Business Insurance in the USA: A 5-Step Process to Get a Calibrated Coverage

Business Insurance in the USA: A 5-Step Process to Get a Calibrated Coverage

OBJECTIVES:
  • Understanding when you need to set up an insurance coverage for your activities in the USA

  • Mastering the process for selecting a calibrated coverage that fits your immediate needs as well as future growth plans in the USA

Quite surprisingly, non-US companies expanding to the USA often overlook the insurance coverage topic, which is quite a big deal when starting to do business in a country where disputes quickly escalate and typically end up in costly law suits and liability claims.

In the USA, it takes time to set up a calibrated and cost-effective insurance coverage. Liabilities and law suits set aside (after all, it is unlikely that someone will sue you during the first year), be sure that you will experience some pain if you fail to anticipate.

Business Insurance in the USA

Let’s say for instance that you want to sign a contract with a US client: if you are the one in charge of providing the contract, your lawyer will ask you about your insurance coverage… if you don’t have any, you will certainly not be able to close any deal with your client until you get a coverage, along with enough materials to help your lawyer prepare the contract. If your clients provide their own contracts, they will most likely have their own contractual requirements and expect you to have an insurance coverage. We met last year with a company in distress: this company was about to close a deal with Apple, but as the technology giant sent the contract, executives realized that the latter required them to have a product liability in place within 3 weeks… but it usually takes 3 to 6 months to set up such a coverage, since underwriters want to get detailed information on the origin of your products, your quality control processes, procedures to returns products, disclaimers displayed on your packaging, etc.

You got it: should you want to secure US sales as fast as you can and protect your cash flow, you must have an insurance coverage in place ahead of time.

Here is a 5-step process to help you get a calibrated coverage for your business activities in the USA:

  • Check with your current (=non-US) insurance company first.

First, check with your HQ’s insurance company to see whether it can extend your coverage to the USA, especially if your products or services require some level of sophistication for underwriters besides a simple product and service liability or errors & omissions exposure. Many insurance companies operating in Europe for instance now have the ability, either directly or through correspondent relationships, to structure a global insurance program for their clients. In these situations, the client often benefits from more uniform coverage terms, better pricing (through economies of scale), and better / broader terms.

  • Pay attention to the conditions set by your current (=non-US) insurance company if you anticipate quick growth.

If your insurance company agrees to cover your company in the USA, you need to check the conditions that apply to the insurance contract. Be careful as your current (=non-US) insurance company may set conditions that will limit your coverage as your business grows. There are 2 typical scenarios: either your insurance company does not cover you any longer in the USA if you exceed a specific revenue threshold (e.g. $ 1M); or it stops covering you as soon as you recruit your first employee (e.g. a general liability insurance may not cover any office space and you may not need any office space, but you will be suspected to have such an office if you have an employee listed on your payroll). You need to clearly establish your immediate needs and your future needs to 1/ get a cost-effective coverage, and 2/ prepare a transition plan that fits your growth perspectives.

If you need additional coverage from a US insurance company:

  • Adjust your mindset and educate yourself.

The various types of coverage, their names, and the way they are bundled together may considerably differ from what you experienced in your home country. Do not expect to “replicate” your non-US coverage in the USA if you use a US insurance company. You need to get a clear understanding of US specifics. Let’s begin with the basics: what are the most common types of business insurance in the USA?

The most common types of business insurance coverage are: General Liability Insurance, Property Insurance, Professional Liability Insurance (or “Errors and Omissions”), Product Liability Insurance, Cyber & Privacy Liability Insurance, and Workers’ Compensation.

Depending on your business activities and the regulations of the state(s) in which you are doing business, you may also want to get other types of coverage: IP Insurance, Directors and Officers Liability Insurance, Short-Term Disability Insurance, Long-Term Disability Insurance, etc.

Click on the image below to download the guide on US business insurance policies:

Business Insurance in the USA: Glossary
  • Hire a good insurance broker.

