Running your own business increases your financial and reputational risk, so it’s important to protect yourself by insuring both your company and your employees. Some small business owners commit mistakes when taking out an insurance policy that creates problems later on. These experts share the most common small business insurance mistakes that can hurt your business.
Here are the top 25 small business insurance tips from the experts:
1. Not Purchasing All Necessary Types of Insurance
Tina Willis, Personal Injury Attorney & Owner, Tina Willis Law
One common problem with small businesses is that they do not purchase all necessary types of insurance. For example, they might have a good errors and omissions policy, but not a premises liability policy. Or they have good premises, but not good auto insurance. Business owners really need at least a good premises liability and auto insurance policy. All policies should have enough coverage to equal the value of the business, and should be higher in high-risk businesses (like semi-truck companies). Generally that means a small business owner might want $300,000 in coverage for each type of policy, and a medium to large business might want $1 million (or even more for very large or high risk businesses).
2. Failing to Include Business Interruption Coverage From a Cyber Policy
Jocleyn Getson, Head of Cyber, Slice Labs
Business interruption is a critical element of proper cyber protection. However, most cyber policies won’t provide business interruption unless the SMB specifically asks and pays an additional premium. Given that more than half of SMBs fail within six months of a cyberattack, failure to include business interruption protection can be catastrophic. The best way to avoid this mistake is to ensure that you purchase a cyber policy that includes business interruption.
3. Overlooking the Need for Umbrella Liability Insurance
Mike Mann, Executive Vice President – Property & Casualty, Plexus
Many small business owners overlook the need for umbrella liability coverage, which extends the liability limits for commercial automobile, product liability and premises liability (commercial general liability) exposures. Given that the typical primary occurrence limit of coverage is $1,000,000, an umbrella policy, sometimes also referred to as excess liability coverage, provides additional liability protection in the event of a severe incident. Risk of loss from vehicle use continues to be one of the most under-estimated risks with the highest severity potential for all businesses. Adding umbrella liability coverage ensures there are funds available should a catastrophic accident occur for which the business owner is ultimately responsible.
4. Not Discussing Your Health Insurance Options Early-On
Michael Stahl, Executive Vice President & Chief Marketing Officer, HealthMarkets
Some small business owners may think they have to wait until their renewal period to meet with an agent and discuss options for group health policies for their employees ― but this is not true. In fact, the sooner you meet with someone to evaluate your current policy, the better. Waiting until the last minute to review options when you have other priorities to attend to is not necessary ― this even creates more stress. It is better to discuss your needs and understand the options available now so you are confident you’ve made the best decision for your employees and business.
5. Not Having the Right Insurance for Online Sales
Andy Wood, Executive Vice President – Retail Operations, Insureon
Online sales help boost many small businesses’ revenue. However, defective products can lead to expensive lawsuits. Business owners should have a product liability insurance to help protect them against these types of lawsuits. Also, a contingent business income (CBI) coverage can protect policyholders against economic losses caused by damage to property owners.
6. Not Working With a Trusted Insurance Agent
Scott Aiello, VP – Commercial Strategy, Simply Business
Small businesses should lean on an adviser or trusted insurance agent especially if they’re not perfectly clear on what they’re buying and how they’re covered. Insurance agents and carriers can explain what they’re buying and to navigate some of the complexities that may exist based on the business type. Some businesses need to consider buying both General Liability and Professional Liability to ensure they’re covered for a variety of events. While it is often tedious, it is important to read through the policy wording and terms and conditions and to understand their policy.
7. Failing to Understand How Your Policy Works
Tony Arevalo, Owner, Carsurance.net
Insurance policies could be quite complicated, but the easiest way to understand them is to read the list of endorsements. You will find there all items that are not excluded from the coverage. For example, if your business is a tanning salon, any liability claims related to cancer are excluded by default. After that, you should understand how different insurance limits work. For example, there is a difference in a liability policy between General Aggregate and Each Occurrence limits. The former represents the maximum payout for the duration of a policy, while the latter is the highest payment for each separate claim.
