Making Makerspaces: Acquiring Insurance

This is the first in a series of posts documenting how to start a makerspace of your own in your local community. This (tremendously long) post is focused on the one question almost everyone asks when starting a space – how do you get insurance for your makerspace? We’ll start with a quick introduction to the series, and then jump into the meat of the question.

Making Makerspaces: A Series

I founded Artisan’s Asylum in Somerville, Mass. three years ago in a 1,000 square foot hole-in-the-wall, by shoving far too many tools into far too small a space and then asking if anyone wanted to join in and make stuff with me. More than 100 people attended the kickoff party, which set the tone for a ridiculous rate of expansion from 1,000, to 9,000, to 25,000, to 31,000, to 40,000 square feet in two and a half years. We now have 300 members using $300,000 worth of tools. We host 140 private studio spaces and a huge number of project storage units, and we have 250-300 students per month in 40-50 classes. We have become experts at setting up makerspaces of varying sizes, if only because we’ve made almost every mistake there is to make (and still survived the process) and have reconfigured our own business plan so many times.

For the past year and a half, we’ve received three or four emails a week from individuals and groups around the world who have heard of the Asylum and would like our help or feedback in setting up their space. We initially tried to keep up with the requests, but answering all of them soon began to cut down on the time we needed to run our own space. Dale Dougherty heard about this problem and asked us to create a workshop and a cohesive pool of data that could be used by other groups to help set up spaces of their own. We ran an event called How to Make a Makerspace in February that had more than 20 panelists answering questions from 180 participants, and we ran a smaller event at Maker Faire last weekend for 35 people. Over the next few weeks, I’ll be presenting the condensed data and advice from these workshops into a series of blog posts to help spread the word on how to make makerspaces of your own!

For now, let’s talk about insurance.

Acquiring Insurance

Let’s start with the unasked question; why do you need insurance? The answer is simple – it’s required by every commercial lease and local government I know of in order to operate legally. Past that, though, it’s just a good idea. Insurance pays for lawsuits and settlements incurred by the legal operation of your business, and for the repair and refit of your space if it should be damaged in any significant way. You can theoretically operate without it, but if something goes wrong and you don’t have it, you can lose both your space, and potentially everything you own, in a lawsuit.

The answer to how to acquire insurance can be broken down into several sequential components – determining (1) what types of insurance you want and need, (2) finding a broker, (3) presenting your business plan to your broker, (4) finding an insurance company, (5) gathering required data for your insurance company, (6) negotiating coverage, and finally, (7) abiding by any rules or regulations your insurance company requires as a result of granting you coverage. I’ll work through these steps with you and explain any new vocabulary you need to know along the way.

1. The Insurance You Need (And Want)

There are two main drivers determining what insurance you need: your lease, and your government. Every commercial lease I’ve ever seen has a section dedicated to what kinds of insurance the landlord requires you to carry in order to be in compliance with the lease; if you don’t carry that insurance, you’re breaking your lease terms and can be evicted. Your government (by which I mean state government, for American makerspaces) will also require different types of insurance that you must carry as a legally operating business. These types of insurance are often dependent on how many employees you have and what kind of work they do for you.

The most common types of insurance that we’ve seen landlords require are:

• General Liability & Property, also known as a businessowners policy. This is the catch-all insurance category specifically for your leased space – if someone hurts themselves in your space, if equipment gets damaged in some way, if something gets stolen, etc., this policy will cover it. This specifically doesn’t cover any events you may participate in or hold that are located outside of your leased space. The most common requirement for this type of insurance is that you’re covered for $1 million in damages per occurrence, and $2 million in damages in aggregate per year. Artisan’s Asylum has found that the cost of this insurance can be roughly predicted as $0.20 – $0.40 per square foot per year, though this depends significantly on your location and how much equipment you plan on insuring.
• Umbrella Policy. This insurance covers any overages that might be incurred if any one situation requires more money than your per-occurrence limit on any specific type of insurance, or if your aggregate protection for a type of insurance for a year is exhausted. It generally doesn’t protect you against any new situations. A common limit is $3 million per occurrence and $3 million in aggregate (to cover both a per-occurrence and aggregate overage situation). We have found that this insurance usually costs 15-25% of the price of general liability & property insurance.

