Unemployment Insurance

Employers are typically required to pay into unemployment insurance—either through private carriers or state-run programs. When a terminated employee collects unemployment, that cost ultimately flows back to the employer through higher rates. Many employees don’t realize unemployment benefits are funded by their former employer, not by the government. A CPA can help you stay compliant with your state’s requirements.

Workers’ Compensation Insurance

Workers’ comp covers employees who get injured on the job. Many states require employers to carry it, and for office-based jobs, the premiums are usually modest. Some states exempt business owners themselves from the requirement—meaning the owner can opt out of coverage. Check your state’s rules, because non-compliance with workers’ comp laws can create serious liability.

Key Person Insurance

If your business depends heavily on one or two people—whether it’s the founder, a top salesperson, or a technical expert—key person insurance protects the company if that individual dies or becomes incapacitated. The business owns the policy, pays the premiums, and collects the benefit. It’s a way to buy time and resources to recover from the loss of someone the company can’t easily replace.

Employment Practices Liability Insurance (EPLI)

Once you have more than about 10 employees, EPLI deserves serious consideration. A single lawsuit or EEOC investigation can cost more in legal fees than years of EPLI premiums. The policy covers claims related to wrongful termination, discrimination, harassment, and similar employment disputes. If you have a clean record and no prior claims, the premiums are usually quite reasonable—and the peace of mind is substantial.

Video Transcript

Transferring Risk with the Right Insurance

You can do everything right in your business. Hire great people. Follow the rules, grow fast, but one unexpected lawsuit, injury or tragedy can still sink it all. That’s why smart business owners don’t just prevent risk, they transfer it. The right insurance policies can be the difference between staying afloat and shutting down.

In this segment, we’re diving into the essentials from unemployment and workers’ comp to key person and liability coverage, so you know exactly what to ask your insurance agent and what could cost you big if you ignore it.

The purpose here is just to give you a quick preview of what is available so you can work with a business insurance agent who can help you figure out what exact policies would be appropriate for and you can weigh the costs of those.

Unemployment Insurance

Unemployment insurance. In some states, this is handled by private insurance companies. In other states, it is handled by the government. And the bottom line is that employers often are required to pay unemployment insurance or pay towards it because if a person then is terminated by the employer, so they get fired or let go, that employee can collect unemployment.

Employer Costs

Employers pay into that fund, and then employers have their annual or monthly rates set for that fund based on how many of their employees, or ex-employees, we could say, are using it. A lot of times, employees who collect unemployment think that the government is just giving them free money. That money is coming from the company, from the employer, and it may not be dollar for dollar, but basically whatever the ex-employees use in the unemployment system, the company gets charged for. So making sure that you are compliant with your state’s unemployment insurance laws is important, and a CPA can help you with that.

Workers Compensation Insurance

Workers compensation insurance is simply an insurance policy that says, “If a person gets hurt on the job, they will have some sort of coverage for that injury.”

When It’s Required

Many states require employers to carry workers compensation insurance, and usually it isn’t that expensive for jobs like office jobs. And so, checking to see if your state requires worker compensation insurance paid by you as the employer is an important step to make sure you don’t run into violations of your state workers comp laws.

How Business Owners Use It

Key person life insurance is a policy that is often purchased by business owners. Here is where it comes into play. Imagine you have two business owners and one of them passes away unexpectedly. If you have key person life insurance on both of them, then when one passes, the other gets a payout. And usually that payout is set to be the same amount as the value of their shares.

Example of a Buyout

So let’s say two owners, 50-50 owners, one of them passes away, and let’s say a $500,000 policy goes to the other owner. That policy pays out cash to the other owner, who will then buy out the spouse of the deceased owner. So, for example, all the shares would now be owned by the living owner. And the money for those shares would get paid to the living spouse of the deceased owner.

For Sole Proprietors and Spouses

So effectively, the surviving spouse ends up with the cash from the insurance policy and the surviving business owner ends up with 100 percent ownership of the company to continue running the company. That is how key person insurance is often used in jointly owned companies.

It also might be used just for spouses. So for example, if one person owns the company and they pass away and they are not going to be able to generate income anymore, the other spouse might have a policy payout so that he or she is getting some sort of compensation from this loss because they will no longer be able to rely on the business generating money for that person.

So, key person life insurance is basically just life insurance for a key person. It is not always collected by a spouse. It might be collected by the other business owner.

General Practice Liability (GPL)

General practice liability is basically your most generic insurance policy for a business. This is the kind of insurance policy that would typically say, “Hey, if somebody gets hurt inside our business, and a customer is here and they get injured due to our negligence, the insurance company will pay for that person’s medical bills.”

What It Doesn’t Cover

General Practice Liability, or GPL, is just your basic insurance coverage for a business, but it often doesn’t include a lot of the areas that are most important to businesses, and we will talk about those coming up next.

Types of Employee Lawsuits

One of the ways businesses can get sued is for mishandling or allegedly mishandling employee situations. Many times ex-employees sue the company for being discriminated against, wrongfully terminated, or being treated unfairly. Sometimes employees will sue for retaliation. Maybe they reported some sort of wrongdoing as a whistleblower, and then they got disciplined or discharged for that.

What EPLI Covers

When those employee lawsuits come in, there is a particular type of insurance policy that can cover the company for that. It is called Employment Practices Liability Coverage, or EPL, sometimes called EPLI, Employment Practices Liability Insurance. Basically, the idea is, look, once you start getting a number of employees, the odds of getting sued goes up, and many times companies with over 10 employees start to find that it would make sense to have some sort of insurance policy if they get sued or have some sort of legal action associated with former employees.

It only takes one legal action. So like one lawsuit or one EEOC investigation for you to spend more money on an employment attorney than you would on a one-year policy that would protect you from all claims of that type. So typically, I recommend when you get to have over 10 employees, it makes sense to get an employment practices liability insurance policy. It is usually not very expensive, especially if you have never had claims and you have a clean record, and it can provide extraordinary peace of mind. Look at it this way. It is a lot easier to pay a few thousand dollars a year to an insurance policy than get hit with a fifty or a hundred thousand dollar legal bill in a particular year when you have some sort of legal action involving a disgruntled employee or somebody who falsely claims you did something wrong and you have to defend it.

Final Thoughts from Aaron Hall

I am Aaron Hall, an attorney for business owners and entrepreneurial companies. As I always say, before you rely on any of this, consult with an attorney. It is my hope that you use these questions to identify topics and questions to bring up with your attorney. I hope you are doing well. Take care.