In my 17 years of working with small business owners, I have identified a commonality among them that is regularly evident: businesses are started by entrepreneurial people who are focused on delivering a great product or service but who rarely spend a lot of time thinking about risk management. In this article, I’ve attempted to condense hundreds of encounters into a quick list of typical insurance issues.
1. Insuring You- In most small businesses, the owner is the rainmaker, IT specialist, notary, office manager and the person who changes the toilet paper in the bathroom. Or, if you’re lucky enough to go into business with a partner, you likely split these duties based on your individual skill sets (or ability to be absent when the toilet paper runs out). Presuming that most of us go into business seeking a meaningful profit to support our families, this could be devastating. Be careful about agreeing to exempt yourselves from workers compensation, rejecting disability insurance or cashing out life insurance policies to buy your equipment. Bad things can happen, but there are ways to make them less economically devastating.
2. The Car Business- Liability arising out of the vehicles we drive represents the top exposure to most small businesses. Many of us purchase vehicles through our companies, which serve us both in and outside of the workplace. I’ve seen plenty of examples where a business owner made this type of purchase through the company, only to keep the vehicle insured on a personal policy. This yields a major coverage gap for the business. Many businesses also routinely have employees who use their vehicles to run errands or make sales calls. In the case of the employee who is driving their personal automobile to try to drop off a Fed-Ex package by 5 p.m. and collides with a bicycle, that claim is probably going to blow through the employee’s personal auto policy and come knocking on the business owner’s door. Do you know how your present business liability insurance would respond?
3. Know Your Limits- Almost all insurance policies come with a maximum limit. Most property policies come with a “coinsurance clause,” which requires you to carry limits that represent a significant majority of the realistic replacement cost of the property you’re insuring. Failure to do so can yield a lesser insurance recovery in the event of a loss. With liability insurance, oftentimes we help our clients discover that purchasing commercial umbrella coverage (usually with incremental limits of $1 million) can be extremely affordable when compared to the risks we’re addressing. Going back to the article’s opening statement, small business owners can get pulled in so many directions that something like this can easily slip past them if someone is not helping them pay attention.
4. The Rule of 4- Many small business owners have run afoul of the state’s requirement to carry workers compensation coverage as a result of pure misunderstanding and complexity within the statute. Are you aware that your corporate structure or type of business impacts whether you’re required to carry coverage and if you’re eligible to file for an exemption? More importantly, even if your company’s size does not mandate coverage, are you aware of your potential liability as an employer should an employee become sick or injured? The penalties levied by the state are severe should you be caught without coverage when it is required, but the potential liability arising from an uninsured, injured employee could be far worse.
5. The End of Year Blues- So you had a great business idea, were smart enough to purchase insurance and worked your tail off to have a first year that blew through all of your predictions. Party time, right? Yes, as long as you knew which of your insurance policies are audited at the end of the year. Workers’ compensation and general liability policies are regularly audited at the end of each policy year (with a few exceptions more commonly found on general liability coverage policies). It is important to understand how your premium is computed as well as the resulting ramifications in the event that your business has higher gross receipts, subcontractor costs or payroll than what was originally forecasted at the start of your insurance year. Failing to do so can yield a nasty surprise.
In sum, insurance is complex, even for the smallest of businesses. However, it is also what allows us to take the financial risks associated with getting a business started. Take time with an experienced commercial insurance agent to understand your coverage. Ask questions, and keep asking questions until you’re comfortable with the answers.