In the USA, you will most likely not be able to deal directly with insurance companies. US businesses usually use an “insurance broker” who searches and negotiates the best insurance packages for them. Finding a good insurance broker is key. A good broker should 1/ ask you a lot of questions about your business model, your financial and operational structure, and the anticipated phases of your expansion, and 2/ provide you with clear guidance and explanations when sending you quotes (versus sending you raw documents and let you decipher them on your own).

As you prepare your 1st interaction with the insurance broker, get ready to answer the following questions:

  1. What is the name of your company?
  2. Have you set up a US subsidiary yet?  If so, could you please provide its name and its FEIN (Federal Employer Identification Number, or “EIN”)?
  3. Could you please provide the firm’s website address, and, if applicable, the US entity’s website address?
  4. Could you please provide a comprehensive description of your products and / or services? How are they going to be used by your clients? How are they delivered, installed and / or performed?
  5. When was the company set up in your home country? How long have you been selling your products and services in the USA?
  6. Who are your company’s 5 largest customers in the USA?
  7. What is the name of your HQ’s insurance company? Does it offer any coverage for your activity in the USA?
  8. Have you incurred any liability claims or losses in your home country, or in other countries you are selling to, in the past 5 years?  If so, please provide a brief description for each occurrence.
  • Be patient with the RFQ process.

Given the complexity of the insurance system in the USA and the unexpected questions your insurance broker will ask, it may take up to 3 weeks to get attractive quotes that truly match your business needs. Expect a lot of back-and-forth between your team and the insurance broker before you even get a first estimate.

As you enter the quoting process with your US insurance broker, we recommend that you involve your various team members in the process and get organized to collect information on your business model across your company’s departments. Typically, the insurance broker will send you an “application” document issued by the insurance companies he has selected for you. You will find there the exact questions you need to answer in order to get a quote.

  • Top executives will have to provide information regarding the types and amount of coverage required, the company’s gross revenue (past, current, projected), the governance structure, etc. Some documents may be required, such as resumes or biographies for the key principals if in business since less than 3 years.
  • Your CFO will have to provide detailed information on revenue allocation as well as products’ or services’ costs. Let’s say for instance that you sell a robot operated by a software and you provide installation, training, and maintenance services to your clients: you will have to give a breakdown on both revenue and costs for the robot, the software, installation services, training services, and maintenance services.
  • Your legal and administrative assistants will have to gather sample contracts used with clients, and sample agreements used with business partners (contractors, distributors, freelancers, advertisers, etc.). They will have to answer questions pertaining to various risks, including definition and timing of property transfer (when products or services becomes customer’s property), confidentiality and privacy terms with each party, liabilities, warranties, and guarantees provided in contracts, the percentage of products or services that are delivered by third parties, etc. If you own a building, be ready to provide the lease and a description of the building’s layout (interior and exterior).
  • Your CTO will have to provide information on security matters, especially if you sell a software: people in charge of security and privacy, type and number of records processed per year, identification of encryption controls, intrusion detection systems, backup storage controls, list of all technology providers upon whom you depend to conduct your business (data center, cloud computing, payment processing, records storage, managed IT services, etc.) along with the contracts you have signed with each of them, etc.
  • Your quality control manager will have to provide a detailed description of quality control processes in place (production, delivery, returns, etc.) along with the list of existing and pending certifications for your products and services.
  • Your CMO will have to provide information on procedures (use, licensing, and consent agreements) regarding contents that you use in your products and services, on your website, in your promotional materials, and on your social media. Questions may also be asked about the various marketing channels you use: opt-in and opt-out methods for email communications, broadcasting or publishing activities, etc.

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Disclaimer: The materials provided in this US Toolbox are for general information purposes only and are not intended to constitute comprehensive or specific legal, accounting, tax, marketing, or other advice. These materials may not reflect recent developments in the law, may not be complete, and may not pertain to your specific situation and circumstances.TradeSherpa, Inc. assumes no responsibility for errors or omissions in the materials, or for any losses that may arise from reliance upon the information contained these materials. Because these materials are intended to provide only general advice, specific advice should be taken from qualified professionals when dealing with specific situations and circumstances. 

2019-01-14T17:41:20+00:00