By Drew Hefflefinger, CFP®
Business risk is a constant threat to entrepreneurs and if not managed properly can lead to disaster. By having a plan in place that addresses these risks the business owner can feel confident about the sustainability of the business in the event of catastrophe.
During the Thursday, May 26th CBA Coffee Talk Mr. Kurt Whitmire from ALPS profiled his firm’s malpractice business and how they specifically focus their underwriting on the legal industry. During the presentation he outlined a variety of considerations to take into account when purchasing malpractice policies including but not limited to “inside and outside limits”, per claim v. aggregate coverage, first dollar defense, and how ‘tails’ work when an attorney leaves a firm or closes its doors.
Although the presentation focused on malpractice insurance it offers an opportunity to talk about risk management of a business in a broader scope. A firm owner is exposed to a variety of risks. When those risks are random by nature, have a definite cost, and are not simultaneously catastrophic to all interested parties insurance companies can accept responsibility for the risk in exchange for a premium. By simply paying a nominal annual premium a business or individual can avoid a seemingly bottomless pit of potential loss by transferring the risk to an insurance company.
This can and should be applied to a variety of risk including, but not limited to:
- Business Life Insurance: What would happen to your share of the business should you unexpectedly pass away? Would your heirs want the responsibility of firm ownership or would you rather see existing partners buy out the business’s portion your estate?
- Disability Insurance: The ability to generate income is often an entrepreneur’s greatest asset. Should disaster strike is your family still in a position to achieve their financial goals? Would the firm have the ability to hire another attorney fill your shoes until, if ever, you recover?
- Cyber and Data Breach Insurance: Should confidential information be exposed how much would it cost to mitigate the exposure? According to IBM the average cost of each lost or stolen record in 2015 was $154 each. That can mean hundreds of thousands of dollars to an established firm with decades of records on file.
- General Liability Insurance: Should a client slip on the steps outside your door, get injured, and file a lawsuit who are they going to target, you or your business? Probably the one with the deepest pockets.
Although these are just some of the insurable risks out there, they are important, not only to the financial stability of the business and its partners, but also your family. Having a well-defined and executed risk management plan is going to enable the firm owner to be more confident and encourage risk taking where there are greater rewards for doing so.
Drew Hefflefinger is a CERTIFIED FINANCIAL PLANNER™ at Engage in Wealth in Denver, Colorado. Drew specializes in working with legal professionals by helping them preserve and grow wealth while achieving life goals. Drew can be contacted at drew@engageinwealth.com.
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