Starting a new business is easier when you have luck on your side. Unfortunately, luck won’t protect you from incurring losses. Even if you are a diligent business owner, life still happens, and you will need business insurance coverage for a number of reasons.
According to the U.S. Small Business Administration, small firms account for more than half of all payroll positions in the United States. In fact, during the past 17 years, small business accounted for an estimated 67 percent of all job creation. By acknowledging these considerable numbers, the sheer size of the small business insurance industry becomes apparent.
Small business owners often have a higher level of personal financial exposure than heads of larger organizations. This makes it especially important for small business owners to have insurance policies that cover them for a variety of issues that could arise, as a serious loss could force them to close their doors for good.
Before you start comparing policies from different companies, it’s important to understand the different types of coverage available to you that can substantially protect your business interests.
Scenarios in which business insurance comes in handy
Small businesses encounter numerous instances where business insurance could prove beneficial, including:
Sexual harassment lawsuits
With both men and women in the workplace, there is the possibility of sexual harassment occurring, which could lead to a lawsuit being filed against a business.
- According to the EEOC, during the course of 2011, there were 11,364 sexual harassment filings brought against businesses in the United States – 1,367 of which were settled.
- Businesses paid out an estimated $52.3 million in settlements, averaging around $38,000 per settled claim.
While $38,000 might not seem like a substantial sum, small businesses that are trying to get started might not be able to handle such a financial hit.
Libel or slander
Libel or slander can be difficult to prove, but just being sued for it can have a small business tied up in court, which can be costly.
To prove libel or slander, the plaintiff must show evidence of four elements:
- The defendant made a defamatory remark.
- The material was published.
- The plaintiff could be identified as the person referred to in the defamatory material.
- The plaintiff suffered injury to his or her reputation as a result of the defamatory material.
If all four of these elements are proven in court, a small business could have to pay out a substantial judgment. Even if the plaintiff can’t prove slander or libel occurred, legal and court fees can be expensive and, thus, potentially lead to a quickly created financial dilemma for business owners.
Theft of equipment and other company property
Companies of all sizes are susceptible to theft, but small businesses are less equipped to deal with such an instance. For this reason, small business insurance should be purchased, as losing equipment could pose a huge risk to businesses if they are unable to recover or replace it.
Employee or customer injury on company property
One of the most costly incidents that business insurance can protect against is employee or customer injury on company property. Whether an employee trips over a computer chord, or a customer slips and falls on a wet floor, for instance, a small business could be forced to pay damages for injuries incurred.
Even though the median personal injury claim has dropped by more than $5,000 to roughly $33,000 per claim, that amount right there could be more than enough to hamper small businesses’ operations. Therefore, owners who don’t think they’re insured enough will not want to skip out on obtaining the appropriate amount of insurance coverage.
Inventory is damaged, destroyed or lost (theft, flooding, fire)
Small businesses that have inventory on site need to invest in insurance in case it is stolen or damaged in a disaster.
For example, flooding can lead to extensive damage to a business:
- According to FloodSmart.gov, just one inch of water can cause significant damage to a property.
An employee is injured following a company party where alcohol is served
Most companies have office parties, whether it is for a holiday, such as Christmas, or to send off an employee that is leaving for another opportunity. At some of these gatherings, alcohol is served, which can create a tremendous amount of liability risk for a small business.
To reduce liability associated with alcohol at these events, small businesses can do a few things:
- Don’t have an open bar, and, instead, give out drink tickets with a maximum amount of alcoholic beverages a person can get.
- Set up a car service for people who don’t believe they are able to safely drive home.
- Avoid serving alcohol altogether by having a dry event.
Natural disaster damages property, forcing businesses to temporarily shut doors during cleanup
Major natural disasters seemingly occur every year, and can cause a significant amount of damage to businesses.
- During Hurricane Sandy last October, business losses totaled between $10 billion and $20 billion, according to Eqecat, which provides loss estimates to the insurance industry.
- Excluding insured losses covered by the National Flood Insurance Program, business lost between $5 billion and $10 billion.
Incidents that happen at home for those who run home businesses
In some cases, small business owners run their company from home, which might lead them to need more than their general property insurance coverage.
For example, any damages suffered to a home business during a fire, flood, theft or vandalism, likely won’t be covered under their homeowner’s insurance policies. In order to receive adequate protection, additional policies will need to be purchased.