8. Getting the Wrong Type of Coverage
J.R. Skrabanek, Senior Counsel, Snell Law Firm, PLLC
One common mistake business owners make when purchasing insurance is failing to get the right type of coverage. E&O, CGL, directors & officers, data breach are all different kinds of insurance that cover different acts and omissions. A business owner should consult with an insurance broker or attorney to determine the right needs for his or her specific business. Failing to have the right insurance can result in a denial of coverage when coverage is most needed.
9. Buying a Policy Based on Price Rather than Value
Michael J. Perry, Vice President of Property & Casualty, CBIZ Insurance Services, Inc.
Most small business owners treat insurance as a commodity and as a result, are buying based on price rather than value. When it comes to buying business insurance, one size does not fit all. It is critical that the insurance carriers understand your business and craft the coverage to meet your needs. Cheap policies are not always the best policies for your business.
10. Thinking You Don’t Need Business Auto Insurance
Myles Trempe, Producer, Wallace & Turner Insurance
If a small business operates company cars, vans, or trucks, there is a great likelihood they need commercial auto insurance. Business owners oftentimes distort the lines between personal auto insurance and commercial auto insurance. A standard personal auto insurance policy has limitations or exclusions relating to the business use of a personal auto. Therefore, small business owners need commercial auto insurance to protect against auto liability for bodily injury and property damage to a third party. A commercial auto policy is critical for protecting the business financially, and is required by the law. A general liability policy for the business does not cover the costs of claims that arise from work-related auto accidents.
11. Not Having Sufficient Disaster Insurance
Brad Plothow, VP of Marketing & Communications, Womply
Most small business owners are not insuring themselves sufficiently against the threats they consider most damaging. Many small business owners with less than a month of reserves consider floods, fires, and other nature-related disasters as extremely damaging. However, only a few have disaster insurance, because some of them think that such disasters are very rare and that these disasters might not happen to them.
12. Not Checking Your Business Credit Before Getting a Policy
Gerri Detweiler, Education Director, NAV
Small business owners often don’t realize that the insurer may check their business credit profile as part of the underwriting process. A poor business credit history may make it difficult or more expensive to get the insurance they need. Before you apply for any kind of business insurance, consider checking your business credit profile to see where you stand.
13. Forgetting About Business Overhead Protection
Raymer Malone, Owner, High Income Protection
While products such as liability and property insurance are often top of mind for a small business owner, policies to protect the business should the owner be unable to work are often overlooked. Known as business overhead protection, these policies are structured to pay many of the business expenses should the owner become sick or injured for an extended period of time. These policies can pay for deductible business expenses such as payroll, other types of insurance, utilities, and even rent/lease. Many small business owners forget that without them driving revenue/sales efforts, the business would certainly suffer. A business overhead protection policy can ensure that if the business owner can’t come to work, the business will have adequate capital to weather circumstances.
14. Not Providing Enough Essential Information
Graham Mills, Partner & Insurance Law Attorney, Newmeyer & Dillion LLP
It is crucial for the business owner to provide all the necessary information so that the insurance company will have an understanding of what the business does to identify the desired and needed coverage. Every business is different and so the risks associated with each business are not identical. Being able to buy the right insurance will depend on the accuracy of the information you share to your broker.
15. Forecasting Business Activity When Pricing Policies
Mike Fusco, Co-founder & President, Fusco & Orsini
If you don’t project proper levels of business activity, it could cause inaccurate pricing your insurance policies. If you forecast gross sales and payrolls incorrectly, your insurance premiums will also be priced incorrectly. This gives you a false cost for budgeting and may also lead to unexpected audit bills.
16. Not Having Term Life Insurance
Gordon E. Conwell, III, Co-Owner, American Term
Small business owners often don’t have, or feel they don’t need, life insurance for buy-sell situations with a partner or a key-man type of life insurance policy to help maintain the business in the event of their premature death. The latest life insurance policies, including some term life policies, also include chronic and critical illness living benefits built in to the life insurance. So a business owner would not just have to die to get benefits from some life insurance policies. Term life insurance is so inexpensive for most people that it’s a mistake for a small business owner not to have any in case of premature death or if they’re unable to work due to having a disease or illness.
