If you’re thinking about starting a small business, you know a thing or two about taking risks. Your entrepreneurial spirit is not only commendable, it’s critical to keeping our economy going. But at the same time, it’s smart business to limit your risks however and wherever you can. That’s where business insurance—and solid advice from your independent agent—come into play.
Is business insurance necessary?
The short answer is absolutely. Especially if you have employees, in which case some types of insurance, including workers’ compensation and disability insurance, may be required by law. You may also be required to have insurance if you have a company car. In other instances, insurance coverage can be a stipulation of getting a business loan, lease, supplier or customer contract or a state or local business license.
In many cases, though, there are no laws, rules or regulations that mandate business owners make smart choices about protecting their business. As a result, around 40% of small businesses don’t have insurance1.
What’s the risk?
Many small businesses go without insurance because of the cost. But those businesses haven’t carefully considered what not having insurance could cost them. The reality is, all businesses face risks that could be financially devastating without insurance protection. Obviously if you’re opening a skydiving school, your business risks are going to be a lot more substantial than if you’re opening up a bookstore. But no business is entirely immune to risks, which could include:
Natural or manmade disasters like tornados, floods or fires
Theft by an employee
Death of a business partner or key executive
False advertising or copyright infringement
Malpractice or negligence
Product-related injuries or accidents
Data breach, and much more
Without the right insurance coverage, any of these situations could break your business—and even jeopardize your personal assets—closing your doors much more quickly than you opened them.
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Tips for protecting your business
If you don’t want all the hard work that goes into starting a business to be in vain, make sure your business is covered. Keeping these tips in mind can help you secure the right insurance for your company:
- Make the right call
Trying to understand your insurance needs and which coverages are the right fit can be overwhelming, if not downright impossible, to do on your own. So don’t go it alone. Call your independent insurance agent. Independent insurance agents are not only well-versed in the types of risks businesses face, they also know the types of insurance products available to protect businesses, and they represent multiple insurance companies, which means they have access to a wide range of products to choose from.. An independent agent can help you carefully consider and identify potential risks to the business and fully explore your insurance options, so that coverage can be matched to your unique needs. Essentially, working with an agent ensures you get the expert help and advice you need to make sure your business is covered, no matter what happens.
- Plan on it.
Create a detailed business plan that outlines what the business will do and how it will do it. A solid business plan is a crucial tool when it comes to securing insurance as well as funding for a new business. A plan demonstrates to insurance underwriters and potential investors that you’ve done your due diligence to consider the risks you may encounter and how to protect your business as it grows. Your independent agent can help you create a good plan and pitch it to insurance underwriters.
- Know your risks
There are many, many types of commercial insurance products on the market, ranging from general liability insurance, to property coverage, to commercial automobile coverage, to data breach and e-commerce coverage. Knowing what protection you need starts with understanding the unique risks your business faces. For example, if you’re starting a contracting business or a manufacturing company, equipment breakdown or electrical failure could seriously jeopardize your livelihood. On the other hand, if you’re launching an e-commerce site, protection against data compromise is probably a must. An independent agent can help you identify your potential liabilities and risks via a professional risk assessment so you know what types of coverage you need.
- Consider a package deal
If your business requires a number of different types of coverage—such as property coverage, vehicle coverage, protection from business interruptions or loss of equipment and liability coverage—you may want to consider a Business Owner’s Policy (BOP). A BOP bundles different types of coverage together and can save you money versus buying separate policies for your various insurance needs.
- Make it personal
Your business is unique, and that means your insurance coverage should be too. Even if a BOP makes sense for you, you should talk to your independent agent about customizing the coverage so you have added protection where you need it most. Your agent can help you look at adding endorsements or other options to your coverage based on your business’s specific needs and risks. Keep in mind that independent agents typically have access to a multiple carriers, so they’re very well equipped to deliver the customized insurance options you need.
- Make no mistake
Owners of home-based and small businesses frequently make two common insurance mistakes. First, home-based business owners often assume their homeowner’s policy covers business assets. But in most cases, you need a separate commercial policy to safeguard business property and protect your business from liability. Second, owners who have incorporated or formed an LLC may think their business structure protects them. While a formal business structure may protect your personal assets, it won’t cover business losses.
- Don’t overdo it
While protecting your business with insurance is no doubt a smart investment, no owner wants to pay for coverage he or she doesn’t need. Working closely with your independent agent and ensuring he or she truly understands your business can help prevent buying unnecessary coverage. You can also save money by choosing a higher deductible and following your insurer’s recommendations for avoiding loss.