Types of business insurance
To protect assets against numerous types of incidents, there are many different forms of business insurance small businesses can purchase.
General liability
This type of insurance protects businesses from a wide array of liability exposure, such as:
- Accidents that take place on the insured premises of operations that lead to injury.
- Injuries that are a result from a product sold by a company.
- Injuries that are a result from services offered by a company.
Should any of these incidents occur small businesses could be faced with a significant liability lawsuit, potentially forcing them to close their doors for good.
Errors and omissions insurance
Small businesses that provide consulting and advice to clients could benefit from errors and omissions insurance. For example, this type of insurance policy could provide protection for a small law firm if a client makes a claim of negligence as a result of poor legal advice.
Commercial auto insurance
Any company that has vehicles used for business purposes should consider this type of insurance. Commercial auto insurance policies have coverage that protects both company vehicles and drivers of those vehicles, similar to how a general auto insurance policy works.
Commercial auto liability losses have been up and down in recent years, but they are still substantial enough that small businesses might not be able to cover them on their own dime.
- The Insurance Information Institute reports commercial auto liability losses totaled $9.34 billion in 2009, $8.8 billion in 2010, and $9.35 billion in 2011.
Workers compensation
If an employee is injured on the job, workers compensation insurance can cover the wages and medical expenses that person is owed.
- Workers compensation premiums written in 2011 were $35.6 billion, a 13.3 percent jump from 2010, when premiums totaled $31.4 billion.
Business umbrella liability insurance
In certain instances, businesses could face lawsuits or settlements that exceed the limit of liability provided by general liability, E&O insurance or workers comp. Instead of having to pay for those costs out-of-pocket, small businesses can purchase business umbrella liability insurance, which provides an additional layer of protection for companies.
Why you need business insurance
Business insurance is important for all small businesses to have, especially those that are up-and-coming, as a single incident that leads to a lawsuit could put them out of business.
1. Reduce liability – Business insurance can protect small businesses from accidents that occur on their premises.
- According to the Occupational Safety and Health Administration, 4,609 work-related deaths occurred in 2011.
- Secretary of labor Hilda Solis said that 13 people go to work and never come home every day in the United States. Additionally, 4 million people suffer a workplace related injury from which they might never recover each year.
- Business insurance covers injuries to both customers and employees, with the most common being falls, electrocutions and being struck by an object.
- One of the major benefits of this type of insurance is that it allows small businesses to maintain cash flow in the event of a liability lawsuit.
2. Loss recovery – In the event of natural disasters, vandalism, theft or damaged goods, small businesses could be on the hook for repair bills or product replacement. Rather than paying this cost out-of-pocket, companies can purchase business insurance, which can help pay for these expenses.
3. Legal requirements – Certain states don’t give small businesses the option of purchasing business insurance, as it is a requirement to operate, especially when it comes to workers compensation.
- The U.S. Small Business Administration requires firms to have workers’ compensation insurance and unemployment insurance.
- Only California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico require disability insurance.
However, the insurance policies small businesses are required to purchase depend on the size of the company and the industry.
4. Secure loans and investments – When seeking out a loan from a bank, small businesses might need to show proof of insurance, as it will give the lender peace of mind. Businesses are able to secure a loan without certain types of business insurance, but it will likely come with much higher interest rates and fees.
5. Improve your image and stability – If for no other reason, companies can use business insurance to help legitimize the company and improve the business’ image. Insurance can demonstrate to customers, clients, employees and potential investors that a business can endure a loss or lawsuit without cash flow taking a major hit.
With all this taken into account, it becomes clear that small businesses can benefit greatly from a number of different insurance policies in addition to the ones they are required to have by law. A major lawsuit or settlement is sometimes all it takes to force a small business to shut its doors. Taking a moment to examine your options from different providers can help ensure small business owners have the coverage they need to deal with the unexpected.
Sources:
http://www.iii.org/facts_statistics/auto-insurance.html
http://www.osha.gov/oshstats/commonstats.html
http://www.sba.gov/content/insurance-requirements-employers
http://www.eeoc.gov/eeoc/statistics/enforcement/sexual_harassment.cfm
http://www.iii.org/facts_statistics/litigiousness.html
http://money.cnn.com/2012/10/30/news/economy/sandy-economic-impact/index.html
http://www.disastersafety.org/commercial_maintenance/commercial-vulnerability-assessment_ibhs/
