good example of this is, let's take a litigation as an example. In a personal injury litigation an insurance company may have liability up to a certain cap. Now, the plaintiff in that litigation may know that what they're asking for, far exceeds the cap that the insurance company has. In a case like that, the insurance company who's now the defendant in the case, they may not be incentivized to settle with the plaintiff because they know, ''Hey, look, the most I'm going to pay is the cap.'' These guys are asking for well over the cap. The insurance company may be incentivized to just roll the dice to see what happens at the end of the day, they're only going to pay the cap. Now in a situation like that, that's not good for you as a business owner because if the insurance company rolls the dice, and if the plaintiff in that case is awarded a judgment that exceeds the cap of the insurance premium, then any difference would have to be borne by your business. Not only would you be paying your premiums to the insurance company in that particular litigation anything over a cap, you also have to be paying that amount and you'll have an adverse judgment against you. In those types of instances, the insurance company's interests, which is, let's roll a dice. Maybe I can get something lower than the cap. Your interests, which is, I want to make sure I get this resolved at an amount that's within the cap. Those interests can diverge. Now the law imposes upon insurance companies are an implied duty of good faith and fair dealing. This means that in situation like that the insurance company can't act in bad faith. They can't roll a dice in an effort to put you in an adverse position. If an insurance company does that, you may have some legal recourse against the insurance company if it's deemed to be bad faith. Now, in order to protect yourself against that, any time you're dealing with an insurance company in a litigation, it's worth the expense of getting separate counsel when your interests diverge. I oftentimes recommend getting a shadow counsel or anyone. A lawyer who can just follow along the case, watch what the insurance company has been doing. So that that lawyer can flag for you when your interests may diverge. That way as a business owner, you can continue to operate your business and not be tied down with the nuances of a particular litigation. Insurance is a very important way to manage risk that your company may be facing. For those very high impact type risk that can really put a drain on the company's resources, transferring that risk to an insurance company, whether it's first-party insurance or third-party/liability insurance, it's a good avenue to consider. But keep in mind that oftentimes your insurance company and your company may have different interests. In those scenarios, you want to seek separate counsel to ensure that your interests are protected.
