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Being an entrepreneur or small business owner is hard work and, often, a risk-filled endeavor. Most anyone who even starts thinking about striking out on their own in the business world is very aware of this and accepts it as a necessary reality of running an independent business. After all, starting and growing your own business means putting your career, free time, personal finances, and even your mental health on the line in order to follow your dreams.
However, what many fail to realize is how common and potentially devastating many business risks can be, especially ones that are out of their control. Many business owners don’t know the types of business insurance available to mitigate these risks.
It doesn’t matter how good you are at what you do or how experienced you are, mistakes and accidents can and will happen. One expensive lawsuit, inadvertent mistake, or an unexpected disaster can easily cause enough financial damage to jeopardize the future of most small businesses.
This is why every small business needs to have a good risk management plan that will provide security when and if difficult situations like these arise. Having a few million dollars to spare would probably help you rest easier, but not many businesses have that luxury.
The next best thing is investing in business insurance.
Having the right insurance program in place will protect your business from losses that could cripple your operations or even wipe you out completely by transferring the financial impact to the insurer in return for a monthly premium.
However, many business owners see insurance as a luxury and not a necessity. And with the day-to-day expenses of running a business, it can be hard to consider allocating resources to protect from a potential loss in the future.
This way of thinking is completely natural and normal. Business owners should be very careful about what they spend their money on and analyze every potential investment and expense to determine whether it’s necessary.
The good news is that buying insurance for your business doesn’t have to be as complicated as it seems.
Let’s break down what types of business insurance policies most small businesses need, what risks those policies protect against, and why businesses buy them. Hopefully, this will help business owners looking to manage their potential risks with insurance make the right decisions, and secure the right types of business insurance.
Potential Risks Small Businesses Face
Obviously, every business is different and not all businesses face the same risks. Even those that do face similar risks, might face them to a different degree depending on each business’s specific characteristics.
Let’s take a look at some of the most common small business risks that just about every business faces in some way or another.
Business Liability Risk
Whether it’s your customers, employees, creditors, or other third parties, your relationship with them can become contentious; and you may end up embroiled in a legal dispute. Having to defend yourself in court can be a massive drain on the financial resources of your businesses, and that’s before you are required to pay any potential settlement money or damages. Protecting your company from potential liability lawsuits is a crucial step for any business owner.
Property such as buildings, vehicles, inventory, or equipment will often be your business’s most valuable asset. Potential damages to your property can, therefore, pose a significant risk to your operations. An example of such a risk would be if faulty wiring were to cause an unexpected electrical fire that damages your building and essential equipment.
Repairing and replacing your property can get expensive quickly, leaving you in a tough spot, and in some cases, maybe even unable to continue operating your business. Additionally, many small business owners operate from a home office. Most homeowners’ insurance policies won’t cover business-related damages.
Business Interruption Risks
Many unexpected scenarios, such as fires or natural disasters, could force you to halt your operations temporarily. Even if you had enough money to cover the damages yourself, it would probably still take some time to get back on track. Would you be able to survive if you had to close your business for a month or even a few months? Many companies never reopen after such scenarios. This is why having the right insurance in place to cover the potential loss of business due to interruptions is a key step in protecting your business in such unexpected circumstances.
Cybercriminals increasingly target small businesses because they store valuable client information and often don’t have the budget to protect this information that larger businesses might have. A cyber attack or a data breach can be financially devastating and hurt your reputation greatly.
Big Risks for Small Businesses Report
Is the Current Approach to Business Insurance a Match for Today’s Modern Risks?
Spoiler: It’s not.
Types of Business Insurance Policies You Need
Different businesses will have different insurance needs. Many factors will determine the needs and costs of your insurance policies. When deciding on which coverage to get, you should take the following into account:
- The nature of your product/service
- The risk profile of your industry
- How much and what kind of property do you own/lease
- The number of employees
- Planned and projected growth
- Your revenue
However, there are a number of core insurance policies that most business owners should obtain in order to mitigate and transfer risk:
Commercial General Liability Insurance: General liability insurance covers third-party lawsuits alleging property damage or bodily injury. It will pay for associated legal costs and medical costs as well as cover eventual settlement monies.
Commercial Property Insurance: This policy will protect your property, including the building your business is based out of and its contents. It will cover assets, equipment, and personal property used in the business from perils of fire, theft, and natural disasters. Additionally, commercial property insurance can often be extended to protect from loss of income caused by these perils.
Business Owners Policy (BOP): A policy that includes three basic insurance coverages; commercial liability, commercial property, and business interruption. A BOP allows you to bundle these three popular coverages and save money.
As your business grows, you’ll need to broaden your insurance program to cover additional risks and extend the limits of your coverage:
Commercial Auto Insurance: If you or your employees use a vehicle for business, it probably won’t be covered under personal automobile insurance. Commercial auto insurance will extend auto coverage to business operations.
Employment Practices Liability Insurance (EPLI): Any business with employees should look into EPLI. It will protect you from employment-related claims such as sexual harassment, discrimination, wrongful termination, failure to promote, etc. EPLI claims are growing in number and severity, and being properly protected from them can prove to be a wise investment.
Errors & Omissions (E&O) Insurance: Errors & omissions coverage will protect your business if you’re sued for damages that your services may have caused. Any business that provides professional services to third parties (lawyers, accountants, consultants, etc.) should consider purchasing this policy.
