Selecting the types and levels of insurance is vitally important to a small business owner seeking to avoid day-to-day liability risks. So an owner should follow some general insurance guidelines if he or she wants to take full advantage of the protections purchased.
For example, banks are fully insured for damages (from fire, etc.) that occur to a home on which they carry a mortgage. In fact, a bank will be named as an insured party on a hazard insurance policy. Yet, the insurance costs the bank nothing. The homeowner is required, by contract, to obtain and pay for the coverage.
The small business owner can do the same thing and rely on another person's insurance coverage. The business owner who lends money, by way of a mortgage, or in any other case where collateral supports the loan, can require that the other party obtain liability and property coverage, which specifically names the business owner as an insured party, in the same way that a bank requires this coverage. In the case of a mortgage or other collateral loan, do not limit yourself to property coverage. Liability for environmental pollution, for example, has sometimes been extended by the courts to banks holding a mortgage on the affected property.
Further, the small business owner can also rely on another party's insurance when he leases property to, or engages in a joint venture with, another party. Here, again, care should generally be taken to ensure that the other party obtains adequate property and liability coverage.
Reliance on other person's insurance, in practice, is usually limited to situations where the other party will be carrying out all, or nearly all, of the activities. A mortgagee and lessee, for example, will have exclusive possession and use of the property. Thus, it is reasonable in both cases to require these parties to secure insurance coverage (this also has implications when structuring and funding a business by using operating and holding companies).
Similarly, in the case of the joint venture, where the small business owner's role is only secondary to the venture (e.g., limited to putting up capital or devising a business plan), it would be reasonable to require that the primary party (i.e., the other party) obtain and pay for insurance coverage.
The small business owner should always obtain a copy of the policy, rather than rely on word from the other party that the coverage has been secured. Where the small business owner is named as an insured party, the insurance company will provide him with a copy of the policy, as well as copies of notices, including cancellation notices, related to the policy.