Everything we do has some measure of risk, including running your own business. Let’s go over some helpful things to know to prepare for common risks facing small businesses.
Risk #1: Property Loss
Business owners with any type of brick-and-mortar presence—anything from a large warehouse to a small café—should consider how their business would be impacted by physical damage caused by occurrences such as fire, flood, or wind. The aftermath of physical damage can be two-fold: (1) the cost to make necessary repairs or purchase replacement equipment, and (2) the financial hit caused by a temporary closure of your business. Fortunately, insurance coverage is available for both of these types of losses.
Commercial Property Insurance
This helps businesses recoup losses caused by physical damage to the property. When purchasing property insurance, business owners should consider all of its property to ensure that the amount of coverage is appropriate. And remember that “property” includes more than just the building itself, but also the building contents, such as computers, machinery, fixtures, and furniture.
Business Interruption Insurance
This type of coverage helps business owners to recoup losses for operating expenses and lost income while your business is temporarily closed. This coverage can be critically important, as even a relatively inexpensive property loss could disrupt a business for several weeks.
Risk #2: Third-Party Liability Risks
“Third party” risks involve risks to people other than yourself and your business. The specific nature of liability risks will vary depending on your business, but all businesses have one thing in common: they should be insured against what are known as general liability risks.
“General liability” risks are the kind of exposures facing anyone in any field, such as the risk of a customer suffering “bodily injury” after falling on your walkway, or the risk that a competitor sues you, saying you’ve slandered them. Yes, liability risks also encompass “advertising injuries,” which include, for example, legal claims for slander, libel, or copyright violations.
You can protect your business against the costs of these types of risks with commercial general liability (“CGL”) insurance. In the event someone brings a claim that is covered by your policy, the insurance company will pay for your legal defense and also cover the cost of a settlement or damages award (known as “indemnification”). Having insurance coverage enables you to continue operating “business as usual” by mitigating the impact of expensive ongoing legal fees or a hefty jury verdict.
Of note, policies known as a business owner’s policies (“BOPs”) often combine CGL, property, and business interruption insurance. These types of policies can be less expensive than purchasing multiple insurance policies separately.
Additionally, if you provide professional services, such as a lawyer, real estate broker, or management or technology consultant, you should strongly consider errors & omissions (“E&O”) insurance. Also called “professional liability insurance,” E&O provides you coverage for the cost of claims made by clients for economic damages they say were caused by relying on your expert advice or service.
Risk #3: Your Employees
Let’s face it, your employees—including you—are a risk to your business. People can make mistakes in judgment or get injured on a job site. The following are the types of insurance you should consider to cover such risks:
Workers Compensation Insurance
This covers medical expenses and lost wages for employees who injure themselves in the course and scope of their work. Workers compensation laws vary by state, but every state except Texas requires employers to carry it. Small business owners may be surprised to learn that in some states, having just one employee triggers the requirement to carry workers compensation insurance. Business owners with any employees should check their state requirements to ensure they are in compliance with state law and have the proper insurance in place.
Employment Practices Liability Insurance (“EPLI”)
Other employee-related risks are claims against businesses for employment-related claims, such as wage and hour law violations, wrongful termination, discrimination, retaliation, and sexual harassment. Similar to CGL coverage, EPLI coverage will provide defense and indemnification for a business against employment-related claims that fall within the scope of the policy. EPLI policies have grown more popular in recent years, and the costs of litigation and settlement can be substantial.
Risk #4: Cyber Attacks
In recent years, cyber insurance has grown in popularity among all types of businesses. Cyber policies are varied and ever-evolving to stay current with developing technology and its related risks. Generally, though, these policies are designed to cover damages resulting from cyber-related issues such as network outages, data breaches, financial fraud, and ransomware.
Most policies provide third-party liability coverage, and defend and indemnify businesses against, for example, a customer’s claims arising out your business’ data breach. More comprehensive policies also provide first-party coverages, which, like property insurance policies, allow an insured business to file a claim of loss directly with its insurer. First-party cyber policies cover your own costs to notify customers, hire public relations and computer forensics experts, and recover data to mitigate the damage from a breach. With the rapid increase in remote work since the onset of the COVID-19 pandemic, insuring your business against these risks may prove to be a prudent investment.
Risk #5: Industry-Specific Risks
Insurance is not a one-size-fits-all endeavor. Every business has particular risks, depending on its size, location, finances, and industry. For example:
- The cyber insurance referenced above may not be worth the expense for a coffee shop that doesn’t keep any customer data, but would be prudent for an e-commerce company that holds sensitive customer data and financial information.
- Restaurants that serve alcohol may want to purchase liquor liability coverage, which protects businesses in the event that an intoxicated customer commits a crime, injures someone, or damages property. This can usually be added to a CGL policy. In fact, some states even require you to have such coverage in place.
- Warehouse operators may want to consider warehouse legal liability insurance, which insures businesses for losses arising out of events that happen while a warehouse is storing a third party’s goods, such as theft or fire.
Now that you have an overview of common risks and corresponding coverages for small businesses, here are some final tips to get the most from your insurance.
- Evaluate your biggest risks — both in terms of size and likelihood — and check your policy to see if they are covered (and for how much). Insurance policies almost always have exclusions for certain types of risks.
- Review your insurance policy when it renews to ensure that the coverage is still adequate.
- If your business undergoes significant changes during the course of a policy period, ensure your coverage remains up to date. For example, purchasing a new building, leasing a fleet of delivery trucks, or hiring a large number of employees are all events that could require a change to your insurance coverage.
With the right comprehensive insurance coverage in place, you can sleep a little more soundly at night, knowing that you have a safety net to protect your business.