- Take a second look
As your business evolves, so will your risks. It’s a good idea to review your insurance policies with your independent agent at least two times each year to identify new risks and ensure you have the coverage you need to protect your company and your livelihood for the long term.
How Insurance Works
How Insurance Works
Insurance is something you buy hoping you never have to use. You purchase it to protect yourself from unexpected losses you can’t afford—the accident you hope you never get into, the fire you pray never destroys your home, the hailstorm you know sooner or later is bound to batter your roof, the lawsuit that threatens to wipe out all your savings.
So, it’s no mystery as to why most people don’t even want to think about their insurance, let alone take the time to understand how it works. But, most people do want to have at least enough information to be on a level playing field with their insurance company, especially when they need insurance the most—when it comes time to file a claim.
Insurance Isn’t a Bank Account
U.S. consumers spent $652.8 billion on homeowners, auto and business insurance in 2020, according to Insurance Information Institue. That’s a lot of money to spend on something when you have only a vague idea of what you’re getting! But, part of the problem is that insurance doesn’t work like other products or financial services that we pay for.
Many people make the mistake of thinking their insurance works like a bank account—money in, money out with interest when they need it. Insurance is about spreading out the risk among everyone who buys insurance from your same insurance company. Your premium goes to help fund losses suffered by the entire group. As a pooled resource, you can cover the larger losses suffered by individuals. Your company works for you by trying to minimize the amount of risk.
Your Insurance Policy is a Legal Contract
An insurance policy is a legal contract between you and your insurance company. Like all legal documents, it very clearly spells out certain conditions that you both agree to when you sign off on the paper work. You agree to pay the premium and your company agrees to cover you for certain losses. Forms may differ from company to company, but all will include what is covered and what isn’t covered by your insurance. There is a limit to the amount any insurance policy will pay for a loss and no policy covers every type of loss. If there is a potential risk that concerns you and it isn’t referred to in your policy, ask your agent or company representative if it is covered by your general policy and if special coverage is available.
Factors that Impact Cost
Insurance companies are like other businesses, in that, the price charged for the product is directly related to the cost of “raw materials” used in the product. If the price of beef or bread goes up, then the price of hamburgers must also rise. Similarly, if the price of car repairs, home construction or settling lawsuits rises, the cost of auto, homeowners or liability insurance must also rise.
But, insurance companies have little direct control over the risk factors that affect the amount of claims they pay out. To hold down costs it’s essential to hold down the costs of what insurance pays for. That’s why the insurance industry devotes considerable resources to supporting programs and proposals that reduce losses, prevent injuries and save lives.
Why do different insurance company charge different rates?
An insurance company sets prices partly on its own past experience with claims that are filed (for example: accidents involving certain types drivers in certain kinds of vehicles) and on competition in the marketplace. One particular company may have a much better experience insuring a certain type of driver than the industry does as a whole.
What about reducing insurance company profits?
Contrary to popular belief, insurance isn’t a very profitable business. Many companies write insurance, particularly homeowners insurance on a loss and make money only on their investment income. The average profit margin is 10% lower than the median Fortune 500 Company. The real cost of insurance is only known after claims are made and paid. No one can know for sure when the coverage is first sold just how much of that premium will or will not be left for profit after claims are paid. The financial viability of your insurance company should be an important part of your decision in choosing to stake your future with theirs.
What should I look for in an insurance company or agent?
Agents and companies are there to help you. At the most basic level, any agent or company representative should be able to answer all of your questions about insurance, provide you a thorough assessment of your insurance needs, and offer you a choice of insurance products to meet those needs. Also, any insurance agency or company should provide you with prompt, quality service in the case of a claim. (Ask questions like, do they provide 24-hour claims service.)
Just as important is the level of professional confidence and personal comfort you feel with the company representative or agent.
An often overlooked factor to keep in mind is that there are two kinds of insurance agents and two kinds of insurance companies. There are companies who sell insurance directly to you and there are companies who sell insurance through agents. There are also two different kinds of agents: those who represent one insurance company and those who represent more than one insurance company.
Agents offering the policies of one insurance company through their agencies are often referred to as “captive agents.” Agents offering the policies of more than one insurance company (but limited to companies who sell through independents) through their agencies are called “independent agents.” You should do a through self-evaluation of what your insurance needs are and select a company that best fits YOU!