Running any size of a business comes with many risks and challenges. You may face unexpected events such as accidents, lawsuits, natural disasters, thefts or cyberattacks that can disrupt your operations and cause financial losses. In some cases, you may be required to carry a host of insurance policies due to laws, or due to your client’s contractual demands. Having adequate insurance coverage is essential for protecting your business assets and liabilities and can help you sleep better at night. Believe me - this is one area you don't want to ignore as it can bite you in the bum, big time! One of my past businesses involved building spec homes from scratch. As (bad) luck would have it, we finished the house, staged it, and three days later a once-in-a-lifetime fire roared through Malibu destroying 1000s of properties... my investment property included. We had decent coverage that covered cost of construction, but not the profits that we were about to realize. Believe me, I wish I had bought additional policies. Black swan events do happen.
But how do you choose the right insurance policy for your small business? With so many options available in the market, it can be overwhelming and confusing to find the best fit for your needs. In this article, we will guide you through some steps to help you select the right insurance policy for your small business.
Step 1: Check your requirements
Your very first step is to find out what kind of insurance you are legally required to have. Depending on your location, industry and size of your business, you may need to comply with certain regulations and standards.
For example, most states require businesses with employees to have workers' compensation insurance, which covers medical expenses and lost wages for employees who get injured or sick on the job. Other types of mandatory insurance may include unemployment insurance, disability insurance, commercial auto insurance or professional liability insurance.
You can check with your local authorities or industry associations to find out what kind of insurance you need to have by law.
Step 2: Assess your business risks
Think about what risks your business may run. What are some potential scenarios that could cause harm or loss to your business? How likely are they to happen? How severe would they be? Some common risks that small businesses face include:
Property damage: This refers to any damage or loss of physical assets such as buildings, equipment or inventory due to fire, theft, vandalism or natural disasters. Not all businesses have physical property risks. However, if you use a computer and work from home – you still have your computer at risk!
Liability: This refers to any legal responsibility or obligation that arises from your business activities such as causing injury or damage to third parties (customers, suppliers, contractors etc.) or making errors or omissions in your products or services. This is an insurance that can come into play when you have customers, suppliers, or when your own employees interact on other physical premises and could damage something.
Business interruption: This refers to any disruption or loss of income due to an unforeseen event that prevents you from operating normally such as power outage, pandemic or cyberattack.
Employee-related issues: This refers to any issues that involve your employees such as workplace injuries, illnesses or lawsuits.
By identifying and evaluating your business risks, you can prioritize which ones are more important and urgent to cover with insurance. If the monetary risks are small, you perhaps can worry less. If the event risks are super low probability events, you can worry less. You should worry about a risk that could put you out of business!
Step 3: Know types of insurance and what they cover
Once you have a clear idea of what kind of risks you want to protect your business from, you can start looking at different types of insurance policies and what they cover. Some common types of insurance policies for small businesses include:
General liability insurance | This covers legal claims arising from bodily injury, property damage or personal injury (such as slander or libel) caused by your business operations to third parties. |
Commercial property insurance: | This covers physical damage or loss of your business property due to fire, theft, vandalism or natural disasters. |
Business interruption insurance: | This covers lost income and extra expenses incurred due to an event that disrupts your normal operations. |
Commercial auto insurance: | This covers bodily injury, property damage or liability claims arising from accidents involving vehicles owned, leased or used by your business. |
Workers' compensation insurance: | This covers medical expenses, lost wages and disability benefits for employees who get injured or sick on the job. |
Professional liability insurance: | This covers legal claims arising from errors, omissions or negligence in providing professional services. |
There are also other types of specialized policies that cater to specific industries or situations such as cyber liability insurance, product liability insurance, or business owners policy (BOP).
Step 4: Get help from a licensed insurance agent or broker
Choosing the right insurance policy for your small business can be a complex and time-consuming process. That's why it may be helpful to get professional advice from a licensed insurance agent or broker. An insurance agent or broker can help you:
Understand your legal requirements and industry standards
Assess your business risks and needs
Compare different plans and options
Negotiate prices and discounts
File claims and handle disputes
However, not all agents or brokers are the same. Some may work for a specific insurance company, while others may represent multiple companies. Some may specialize in certain types of policies, while others may offer a wide range of services. Therefore, it is important to do some research and find an agent or broker who is trustworthy, experienced and knowledgeable about your industry and needs. You can ask for referrals from your peers, check online reviews, verify credentials and licenses, and interview potential candidates before making a decision.
Step 5: Consider bundling insurance into one policy
Another way to simplify your insurance selection process is to consider bundling multiple types of coverage into one policy. This can help you save money by getting discounts, save time by dealing with one provider, and save hassle by having one point of contact. One common example of bundling is a business owners policy (BOP), which combines general liability, commercial property and business interruption coverage into one package.
Step 6: Compare prices and companies
Once you have narrowed down your options, you can start comparing prices and companies. Price is an important factor, but it should not be the only one. You should also consider other factors such as:
Coverage: Make sure the policy covers all the risks that you want to protect
your business from.
Deductible: This is the amount that you have to pay out of pocket before the insurance kicks in.
A higher deductible means a lower premium, but also more risk for you.
Limits: This is the maximum amount that the insurance will pay for each claim or per year. A higher limit means more protection, but also higher premium.
Exclusions: These are the situations or events that are not covered by the policy. Make sure you read them carefully and understand what they mean.
Customer service: This is how well the company handles your inquiries, claims
and complaints. You want a company that is responsive, helpful and reliable.
You can use online tools such as quote generators or comparison websites to get an estimate of how much each policy will cost you based on your information. You can also read customer reviews or ratings to get an idea of how satisfied other customers are with each company.
Step 7: Reassess your needs on a regular basis
Finally, you should not treat your insurance policy as a one-time purchase. Your business needs may change over time due to growth, expansion or new challenges. Many insurance companies do an annual audit to see if your risks or needs have changed, and they alter the price of the insurance accordingly. It’s a really good idea to contact them during the policy period if your business has any material changes (like hiring more employees or contractors, opening a new location, buying some equipment, etc).
Choosing the right insurance policy for your small business is not an easy task and it’s not super cheap, but it is worth it in the long run. It can help you protect your business assets and liabilities, reduce financial losses, and increase peace of mind. At the end of the day, consider what you could lose, and what would happen if you lost it all. Would it ruin you financially or just set you back? That will help guide you to the right level of coverage.