Cash flow is a top priority for most new start-ups if they are not already. According to Hartford (2015), 40% of small businesses will experience a loss due to a claim by 2025. It may seem unnecessary to add business insurance to your overheads so early. The average cost of general liability claims, including legal services, as 35% of them end up in court, is $75,000. The majority of small-business owners cannot afford to add business insurance to their ‘nice-to-have list.
Other business owners may sue you for damages you didn’t consider, such as mislabelled products or unhappy customers. The umbrella term business insurance covers third-party liability costs such as bodily injury or property damage. Entrepreneurs can ensure their success by providing their business right from the beginning.
What type of insurance should a small company consider?
The following types of coverage are typically included in a comprehensive insurance policy for a business:
1. Commercial General Liability Insurance
It is the type of insurance that you are most familiar with. CGL is the basis of most insurance policies. It covers all common risks that you might encounter in your business operations. These include bodily injury, property damage, personal and advertising injures (e.g. libel. slander. defamation) up to the policy limit. For example, a CGL policy limiting $2M for small start-up businesses will cost you approximately $450 per year.
2. Product Liability Insurance
Product Liability Insurance is vital for any start-up that develops, manufactures, or sells a product. It covers third-party injuries and property damage caused by your products. Design defects or inadvertent safety features often cause these types of damages. The price and limit of your policy will depend on the product and the volume you sell, and the role you play in the distribution process.
3. Errors & Omissions Insurance
E&O Insurance, also known as Professional Liability Insurance (or E&O Insurance), is essential for anyone who offers services, designs products, or provides advice for a fee. This insurance covers claims of negligence and failure to deliver the service promised. E&O covers professional services as well as product failure and advertising services. You can expect to spend approximately $250 per year for a limit of $100,000.
4. Cyber Liability Insurance
Cyber Liability Insurance is becoming more important as small businesses move into the digital age. It covers cybercrimes that target your network or data. This insurance covers the costs of notifying your clients, crisis management, and restoring your system if your data is compromised, stolen, or held hostage. Most businesses will be satisfied with the cyber coverage (50K limit) in their E&O policies. However, if your start-up has sensitive client information or requires a higher limit, you should consider a standalone policy ($750 – $1K/year).
Cybercrime Insurance should be added to your Cyber Liability Insurance policy. Cybercrime Insurance covers you against the loss of funds from a cybercrime (e.g. hacking, phishing and social engineering), as it also covers notification costs, data recovery, legal fees, and other expenses.
5. Commercial Property Insurance
Commercial Property Insurance is essential, regardless of whether you own or rent a business property. This coverage covers property damage as listed in the policy and contents (e.g. stock, inventory, furniture). Your policy’s limit and the price will differ depending on your business’s location, type, and size. As an option, you can add Business Interruption Insurance to your commercial property policy. It covers lost income, overhead expenses, payroll, and the time required to recover your business after a covered loss.
Important note for home-based business owners: Most home policies don’t cover damage or loss to business property. Talk to your broker to find out if a commercial policy is suitable to fit your needs.
Consider these things before you buy insurance for your company
It can be not very clear to purchase insurance if you are not familiar with the process. First, you must consider what coverage you require, as well as the limits, exclusions and inclusions. It will help you avoid purchasing a policy that doesn’t provide sufficient coverage. These are three tips to help you navigate the commercial insurance process.
Understand your risk exposure
Your business’s risk management strategy should include insurance. The first step in determining the right policies for your business is assessing and understanding its risk exposure. For example, a financial consultant might need more professional liability insurance than a landscaping business. An online company that stores confidential information (cyber risk) may also require additional commercial general liability insurance.
Research claims and industry risks to understand your risk exposure and establish a baseline. It is a great way to reduce your risk exposure, identify areas that can protect your small business, and possibly lower your premium. Talk to your broker about risk management solutions that you can implement for your small business.
Calculate your policy limits
The policy limit is the maximum amount your insurance company will pay after an insured loss. Most policies have a liability limit of $1M, $2M or $5M. The worst-case scenario for your company and the recovery cost is the best ways to determine the policy limit. In your calculations, consider overhead costs such as furniture, stock, inventory, or equipment when choosing a limit on your property insurance.
You may assume that you won’t lose all and decide to insure a portion of your small business. Your premium is calculated according to the likelihood that you will suffer a partial loss. However, in the rare event that you experience a complete failure, your premium is deducted by a percentage.
Reexamine and adjust your policy
It is not necessary to accept the first policy offered. You don’t have to take the first policy you are offered. While you need to ensure sufficient coverage, it is essential also to review the exclusions, sub-limits, and limitations. You can either remove it or use it to indicate that you are looking for a new policy. Quality is just as important in insurance as quantity. It is not worth paying more for a policy that is cheaper in the long term.
Review and adjust your existing insurance policy if you have one. You may be covered for certain risks, even though you don’t know it. For example, commercial property insurance usually covers employee theft. It is a good idea to review your policy each year to ensure that your company doesn’t outgrow its policy. Ask your broker for details about the policy’s limitations and restrictions before you purchase it.
Disclaimer. The opinions and views expressed in this article are the authors Andrew Napolitano.
