As a small-business owner, chances are you’re always on the lookout for ways to reduce your expenses. But are you looking in the right places when it comes to your business insurance? Here is a brief rundown of six costly mistakes small-business owners make when it comes to their coverage and ways to ensure you don’t make them.
6 MAJOR INSURANCE MISTAKES BUSINESSES MAKE
1) Not having business interruption coverage
Business interruption coverage is also known as business income coverage which provides a business financial support when something interrupts its ability to conduct business and create an income. For example, a fire causes substantial damage or destroys all the merchandise in a retail shop forcing the company to close for two months.
The business owner has no way to recover the income lost from having to close for those two months. After a disaster, 40% of businesses fail to re-open. The United States Small Business Administration indicate that over 90 percent of businesses fail within two years after being struck by a disaster. It is hard to estimate business interruption.
2) Buying inadequate insurance coverage
Businesses may choose to purchase insurance but do not obtain enough insurance to cover their potential losses, unfortunately they don’t realize the mistake until it is too late. In fact, a recent survey from Aviva showed 75% of US businesses are currently underinsured. As a result, the business owner is liable for paying losses, attorney fees and legal settlements out of pocket! It is hard to convince businesses of the need to take out a full portfolio of insurance in times of economic pressure especially when they have not experienced a previous claim or understand the devastating effects of underinsurance. While it is something that most businesses think won’t affect them, it is actually something that affects many businesses. Although it is better to have purchased inadequate insurance rather than none at all, it is only slightly better. The question to ask yourself is if a disaster occurred, could I really afford the cost?
3) Insurance Exclusions
When choosing disaster insurance, there are two choices - a named peril policy or an all-risk policy, which is known as a comprehensive policy or an open peril policy. A named peril policy covers what is "named" (included) in the policy. The policy spells out the specific events for which you are covered. The cost of the premiums will depend on the likelihood of the specific peril(s) and the location of the business. Anything not specifically named in such a policy is not covered. An all-risk policy covers businesses from damages caused by any type of disaster unless it specifically excludes coverage for a particular peril in the policy. Floods and earthquakes are two events that are typically excluded, but coverage for these types of disasters can be added to the policy for an additional fee or purchased as a separate policy. For most businesses, an all-risk policy will be sufficient. Business owners can determine their needs based on location and the property and equipment they need to protect. Every insurance policy excludes something. Look at your insurance contract. What are the exclusions in your policies? Some will remove coverage for certain events and situations. If an exclusion removes coverage that seems important, contact your insurance agent and ask for clarification and talk about the available alternatives.
4) Using the Wrong Classification Codes for Workers
This mistake affects your Workers’ Compensation Insurance premiums. There are over 700 classification codes that are part of a system used to determine the cost of Workers’ Compensation Insurance. As you may have surmised, each code denotes a specific profession’s injury rate and some professions are more hazardous than others. The higher the risk a job has, the more you can expect to pay for coverage for that worker. For example, a construction worker has a more hazardous risk of potential injuries than an office secretary. Using the same code for all employees may cause you to overpay for your Workers’ Compensation coverage.
5) Not Updating Your Insurance Plans
Businesses can experience major changes. When this happens it can affect all aspects of your business, including its insurance policies. For example, if there was a significant decrease in business income, you could be paying too much for coverage you no longer need. On the flip side, if your business takes off and your business income increases significantly, you may need to adjust your insurance policy limits to prevent being underinsured in the event of a catastrophe.
Examples to consider:
· Your business moves to a new location. Your General Liability Insurance and Property Insurance will need to be updated.
· Number of employees have changed either by hiring or firing them. Your Workers’ Compensation Insurance will be impacted.
· You purchase new expensive equipment or invest into commercial real estate. Your Property Insurance policy will need to be updated to reflect these new assets.
· Your business starts offering new services. This impacts your Error & Omissions Insurance and your policy needs to be amended to cover these new services your business provides.
6) Not insuring for liability
According to the Insurance Information Institute, about 40 percent of small business owners have no insurance at all because they claim they are cash constrained. They choose not to pay for insurance for a number of reasons. The uninsured may be buying into a common misconception that small business insurance is expensive, or trying to cut down on overall expenses to keep the business afloat. General Liability covers losses resulting from bodily injury or property damage to others. Even if you did or didn’t do something to cause an injury or cause property damage, liability insurance protects the assets of a business when it is sued. Don’t bypass purchasing liability insurance unless you have enough money to pay claims out of your own pocket. No one is immune from being sued and a legal judgment could deplete its cash reserves. The truth is that not having insurance can cost a lot more than annual premiums - you can end up losing your livelihood to a disaster.
So how can you avoid these common mistakes?
Business owners are challenged with the ever growing concerns of staying in business due to inflation, government requirements, and competition. Annually, or even every six months, sit down together with your insurance agent to review your policy and re-evaluate the costs involved. As your business grows and develops, so too will the costs of keeping your business on track. Remember, purchases of equipment or office locations since the insurance was taken out may require adjustments in your policy. To be adequately insured, notify your insurance agent to add these to your policy. Don’t be caught with inadequate insurance. Ask yourself, what if…?
For a free analysis of your insurance policy at no obligation please contact Tom Broadway, your small business insurance expert.
Borjas Insurance Services
License # 0K45530