In addition to those types of insurance, landlords generally want to be named on all of your insurance policies as additional insured. This means that your insurance covers your landlord, in case someone wants to sue them or claim damages against them. This is standard practice, and is usually included without a fee when you purchase insurance if you let your broker know ahead of time.

Legislated insurance varies from state to state and country to country, but the types of governmentally-required insurance we’ve seen most often are:

• Worker’s Compensation. This insurance pays for medical care to employees if they get hurt working for your business. This is required by Massachusetts state law, but may not be required elsewhere. The insurance is billed as a small percentage of the salary you pay your employees, which varies based on the type of work they do for you. It’s estimated at the start of a year, and then audited and adjusted at the end of a year. We’ve found the percentage varies from .61% of total yearly salary for clerical and administrative work, to 3.17% of total yearly salary for trade or vocational instruction. This doesn’t include 1099 contractors, generally, who are required to have their own insurance.
• Disability Insurance. This insurance is a guarantee of an employee’s earned income if they happen to be disabled due to an on-the-job accident. Statistics from the U.S. show that one in four employees will suffer a disabling injury before retiring, which is why this is a required in several states. This type of insurance isn’t required in Massachusetts, and we don’t know too much about it.

Finally, there are some types of insurance that you should just plain want for yourself and your business. These are intended to protect you, your business, and the people working for you in the most comprehensive way possible should an accident happen.

• Directors and Officers Liability. This type of insurance covers your officers, your Board of Directors, your employees, your volunteers, and any other agent for your company from getting sued in the course of their work. It specifically covers actions brought forth by current employees (i.e., if someone gets fired and wants to sue you because of it). We believe this is priced based on how much business you do, though we’re not sure – if that’s the case, we’ve seen this priced at .2-.5% of your gross income over the course of a year.
• Business Income Liability, also known as business interruption insurance. Liability and property insurance pays for rebuilding your facility in case of horrific damage, but if you’re not making income while you’re rebuilding (and your doors are closed), you could easily go out of business anyway. Business Income insurance grants you your regular income in the case of an emergency, so it’s as if there was no interruption in the services you provide. We don’t have this insurance, but are thinking about acquiring it. It costs a small percentage of your annual income.

There are other, less-expensive types of insurance that may come up in the course of your lease, or that may strike you as a good idea. This list isn’t intended to be comprehensive, and you shouldn’t take my word for it – be sure to do your homework on requirements with your broker and a real estate attorney, if you can get access to one.

2. Finding A Broker

You’ve finally figured out what insurance you want – now it’s time to get insurance! It’s time to find a broker. A broker is your liaison to an insurance company, which you may never talk to directly over the life of your business. The insurance company is the entity that provides your insurance, not your broker. Think of your broker as a real estate agent, or your lawyer in a lawsuit, or an architect talking to a building code official – they sound like they’re speaking in your language, but they’re actually speaking a dialect of your language to insurance companies, with special words and special meanings that you don’t understand.

If you learn one thing from this section, learn that not all brokers are created equal. Most have specialties – whether it’s car insurance, homeowners insurance, or what have you. If your broker doesn’t have experience insuring businesses related to manufacturing, you need to switch brokers. I suggest that you go to a local machine shop, woodworking shop, equipment dealer, craft school, vocational school, or related business, and ask to be connected to their insurance broker. 80-90% of the claims of “I can’t get insurance” that I’ve heard have been directly related to brokers turning people down because they don’t understand the risks of a manufacturing environment, much less the risks of a membership-enabled manufacturing environment. If your broker doesn’t understand your business plan (and the risks therein), they’re not going to be able to convince an insurance company to back you.

Remember this – a good broker gets you insurance that actually represents your business plan, and if your insurance reflects your business plan, you get payouts if something goes wrong. A bad broker gets you inappropriate insurance that won’t hold water under scrutiny when something goes wrong. If your business plan and operations don’t match what your insurance company thought you were doing, they won’t pay for anything that happens to you.

3. Presenting Your Business

Once you’ve found a broker who has experience insuring manufacturing-related businesses, it’s time to meet in-person and bring them up to speed on your particular business. They’re going to need your business plan – what services you offer and events you run, who pays you money for those services and events, how much money you expect to be making, how many people you expect to be serving, who has access to your facility, and so on. As a rule, they’re generally less interested in how you spend money, and more interested in how you make money, so if you don’t have your expenses fully figured out yet don’t worry too much about it. At this point, they’re looking to understand your business, so they can interpret your business plan into their insurance company dialect and present you appropriately.

