Becoming Your Own Boss (BYOB, 3.4)

In the first and second articles of this series (BYOB, 1.0 and 1.1) you learned some of the facts related to the current employment picture and examined some of the choices that were available to you. In the third, fourth, and fifth articles of this series (BYOB, 2.0, 2.1, and 2.2) you answered some key question to find if starting as an independent contractor was a good idea for you.

This set of articles (BYOB, 3.x) covers a number of topics that will make it more likely that you will succeed as an independent contractor. The last article covered the equipment needs of your business as an independent contractor. This article goes into detail on the several different types of insurance that you might need as an independent contractor. There are several kinds of insurance that you must consider as an independent contractor. These are described in the following sections.

Health Insurance

In the medical climate of today, health insurance of some kind is an absolute necessity. If you are laid off or if you can arrange to be laid off, the insurance carrier that provided your company insurance plan is required to make coverage available to you for a time, by law. The Federal Coordinated Omnibus Budget Reduction Act (COBRA) requires that the carrier make it available to you for 18 months after you leave employment. Such coverage is often expensive, but it is a way to secure coverage while you are searching for the "right" plan.

If your spouse works and has coverage with an employer, perhaps you can be covered by that program. If so, it is almost certainly the least expensive coverage that you will find.

If you must shop for coverage, do so carefully and do not overlook any possibilities. For example, perhaps an organization or society of which you are a member (or prospective member) offers coverage. Perhaps there is a local health maintenance organization (HMO) in your area that offers good coverage.

If you or other family members are effectively uninsurable through a private plan (because of a pre-existing medical condition), and you do not have COBRA or group coverage available to you, many states have a medical pool" group plan that is available. This "pool" coverage usually costs about the same as an unrestricted group plan, but you must meet certain requirements in order to qualify. Check with your state insurance commission to determine if it is available.

In any event, major medical insurance is the absolute minimum health coverage that you need. It might be expensive, but it is necessary. Don't leave employment without it.

REMEMBER - It might take several months for new health insurance coverage to become effective, so plan ahead.

Business Insurance

In any new business, the facts of life include high expenses, high cost of borrowing, and limited operational funds. Under those conditions, business insurance is another absolute necessity. For the independent contractor, there are two kinds of business insurance: one kind (business contents) covers possessions such as equipment and other office contents; the other (business interruption) covers business income loss that arises out of a covered circumstance. It is possible that coverage for the second is provided in a package with the first.

Business Contents Coverage: Business contents coverage is a type of commercial insurance that protects you against loss of the contents of your office from fire, burglary, storm, and other calamity. This coverage is offered by many companies that provide homeowner coverage. Several companies offer decent coverage at an apparently fair price, both for offices in the home and for traditional offices.

If the company from which you purchase your homeowner's insurance does not offer such coverage, shop around for companies that write commercial policies. Ask among the small businesses in your neighborhood for recommendations on companies that will provide service rather than just taking your money. Make certain that you specify "replacement cost" coverage, not "actual cash value" coverage. It will cost somewhat more, but it is necessary and will pay for itself, perhaps many times over, if you suffer a loss.

Also, make certain that you inventory all of your business equipment and facilities and buy sufficient coverage. If you customarily keep personal items in your office, you probably should include those in the business coverage. It would probably be a good idea to engage the services of an appraiser to establish values, and then repeat the process whenever you make significant new business equipment purchases.

Business Interruption Coverage: Business interruption coverage is a type of commercial insurance that reimburses you for income that is not derived because you were unable to perform following an unfortunate incident. For instance, it is entirely possible that you would be unable to perform regular tasks for a protracted period following a fire. Many businesses could not survive such an income loss, particularly if it occurred early in the life of the business. Business interruption insurance could literally save your livelihood. Some companies offer business interruption coverage as a package with business contents coverage. Check with your insurance agent for information on this coverage.

NOTE: It is very important that you evaluate your personal and business coverages as a complete package to make certain that everything is covered. If your office is located in your home, this is doubly important because a burglary, fire, or some other kind of unfortunate occurrence could have devastating consequences on both parts of your life. Shop very carefully, and evaluate potential carriers very carefully and very thoroughly.