17. Not Buying an Errors & Omissions Policy
Mike Payne, Commercial Property & Casualty Insurance Agent, My Knowledge Broker
If you are a manufacturer, you should consider buying an E&O (errors and omissions) policy. E&O covers claims made by clients for inadequate work or negligent actions from products made by your company. The legal costs associated with a major lawsuit could put a small and growing business under great distress.
To learn more, check out our article on errors and omissions (E&O) insurance.
18. Not Investing in Cybersecurity Insurance
Keri Lindenmuth, Marketing Manager, Kyle David Group
One major insurance mistake businesses make is not investing in cybersecurity insurance at all. With more small businesses falling victim to data breaches and cyberhacks every single year, and with most of those small businesses closing within six months of their attack because of steep financial losses, it’s so important to invest in cybersecurity insurance. This insurance helps protect the costs of your data, helps cover the legal and technical costs of rebuilding. It’s gotten to the point that some legal experts will not even help a business that hasn’t been insured because the risk is so high. Meanwhile, as customers learn more about data security, they’re starting to look into whether or not a business is insured to handle their private data. This is especially true if you’re a B2B business.
19. Not Taking Advantage of IRS Code Section 162
Chris Abrams, Founder, Abrams Insurance Solutions
Section 162 allows for an Executive Bonus plan. An executive bonus plan is a fringe benefit, funded with life insurance, given to a select group of key employees and/or business owners. It provides protection to the executive’s family during their working years, and when it’s funded with permanent life insurance, it can also provide tax-advantaged supplemental retirement income.
20. Not Understanding the Limits & Terms of the Policies
Joseph Deutsch, Owner, The Fidella Agency
One common mistake in purchasing insurance is not understanding the true ramifications of all the limits and terms of the policies. Insurance policies can be tricky with many industry-specific terms that need to be understood. It is crucial to read every single exclusion and endorsement in the insurance policy and make sure you understand all the details before you agree with the terms.
21. Buying a Cheap Insurance Policy Online
Ben Taylor, Founder, Home Working Club
It’s easy to perform a Google search and buy a cheap insurance policy online. However, getting such a policy to pay out on a claim may be far more difficult. Often, there will be terms and conditions hidden in the small print, such as not being covered for work done for clients in other countries. It’s important to really understand the policy you’re buying and discuss this with an insurance adviser.
22. Not Having Key Man Life Insurance on Partners or Key Employees
Lingke Wang, Co-Founder, Ethos Life Insurance
One common insurance mistake is not having keyman life insurance on partners or key employees. This is a life insurance policy on the keyman’s life with the business as beneficiary. It can save a small business if that person dies or becomes disabled and can no longer work. The benefit amount helps offset what it would cost to find and replace the key employee.
Interested in learning more? Read our complete guide to key man life insurance.
23. Not Having Your Property & Equipment Insured
Jay Labelle, Owner, The Cover Guy
Although liability insurance is probably the most important insurance for every small business, it is equally important to insure your business assets such as your business property and equipment. Business equipment insurance provides cover for loss or damage to property or equipment that you use for your business. If your business couldn’t function without expensive equipment, it’s essential to have sufficient business equipment insurance cover in place.
According to Cover Wallet, failure to update policies as your company grows is one of the most common insurance mistakes most business owners make. As your business grows, you should regularly review your existing insurance policies as both the types of coverage and your limits may need to be updated.
Purchasing too much coverage than what you need is a costly mistake every business owner should avoid. Not all types of insurance coverage are applicable for your business, and you’ll only be wasting your money on business insurance products that your company will never use or even need. Poms & Associates recommends talking to an expert insurance agent to ensure that you’re only buying what your business needs to buy.
Failing to protect your business with the appropriate insurance is a big mistake you should avoid as a small business owner. There are different types of business insurance and you may or may not need all of them, depending on the type of business you’re running. When buying a business insurance, make sure to follow the business insurance tips above.