Charles Lloyd, owner of Scramblez Cafe in Quartz Hill and in Lancaster, lost $2,800 in premiums and went almost a year without valid workers' compensation insurance without knowing it.
His insurance agent, who won the business after a cold call, sent Lloyd official-looking documents with an insurance policy number, the name of a major insurance company and details of his supposed coverage.
"Everything was perfect," Lloyd said.
Then, in 2005, the cafe owner learned that he had been ripped off. The agent didn't have a license to sell insurance and had pocketed the premium money from Lloyd and at least 13 other Los Angeles-area small businesses.
The majority of the approximately 275,000 insurance agents licensed in California are legitimate, but the ones who aren't can wreak havoc on a small business.
Protecting your small company from unscrupulous insurance agents isn't difficult. But busy small-business owners, who usually are unfamiliar with how the insurance market works, often overlook the few steps required.
"You have small businesses, especially start-up businesses, that are concerned with anything but insurance," said Michael C. Strickler, a principal at Strickler Insurance Agency in Encino and owner of LyteSpeed Learning Center, which provides insurance and financial services training.
The cost of insurance and the lengthy list of insurance types a business owner needs can add to the confusion.
"Insurance is a big ticket -- it's a huge cost for us -- and everybody is always looking for some sort of relief," said Greg Owen, owner of Ability/Tri-Modal Transportation Services Inc. in Carson and a former chairman of the California Trucking Assn.
Businesses that need insurance that is hard to get or is very expensive also may be more prone to running across fraudulent agents, said Steve Young, general counsel of IBA West, a trade group for independent insurance agents and brokers.
That can include workers' compensation, liability and commercial auto insurance. The way the insurance market is organized also plays a role. Because the agent acts as a go-between, a small-business owner may never have direct contact with the insurance company that provides coverage.
Agents are authorized to issue binders, documents that list your policy number. A binder arrives a day or two after you pay. Your actual policy usually is mailed to the insurance agent, who is supposed to verify its accuracy and then mail it to you.