Unemployment Insurance

Every employer is required to provide unemployment insurance for each employee. This insurance provides emergency income in the event of job loss.

As an independent contractor, you will not be eligible for unemployment insurance for yourself unless you incorporate. The state defines compensation for a sole proprietor or a partner as distribution of profits, not payment of wages. Thus, if you do not incorporate, you may not participate in the unemployment insurance system because you are not a wage earner.

If you incorporate, you will be required by the state to pay unemployment compensation insurance premiums to protect yourself, because you will be an employee of the corporation.

Actually, this coverage is not expensive, and it could come in handy. At some time in the life of every independent contractor, there is slack time between contracts. For many contractors, it is a yearly occurrence, almost always around the year-end holidays. It seems that many companies run out of money for contracts in the fall. Then, what with the holidays and budget controversies for the next year, contracts do not start again immediately after the holidays.

Whatever the reason, in most states, contractors who are incorporated can simply lay themselves off and collect unemployment compensation for that slack time. Obviously, unemployment compensation is less than the income that would be derived from contracts, but it is better than nothing. Check the law in your state.

NOTE: If you collect unemployment compensation, or an ex-employee does so, your unemployment tax rate will rise. If you decide to collect unemployment compensation yourself, check into the probable increase beforehand so that you will be prepared for the increased tax later.

NOTE ALSO: In most states, if you lay yourself off and collect unemployment compensation, you will be required not only to search (and document that search) for contracts for the corporation; you will also be required to search for regular employment for yourself (and document that search also). If you object by using the seemingly logical reasoning that any contract that you obtain for the corporation will result in work for its employee (you), you will not prevail. The position of the state will be that searching for contracts only for the corporation unnecessarily restricts the potential for removing you from the unemployment rolls. As with most government agencies, the state bureaucracy is perfectly willing to take your money for unemployment insurance, but it is very reluctant to give any of it back.

Life Insurance

As with medical insurance, family life today simply requires life insurance. As you leave employment, you will lose the life insurance provided by your employer. However, it might be that you can continue coverage on all or part of that insurance on a private basis. Check into this carefully. Compare rates among several companies. If you have some private life insurance as a supplement to the employer supplied coverage, perhaps that coverage can be increased at a reasonable rate. Continuing or increasing present coverage has two very significant benefits. First, the premium that you pay now is based on your age when you obtained the coverage, not your age today. (Obviously, the premium for any new or expanded coverage will be based on your age at the time that you acquire it.) Second, because of your present coverage, a new physical examination might not be required if your last examination was relatively recent.

Liability Insurance

There are three general classes of liability insurance about which you will need local information:

1. Liability coverage for errors and omissions in the work that you perform,

2. Liability coverage for losses that a client might suffer at your hands or in your place of business, and

3. Liability for losses that others might suffer in your place of business.

Errors and OmissionsInsurance - As an independent contractor in the primary professional fields treated in this book, the work that you do for a client is, in virtually every instance, both defined by and approved by the client or the client's representative. Thus, errors and omissions liability for the work is assumed by the client. For this reason, liability insurance is usually not purchased by an independent contractor. This does not suggest however, that liability coverage is never required or appropriate. In some instances, the client will require such insurance. In other instances, you might decide that caution is the better part of valor. Liability insurance is available, and it is not terribly expensive. It is ordinarily purchased for the duration of a contract or a risk, and is thus not an absolute requirement for starting your business. Shop around carefully to find a supplier of such coverage so that you will be prepared should the need arise.

Business Owner's Policy - As an independent contractor, you will probably also need insurance coverage for any damage that you might cause to the client's premises or equipment, including the loss of computer files. Also, if you take the client's equipment or information from the premises, including into your own premises, you might need insurance coverage for damage and also from loss or theft. This type of coverage is ordinarily called a business owner's policy and it is reasonably inexpensive. As with errors and omissions coverage, it might be possible to purchase this coverage only for the duration of a contract or a risk, but it is probably not appropriate to do so except under unusual circumstances. If you attempt to start and stop coverage more than a time or two, you will probably find that coverage will become hard to find. Again, shop around carefully to find a supplier of such coverage.