Directors & Officers Insurance: D&O insurance is important for any business that has a board of directors or has raised venture capital. It will protect the leadership of your company from lawsuits alleging breach of fiduciary duty, misrepresentation, or errors & omissions. In such cases, board members and senior officers can be exposed to management liability risks. Companies seeking venture funding will be required to secure this coverage as most VCs will require a seat on the board of directors and will want to know that their personal assets are secure. Additionally, attracting qualified members to sit on a businesses’ board can be very much linked to the coverage that your D&O insurance offers candidates.
Key Person Insurance: Key person insurance is basically a life insurance policy on a person crucial to the success of the company; a top-level executive or a critical employee whose death or disability would be a major setback for the business. Key person insurance will ensure that the business is financially protected from the negative consequences of their passing and will also cover the costs of finding a suitable replacement.
Commercial Crime Insurance: Crime insurance will protect you from crime-related losses that other policies don’t cover. Whether it’s crimes committed by someone from outside of the business or your employees, commercial crime insurance can help protect your company from significant losses of money, securities, or property lost due to criminal activities.
Cyber Insurance: A cyber insurance policy enables business owners to transfer costs associated with cyber-related attacks and data breaches. It will cover first-party costs such as computer forensics to find out why the breach happened, notification of potential victims, credit monitoring services, and public relations handling of the potential fallout. Cyber coverage will also protect your business from third-party claims of financial injury resulting from the data breach. Preferred insurance policies will cover both first and third-party damages and should be combined with your E&O policy and more traditional types of business insurance, such as commercial crime insurance, to ensure complete coverage.
What Isn’t Covered By These Insurance Policies?
Some risks are excluded from normal insurance policies and may require a custom insurance program. For instance, certain natural disasters such as earthquakes or floods are typically excluded because they cause massive damage to a relatively small geographical area and it just isn’t financially viable for insurers to offer standard coverage for these types of events. Infectious diseases are also excluded, as their impact is unpredictable and can potentially impact the entire country.
If you wish to be protected from these dangers, you’ll have to talk to your insurance broker so that they can advise you on getting specialized coverage. A few risks cannot be insured at all. Most types of business insurance cannot insure commercial property against damage caused by war, radioactive fallouts, or government seizures, for example.
Types of Business Insurance Recommended By Industry
Businesses across industries share similar risks and that’s why it’s good to educate yourself on the particulars of insurance for your profession. You can review some industries from the list below to learn more about the potential exposures and insurance recommendations for what you do:
Accounting – Accountants take care of their clients’ most sensitive matters; their finances. No matter how careful and experienced you are, mistakes can and will happen. An inadvertent error or a missed tax deadline can lead to massive losses for clients and possible expensive lawsuits for you. Additionally, accounting software and technology have become an indispensable part of accounting, which means that data breaches and cybercrime can lead to serious exposures as well.
Construction – Construction has always been considered an extremely high-risk industry. No matter how experienced and cautious you and your team are, unpredictable accidents are always a possibility on a construction site. The right insurance program will protect you from losses and cover any potential lawsuits if a third party is injured on your site or as a result of your work.
Law – Legal malpractice claims are a reality for any law firm and should be protected against with the right lawyers’ professional liability insurance. It’s incredibly easy to bring forward a malpractice suit, and the exposures are wide-ranging. Clients can claim that you misinterpreted the law, offered bad advice, missed deadlines, or had a conflict of interest. Also, many disgruntled clients may decide to sue even if there are no grounds for doing so. Additionally, law firms store great quantities of very sensitive client information in their databases, making them an attractive target for sophisticated cybercriminals. Furthermore, their employees are often lawyers, which can make employment-related claims especially painful and expensive.
Technology – Tech companies quickly reach a point in business where they need an adequate insurance program. Property damage, cyber attacks, data breaches, product issues, discrimination and harassment issues, and contract disputes are all possible and potentially costly risks a tech startup insurance program can help mitigate. And as already mentioned, most investors will require directors & officers insurance to be purchased within a certain time frame after securing funding.
Cannabis – Cannabis is an emerging industry that’s quickly becoming mainstream. However, most cannabis companies still struggle to secure insurance, despite posting impressive results in terms of profit and growth. This is why it’s important for them to work with a broker who has a dedicated practice that can help them stay in compliance and maintain their license to operate, cover product-related claims and lawsuits, and transfer the financial risk of a potential natural disaster or theft can pose to their business.
Hospitality – Restaurants face potential property damage and liability risks every day. The restaurant setting (open flames, hot surfaces, slippery floors) is highly conducive to injuries. And even if you strictly follow health codes, accidents happen and foodborne illnesses can lead to costly claims. Customers can also file bogus lawsuits claiming that a certain restaurant made them sick. Additionally, if you sell alcohol at your restaurant, you could be held liable for the actions of your inebriated patrons.
Don’t see your industry? No need to worry, we help many businesses get the right types of business insurance at a lower cost, and with less hassle. You can reach out to our team of expert brokers, or if you prefer to get started on intelligent quotes, create your Embroker account today.
One of the common misconceptions related to this issue is that many believe that the carriers themselves are either admitted or non-admitted. In reality, the classification of admitted and non-admitted refers to the insurance product itself that is being sold by a carrier.