One quick note – it is not in your interest to be a new, ground-breaking type of business that your insurance broker has never heard of before. The insurance profession is about quantifying and accepting known risk – not taking chances on unknown risks. Frame your business as a slight modification of an existing business. We know of makerspaces that have been insured as craft schools with a membership component to allow for extracurricular work, and those that have been insured as a membership-enabled machine shop that offers training on its equipment. Even if these descriptions don’t fully encompass your mission, it’s best to start your broker on a business model they’ve heard of before, and expand later as they catch up to your thinking. But keep  in mind that each of those models comes with its own allowances, requirements, and restrictions. The companies willing to insure the first are not likely to insure the second, and vice versa.

Your goal here is to present yourself as an experienced person starting or running a real business. Your broker is going to pore over your business plan to figure out what risks are involved in your business operations. They’re going to want to know how many students are taught in your facility, how old those students might be (and if they’re younger than 18, you’re in for a rough time!), how many members you plan on having, how trained (or untrained) those members might be, and so on and so forth. Once they’ve got a good idea of your business plan and model, they’re going to work with you to fill out a couple of forms that look like this, for every type of insurance you’re applying for. This is your formal application for insurance to an insurance company, and you have to sign it to indicate that it’s accurate. Once you’ve completed this, your broker will then try and sell you, your company, and your application to an insurance company.

4. Finding an Insurance Company

Now that you and your broker are on the same page, and you’ve filled out an application, it’s time to find an insurance company. Insurance companies are grouped into markets that bid on insurance applications (at least in the U.S.). There are two main ‘insurance markets’ that your broker will choose from that you should be aware of:

• ‘Primary’ Market: A primary market is a group of insurance providers that are vetted and approved by your state. These are the insurance providers you see television ads for; Geico, State Farm, Allstate, and so on. Your broker is legally required to approach primary markets first, no matter how unlikely your case may be with them. Primary market insurers tend to only be interested in low-risk known business models, and are unlikely to be interested in you unless you’re a successful chain like TechShop or have been around for more than 3-4 years without an accident or payout. If you don’t have a good broker, your broker may tell you they ‘can’t find insurance for you’ if they get rejected by the primary markets – this just isn’t true. I promise someone is willing to make money off of you, no matter what the risk – your broker just hasn’t looked hard enough.
• ‘Secondary’ Market: The secondary market is a national group of insurance providers that aren’t explicitly vetted by your state. In all likelihood, you’ve never heard of these companies before, and may never hear of them again. These providers focus on high-risk entities like you, and in exchange for not knowing the general risks associated with your type of business, they demand tremendous amounts of information about you before they’re willing to insure you.

It may help your case to tell your broker that you don’t expect them to find an insurance company in the primary market. They’ll have to go through the motions of looking for insurers in it anyway, but they’ll have more confidence in you and your knowledge of their industry.

5. Gathering Data

If you thought the application for insurance was bad, wait until you hear what high-risk insurers want to know about you before quoting a dollar figure. Without exaggeration, this is a limited example of what Artisan’s Asylum and other makerspaces around the country have been asked to provide in the context of providing follow-up information:

• A full business plan with projected expenses and income for an entire year.
• A signed lease with insurance requirements listed explicitly.
• A full list of staff (real or projected), their salaries, and a rough division of how much time they spend doing what kinds of tasks.
• An expected number of members and students that will make use of the space in the coming year.
• A copy of the membership agreement you have all members and students sign before using your space.
• A full inventory of machine tools, their dollar value, their age, their model numbers, their serial numbers, and their operators’ manuals.
• A full set of training and testing syllabi used to train incoming members on said tools.
• Exact details on any alarm or door access system you use, how it’s triggered, and how said alarms connect or are monitored by the outside world.
• The age, construction, and general character of your building – including when the roof was last serviced, if sprinklers are available, and so on.
• A full architectural plan showing all improvements planned for the next year.
• A dollar value for all improvements you have made or are planning on making to the building (electrical, mechanical, ventilation, etc.).
• Any and all plans for storage of hazardous materials, chemicals, and the like.
• A full safety plan, including evacuation routes, actions to take in various emergencies, incident report processes, and so on.
• The availability and coverage of security cameras, and policies regarding how long you save the data from them.

