Five Blind Spots that Can Sink a Company

After spending your days—and nights—growing your business by analyzing your financials, freshening up your marketing strategy, and investing in your own employee management skills, there are still unforeseen circumstances—blind spots—that can affect the success of your business. There may be time bombs lurking in these blind spots that can explode and take your business down. There are several options for protecting your business against some threatening—and often overlooked—risks.

1. MAJOR CUSTOMER CAN'T PAY

There is always a chance that one of your major customers will go bankrupt or be unable to pay the bills, leaving the creditor business holding the bag. Even one major customer going belly up can hurt a business of any size. Unfortunately, many small businesses are dependent on a few major customers whose reversal of fortune can threaten their own viability.

Fortunately, credit insurance can save the day by covering the business for qualified debts that may go unpaid by troubled or bankrupt customers. This type of insurance can be even more important in a difficult economic time, when a good customer can go out of business virtually overnight. The cost of this type of insurance averages less than one percent of the covered receivables.

2. EMPLOYEE LAWSUITS

A disgruntled employee, especially one laid off due to a downsizing, may sue your company on the grounds of discrimination. Even if there is absolutely no merit to the charge, the business may face thousands of dollars in legal fees. Employment practices like liability insurance can remedy this risk by paying for legal bills and possible settlement costs and fines. The cost of these types of policies depends primarily on the number of employees and the industry sector. Premiums can be as little as $2,000 per year for a $1 million limit for companies with less than 10 employees.

3. CYBERCRIME

This may be the most dangerous threat to the company’s confidential and financial information. In the past, small businesses had no protection from the fiscal damage caused by hackers and computer viruses, because cyber insurance policies were difficult to underwrite. While the cost depends on the size and type of business, cyber insurance policies are now much more affordable. For example, a small business that only wants to protect against claims arising from a privacy breach due to online hacking, may have a premium of $2,500 per year for a $1 million limit. As the coverage expands and the level of risk in the operation expands, so too does the premium.

Cyber insurance policies for small business are especially broad, because they also protect companies against virtual crime committed “offline,” meaning a perpetrator steals confidential files found within a business’s network. An example of an offline cybercrime would be if someone copies files from a business’s server, and then publically displays the material on the Internet. The cause of the privacy breach was not a computer security flaw, it was an office security flaw. This exact scenario was recently played out when an ex-employee of Goldman Sachs allegedly stole trading codes that he could have sold to the highest bidder.

4. EMPLOYEE ACTIONS

Your business can be held responsible for your employees’ actions. Basic insurance policies are offered to business owners that mostly cover damage to property, errors or omissions (i.e., malpractice), and automobiles. However, they do not protect a business against potential claims filed by its customers for actions committed by employees. For example, only a comprehensive insurance package will cover money stolen by an employee in transit before it could be deposited; when an employee commits forgery either on a bank deposit or withdrawal; or when computer or wire fraud is committed by an employee of the company either involving your business, or a customer’s account.

5. PERSONAL LIABILITY

An owner or executive of an LLC can be held personally liable through a legal maneuver called “piercing the corporate veil,” which is undertaken by a creditor. Factors a court considers when deciding whether to seize a director’s or officer’s personal property is whether fraud was committed, whether corporate formalities were followed, whether there was a commingling of personal funds and company funds, whether the LLC was sued under tort or contract, and whether the company was grossly undercapitalized or had no capital.

Director’s and officer’s insurance can help protect against these claims. Having the right insurance policies in place can protect your business against the toll these five hidden risks can take, and put you at ease if you find yourself in the middle of a crisis.