No small business owner is immune from misfortune. Eventually it will strike. It always does. Fortunately, misfortune can usually be anticipated, and plans can be made to mitigate its impact. Yet many SBOs totally ignore the risks and dangers inherent in running a business and fail to take any measures to protect themselves.

The worst blow to any small business is the loss of the owner or a key employee. Yet very few small businesses have adequate life and disability insurance on these key figures. If there is insurance, it is purchased to protect the spouse or children with little thought to what would be necessary to preserve the business itself.

Another common omission is contents insurance. Whereas the landlord usually insures his building, the tenant often doesn’t bother to take out a contents policy. If a fire occurs and his business assets are destroyed, he may have no recourse and find himself out of business. Even if the tenant does have contents insurance, rarely is there business interruption insurance. After a fire, a business may be shut down for months and, without income for that period, most businesses will fail or be forced into bankruptcy.

I can remember two of my clients who suffered this fate. One was an immigrant from China who had established a very nice computer training school in North Dallas. His training was state-of- the-art and in high demand. Unfortunately, one night there was a fire in his office building. When he went to work he found his business totally destroyed. He had bought fire insurance to replace his computers and equipment, but had very limited business interruption coverage. When he finally got the proceeds from his insurance it wasn’t enough to pay even half the debts he had racked up while he was shut down.

Another client owned a very popular independent grocery store in the mid-cities area. He had owned the store for years, and it made a very nice living for him, his wife and several family members. One night he was called and advised that his store was on fire. When he got there, his heart sank as most of the store was gutted. Although he had adequate fire insurance, he didn’t have business interruption insurance. As the months dragged, his customers found other places to buy groceries. Because he had gone almost six months without income, he had exhausted all his capital and, when he reopened to lackluster sales, he was forced into Chapter 11. He struggled for six months to come up with a viable plan but ultimately had to convert to Chapter 7.

Another danger to SBOs is employees. Employees have a propensity for being injured on the job and expect the employer to take care of them until they recover, even if it was their own fault they were injured. The workman’s compensation system was developed to protect the employer from this potentially devastating liability, but over the years the cost of workman’s compensation insurance has become cost prohibitive in the eyes of many SBOs. Because of this, many SBOs have elected to opt out of the system and go naked or provide an alternate plan to deal with on-the-job injuries.

Most of these alternative plans do not provide anywhere near the protection that a regular workman’s compensation policy would provide. Consequently, many SBOs facing substantial employee claims can be literally put out of business because the law provides that without workman’s compensation coverage, all common law defenses the employer would normally have are lost.

Another pitfall that SBOs often stumble into is terminating employees while on workman’s compensation or with an outstanding claim for an on-the-job injury. It’s often difficult for an employer to continue to pay an employee who has been injured and can’t perform his or her job. I frequently receive calls from my clients asking if they can terminate an injured employee, particularly if it is clear he would never be able to resume his job. I have to tell them they can't do this because injured employees are protected by law, and employers can be sued if they wrongfully terminate an employee. This is extremely frustrating to my clients and difficult for them to accept.

It is particularly bad when the employer thinks the employee has faked the injury. One client, a rather outspoken owner of a chain of dry cleaners in Dallas called me one Monday morning and said an employee had reported an injury while bending down to pick up a basket of clothing. The employee reported that as he straightened up he felt something pull in his back and felt a sharp pain. Of course there were no witnesses to this injury, and my client was convinced the injury took place over the weekend while the employee was gardening at home. Apparently a coworker had heard the employee talking to someone on the phone, remarking that he had injured himself while gardening the day before.

When my client heard of this, he got very angry and fired the employee. Unfortunately, the coworker who heard the admission was an illegal immigrant and was afraid to testify. It wasn’t long before my client was served with a lawsuit for wrongful termination. The lawyer who handled the case for the employee specialized in this area and took all his cases on a contingent-fee basis. The law was so much in favor of the employee that this attorney found it a very lucrative business to prey on SBOs struggling to keep their labor costs down.

Although insurance against all of these hazards isn’t cheap, it’s not usually all that expensive either. In the long run, it’s much cheaper to have the insurance than to suffer the consequences of having no coverage at all. SBOs are an optimistic bunch and often delude themselves into thinking disaster won’t strike them. But they are wrong; it’s just a matter of time until it strikes everyone.

Next - Larger Forces