The answers that you give during this portion of your quoting process are recorded as the gospel truth regarding how you conduct your business. If you significantly change how your business runs after you get insurance, you are obligated to let your insurance broker (and thus, insurance company) know about those changes. If they don’t know about the changes, they’re not obligated to cover said changes, which may invalidate the insurance you paid for in the first place. Be careful and be truthful during this stage. If you don’t have answers to some of their questions, they may tell you that they’re unwilling to insure you until you do have answers.

I’m not going to lie – this step is incredibly difficult, and incredibly time consuming. If you haven’t made a business plan yet, or haven’t gathered all the data you need to gather about your space yet, this step will force you to catch up.

6. Negotiating Coverage

In all likelihood, you will likely enter a negotiation with your potential insurance company before you get a fixed quote – or, if they give you a fixed quote, they may have conditions that you have to meet prior to getting insurance. Some conditions of insurance and negotiating points we’ve seen in our space and others have included:

• Installing security cameras in shop areas.
• Installing heat detectors and fire suppression gear in welding areas.
• Installing a door access system or burglar alarm.
• Restricting access hours for members.
• Requiring members and students to be at least 18 years old.
• Requiring a tool training and testing process for all members, regardless of prior experience.
• Requiring employment policies such as conflict of interest, whistleblower, and sexual harassment.
• Not insuring particular aspects of your business (such as not insuring against theft if you’re a 24-hour facility, or not insuring against certain types of natural disasters if you’re in susceptible areas).

These restrictions will likely loosen as you develop a history of good performance as a business, but may be required at the start to get an insurance company to give you the final check-off.

One interesting negotiating point that you can keep in your back pocket is asking for your property to be insured to At Cash Value instead of Replacement Cost. Replacement cost for property like tools means that your insurance company will pay for brand-new tools to replace older tools if they’re damaged, no matter what the wear on them may be. At “cash value” means that your insurance company will pay you enough money to buy a tool that’s equivalent in wear, tear, and age to the tool you have now. Replacement cost is the default assumption for insurance companies – most businesses purchase new equipment to start with, and in 10 years of operation, would like that new equipment back if something goes wrong. Your ability to offer “at cash value” instead (which is much lower cost and thus, lower risk to the insurance company) is a significant bargaining chip, and one that Artisan’s Asylum used to seal the deal in our insurance negotiations.

7. Following the Rules

You’ve found a broker, convinced them of your business plan, found an insurance company, given them all the information they’ve requested, paid them thousands upon thousands of dollars, and are now insured! Congratulations! Now, you have to follow their rules.

The first thing that will likely happen after you close on a policy (if your building is big enough, or property high enough in value) is that your insurance company will send an inspector to your site to verify that your building quality and floorplan are what you say they are. If you’ve lied to your insurance company and the inspector catches you, they’ll cancel your policy.

After that initial inspection, your insurance company will happily not interact with you until it’s time to renew your policy next year. In the meantime, you’re expected to send updates to your broker if anything significant changes in your business plan or model. If an accident occurs, the first thing that will happen is a group of inspectors will come to your site and check up on you. They’re specifically looking for violations of the plan or model you submitted to them – if they find any discrepancies, they’ll use that as an argument for not providing you money. Discrepancies might include having a tool on-site that wasn’t included in your initial list; training members on the use of a tool in a way that wasn’t documented, or not training your members when you said you would; not having features like cameras or door access systems that you promised you would have, and so on.

If you follow the rules, you have relatively little to worry about. If the rules are onerous to you (one rule the Asylum doesn’t like, for instance, is an age requirement for memberships), either find a quote with another company or use good behavior over the course of your business operations to petition for a loosening of the rules the next time you need to renew.

Conclusion

Acquiring insurance is a long and painful process. It usually takes 2-3 months of continuously talking to a broker and gathering data the first time you seek insurance, and it may even take several brokers. Take heart in the fact that other spaces have accomplished this monumental task, that you are not alone in your pain, and that you are creating a real, legal, legitimate business that will protect you if things go wrong.

That’s it for this week! Let me know what topics you want to learn about next in the comments below, and I’ll see what I can do to include them in the lineup.