Personal Liability Insurance - As the owner/operator of a business, you will require continuous liability coverage to protect others in your place of business or on your premises in the event of personal injury or property damage. This is similar to the coverage included in your homeowner's policy. If your office is in your home, it is entirely possible that your homeowner's policy will suffice or can be made to suffice easily. Such coverage is relatively inexpensive. Again, shop around for the best combination of coverage and rates, but secure this insurance as soon as you open for business.

Worker's Compensation Insurance

When worker's compensation insurance was instituted some years ago, it was designed to protect the employer against litigation by injured workers. With the passage of time, the perception has changed. Worker's compensation insurance is perceived today as protecting the worker against losses resulting from injury in the work place. It is evidently a profitable business because it is now a multi-billion dollar segment of the insurance industry.

However you perceive it, if you own a business, it does not practically apply to you personally because it is prohibitively expensive to cover a business owner. (The position of the insurance industry is that, as the owner of the business, virtually anything that you do is business related.) Fortunately, you can purchase medical and disability insurance to provide the necessary protection at much lower cost.

If you hire an employee however, you will be required to purchase worker's compensation insurance coverage for that person. In some states, worker's compensation insurance is a state-run business and it is required that you acquire coverage from that agency. If your state does not provide it, coverage is readily available on the market today. Your business insurance provider probably does not write such coverage, but your agent can probably arrange it for you or advise you as to where to procure it.

Storage Insurance

Storage insurance is not what you might think. Actually, it is not insurance at all in the commonly accepted sense. Instead, it is fire and burglar resistant storage space that is used for storing your records, software, archives, tapes/disks, drawings, and other such valuable or irreplaceable items. Ideally, it should consist of a fire-rated safe in your office, and an off-site storage space in a suitable protected location. With this combination, you will have a reasonably safe storage area in your office for items that you collect or modify between trips to the off-site facility. It is important that you make this provision early in the life of your business so that you will be prepared for the records accumulation that will naturally occur.

Make certain that the office safe is rated sufficiently to protect your magnetic and paper records from heat, smoke, and water. Obviously, heat will destroy magnetic records, but a small amount of smoke and water also can contaminate magnetic records to the point of unusability. In addition, be aware that the manner in which buildings burn is affected by construction methods, materials, oxygen supply, etc. There are spaces in any building that offer lower potential for exposure to heat, smoke, and water. Make certain that the safe is placed in such a location. Seek advice from your local fire marshall or fire department on this. These factors are very important. Don't increase your risk through carelessness.

Performance Bond

A performance bond is a type of insurance policy that guarantees to the client that a contractor will perform according to the terms of a contract. The bond is written and purchased so as to be applicable to a particular contract. Performance bonds are not ordinarily required for work that is done by an independent contractor in professional technical disciplines. However, should the client bring up the subject, you should be prepared to offer some educational information.

First, bonds are expensive. For a non-standard type of bond, which yours almost certainly would be, the typical charge would be three percent of the subject contract.

Then, there is the delay involved in obtaining the bond. It is a relatively complex process that often takes two to three weeks to accomplish.

A credit check will be required just as in the case of a loan. Your last three years of financial statements and tax returns will probably be required. A financial report by an accountant will probably also be required. If you are incorporated, both your personal and company records will probably be scrutinized. A telephone call to a local company that offers bonding will give you cost and other information pertinent to your area.

Should the question arise, your best course of action is to point out that the principal disadvantages of a bond are cost and time. Diplomatically make it known to the client that such cost is not ordinarily part of your overhead and would necessarily be passed on in some fashion. Then point out other methods for obtaining the same kind of performance assurance. For example, the following methods can be offered:

Frequent progress payments based on completion levels for the contracted task allow for good performance assurance (by allowing careful monitoring) with little monetary risk to the client.

Your personal reputation as a professional person is also a measure of assurance.

A comprehensive project plan, with performance milestones, and with participation and approval by the client, is another measure of assurance.

Use your imagination. There are many ways to make the client feel more positive about your contribution to the project.

The next article in this series (BYOB, 3.5) addresses the important topic of your personal appearance, marketing, and confrontation skills.

To read the rest of the series click here