Both Coverages and Limits Are Important
Whether you’re starting a new venture or running a long-established company, you have a myriad of responsibilities as a business owner. One of these is to ensure your company has adequate business insurance.
Like many small business owners, you may be an expert in your industry but know little about insurance. Buying the right coverage requires some skill, and mistakes are easy to make. Some errors may be minor, but others can have serious consequences. Here are some pitfalls to avoid when buying insurance for your company.
1. Always Choosing the Cheapest Policy
When buying business insurance, it makes sense to shop around since some insurers provide better value than others. This does not mean you should always choose the cheapest policy. The policy that costs the least won’t be a bargain if it leaves you vulnerable to costly claims.
Warning: Before you buy a policy, be sure you know what exclusions it contains.
2. Buying Too Little Liability Insurance
Virtually any small business can be hit with a lawsuit, which can cost anywhere between $3,000 and $150,000. A legal action can threaten your company’s financial stability and harm its reputation. One large claim can even put your company out of business. To protect your business against lawsuits, don’t skimp on limits when buying general liability or auto liability insurance.
Does your company perform work or services for other businesses under a contract? Those businesses may prohibit you from starting work until you provide proof of liability insurance. The amount of insurance you must purchase is typically stated in the contract. Similarly, a landlord may refuse to lease property to you unless your business has purchased liability insurance.
3. Automatically Choosing a Low Deductible
A deductible can help you save money on insurance premiums as it enables you to pay for small losses out of pocket. It’s a form of self-insurance.
When buying commercial property or auto physical damage insurance, don’t automatically select the lowest deductible. Instead, consider how much premium you will save by raising the deductible from, say, $100 to $250, or from $250 to $500. As a general rule, you should choose the largest deductible your firm can comfortably absorb.
Note: In addition to reducing your premium, a larger deductible will give you an incentive to practice some risk management and protect your property from damage.
4. Failure to Adjust Your Coverage as Your Business Changes
Most businesses change over time. Small companies may grow, adding locations and hiring additional employees. Some businesses may change the mix of products or services they offer. When businesses change, their insurance needs change as well.
If you have made a major change to your business, like acquiring a new company or location, notify your agent or insurer right away. All other changes should be reported before your policies renew. Try to communicate with your agent or broker several weeks or months in advance so he or she has time to gather information and forward it to your insurers. Your agent can help you decide whether your insurance coverages or limits should be adjusted.
5. Failing to Read Your Policies
Reading your insurance policies may not be enjoyable but it’s an essential task. It’s the only way to know what risks are covered and which are excluded. Don’t wait until a loss occurs to look at your policies. You can’t buy coverage for a loss that has already taken place.
While many insurance policies are written in simplified language, they still contain some “legalese.” If you have trouble comprehending the wording, ask your insurance agent or attorney to explain it to you in layman’s terms.
6. Buying Too Little Property Insurance
If you are insuring your buildings and personal property under a commercial property policy, make sure you buy adequate limits. This is essential even if your policy includes replacement cost coverage. While the latter will automatically cover the cost to repair or replace your damaged property, it won’t pay more than the limit of insurance. If the cost to repair or replace your property exceeds the limit, your policy won’t cover the entire loss.
Watch out for coinsurance clauses and agreed value provisions, which are often found in property policies. Both impose a penalty for underinsuring your property. If a loss occurs and you have failed to maintain a minimum amount of insurance, your insurer will not pay the full amount of the loss. Deliberately underinsuring your property is not a good way to save money on property premiums.
7. Failing to Insure Potential Income Losses
Many business owners are careful to insure their company’s physical assets but fail to consider a common consequence of physical losses, namely a loss of income. A company will lose income if its premises suffer a physical loss and the business cannot operate until the damage is repaired.
You can help ensure your company survives an interruption by purchasing business income coverage. Also called business interruption insurance, this coverage reimburses your company for the income it would have earned if the loss had not occurred. It also covers expenses you must continue to pay (like rent or electricity) whether or not your business is operating.
Tip: Your business may also need extra expense insurance, which covers expenses you incur to avoid or minimize a shutdown when property has been damaged by a covered peril.
8. Failing to Accurately List Entities or Locations
Under most liability policies, only the people or entities shown in the declarations qualify as named insureds. Those not listed on the policy generally aren’t covered. Failing to list a business entity on a general liability, commercial auto, umbrella, or other liability policy can have disastrous consequences.
For example, suppose you own a company called ABC Inc. For tax reasons, you transfer ownership of all your business property to a newly-created subsidiary called XYZ Inc. Your liability policy that lists only ABC as the named insured. An accident occurs on your property, and XYZ Inc. is sued. Because XYZ is not listed on your policy, your insurer refuses to cover the claim.
Similar problems can occur if business locations are omitted from a commercial property policy. Most property policies cover physical loss or damage to covered property at the premises described in the declarations. If damaged property is situated at premises not shown on the policy, the damage may not be covered.
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