Are you a sole proprietorship, partnership, LLC, or S or C Corporation? Do you have a DBA (doing business as)? Have you changed your business name or moved from a sole proprietor to an LLC, or added a DBA? Folks, all of the above can really affect your insurance, so let's take a look at why it's super important to make sure you have this correct with all your insurance companies.
Let's begin by looking at a general liability policy form. Whether you are taking out a PSI Liability policy, a Business Owners Policy (covering liability and property), or a liability policy from another insurer, the named insured and dba's really matter. There is an entire section in the policy titled "Section II - Who is an Insured" that spells out exactly who is covered under the policy based on your business type. For example, if you are an individual/sole proprietor it reads: "you and your spouse are insureds, but only with respect to the conduct of a business in which you are the sole owner" and if an LLC, it reads: "you are insured, your members are also insured's, but only with respect to the conduct or your business. Your managers are insureds but only with respect to their duties as managers" Each of these definitions varies based on the business type, as to who is covered under the policy.
If you change your name, or you acquire or form a new entity, it is extremely important that you contact your insurance agent to make the change so that there is not a problem when a claim arises. It is usually recommended that you keep the old name listed as a named insured as well, as there may be a claim that arises from the past when you were operating under the prior name. Let's look at the following case study: Jon Doe starts his business and purchases insurance under Jon Doe, but after 3 months in business, he changes the business to an LLC and adds a dba, JD LLC dba Jon's Pet Sitting and Dog Walking Service. A year goes by and he hastily completes his renewal application and simply uses Jon Doe as the named insured again on the renewal. In the fourth month after renewing his policy, he has his first dog bite claim. The victim contacts her attorney and they file suit against JD LLC dba Jon's Pet Sitting an Dog Walking Service. Jon's insurance company receives the claim and denies the claim as they do not have an insured by the name of JD LLC or a dba Jon's Pet Sitting and Dog Walking. In doing so they cite a provision in Jon's policy that states that coverage for newly formed entities is afforded for 90 days or until the end of the policy period, whichever comes earlier. The insurance company has visited the secretary of state website which clearly shows the LLC was set up a year earlier, and the insurance company was never notified.
Now let's turn our attention briefly to property and auto insurance to anyone out there that may own an office building or a rental dwelling or another commercial structure or a commercial vehicle. Let's use the same Jon Doe as before. Jon may purchase the property in his personal name and take out a policy in his personal name, but later he transfers the property into an LLC. If Jon continues to renew his insurance under his personal name, he once again could be out of luck at claim time. As Jon Doe would not have an insurable interest in the property if the title is under the LLC. For commercial auto insurance, many insurance companies will refuse to write a commercial auto policy in the name of an individual, and will require the vehicle to be titled in a business name. If Jon had taken out a personal auto policy and then transferred the vehicle into his LLC, the personal auto insurer could also refuse to pay the claim and/or cancel the policy once it is discovered.
Last but not least, let's look at workers' compensation, as this policy in particular can cause major problems if the Named Insured on the policy is not exactly matching the correct entity name. Most all insurance companies require Federal ID #'s to quote and bind a workers' compensation insurance policy. If you are an individual/sole proprietor, they will accept a social security number. We often see pet sitters request an insurance quote under their personal name and use their social security number. Sometimes they may have an LLC and just not recall the Federal ID #, and sometimes they may be starting out and in a couple of months they opt to change over to an LLC or an S Corp. The problem arises at audits when they are required to send in payroll records.
Unlike the general liability and other policies above, workers comp is subject to individual state statutes. In those statutes, they define the various business types similar to the general liability form, but they take it a step further. You see, under a workers comp policy, the owner(s), partners, LLC members, and corporate officers have the option to include or exclude themselves from coverage. However, the statutes typically define wages that must be used for these people (if included in coverage) based on the type of business entity. In addition, some states may automatically exempt sole proprietors, but automatically include LLC members or vice versa.
So one more time let's look at the effects on Jon Doe. He takes out a workers comp policy in his personal name as a sole proprietor and informs the agent quoting the coverage that he prefers to be excluded from coverage. The agent reads the state statute and sole proprietors are automatically excluded, so the policy is issued, correctly excluding Jon. After a few months, Jon changes over to the LLC and fails to inform the agent or the insurance company of the change. After his policy expires he sends in his payroll records, all of which show he paid all his employees under the JD LLC, and not under his personal name. The auditor reads the state statute and it says all LLC members are automatically included in coverage at $50,000 wage, regardless of what you actually paid yourself. Jon had estimated his employee payroll correctly at $25,000. But since he failed to alert the agent or company that he had changed from a sole proprietor (automatically excluded by state statute) to an LLC (automatically included), he is being billed an additional $2,500 on his prior policy, as well as his renewal policy. Had Jon informed his agent/company, he could have completed an exclusion form and not been charged the additional premium.
So no matter what type of insurance you have, please be aware, the Named Insured and the Business Entity type need to be 100% correct. If you change a name, add a dba, acquire/purchase, or start another business, please alert your insurance agent/company. Don't be like Jon, or you may find yourself with a headache that won't go away.
Questions?
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