Businesses who do not have the proper insurance coverage face a variety of risks that could impact their bottom line. In the event of a claim, being underinsured may result in economic losses for the policyholder, since the claim could exceed the maximum amount that could be paid out by the insurance policy.
Underinsurance comes from having wrong coverage or insufficient coverage for your small business. Underinsured businesses are a growing problem in the United States. According to a survey
by Marshall & Swift/Boeckh, 75% of businesses in the U.S. are underinsured by 40% or more.
Why Are Businesses Underinsured?
Small business owners have a variety of excuses for not having sufficient insurance coverage for their business, including:
- Costs of insurance
- Not sure what coverage they need
- Don’t think that they need to have insurance
Underinsured also happens when a small business owner does not understand insurance requirements,
miscalculates their company value, or underestimates business growth. In an attempt to save money, some business owners may also purchase limited insurance. No matter the reason, small businesses who are underinsured run the risk of potentially devastating consequences.
Risks of Being an Underinsured Businesses
Business owners who are underinsured are exposed to
financial or legal risks on a daily basis. If a business is underinsured, their insurance claim payout might only cover a portion of the claim, with the business having to cover the rest of the amount out of pocket. Many threats could endanger a business that does not have the correct insurance coverage, such as:
- Financial impact: In the time of a cataclysmic event, such as a fire, flooding, hurricane or major storm, not having the right insurance coverage could be devastating for a business to recover from financially.
- Legal action: Customers, clients and even employees could take legal action against a business if they fail to deliver on a contract. Lawsuits could be financially draining to a business if they do not have the right insurance coverage.
- Non-compliance: Local, state and federal laws require businesses to have insurance coverage for a variety of risks. If your business doesn’t have these insurance programs, they could be at risk for penalties, high fines and revocation of licenses.
- Reputation damage: Small businesses can be at risk for reputational damage from issues caused by customer/client complaints or cyberattacks. Underinsured businesses might not have the right coverage to assist in the payout for these types of damages.
- Loss of Business: Catastrophic events could damage a small business’s property and equipment, directly affecting the business’s productivity and, ultimately their profit. Recovering from paying for this damage above and beyond what insurance covers could be detrimental to small businesses and could put small business owners into personal bankruptcy as well.
Prevent Risks to Your Business by Being Prepared
When purchasing insurance coverage for your small business, you need to be prepared to discuss all aspects of your business with your insurance agent. Keep these
tips in mind:
- Understand your needs: Each business has its own unique insurance risks and requirements. Since there are several commercial insurance options, you must understand the level of risk before you choose your coverage.
- Protect home-based small businesses: A homeowners’ policy does not protect a home-based business. Be sure to add a rider to the policy that would cover your home-based business.
- Have a good agent or broker: An insurance agent is a person that you rely on to protect your business. Find an agent who is familiar with your business and industry.
- Review and update the policy every year: Your business needs change, and so should your insurance. Make sure to review the policy, coverage and any changes for the upcoming year.
Small Business Insurance Coverage
Being underinsured is not an option. Small business owners need to assess their risks and loss potential and investigate which policies would best fit their needs.
Basic insurance coverage for small businesses starts with the following:
- General Liability: General liability insurance can provide coverage for bodily injury or property damage from incidents that occur on your premises. This includes coverage for your products or operations, certain legal defense costs if your company is sued, and reputational damage due to libel, slander or copyright infringement. Commercial Property: Commercial property insurance covers buildings you own or rent from fire, smoke, wind, hail, storm, hurricane, tornado or vandalism damage. It also covers desks, equipment, tools, computers and your business’s files.
- Workers’ Compensation: Workers’ compensation insurance covers the costs associated with an employee work-related injury. Most states have individual workers’ compensation insurance requirements.
- Businessowners’ Policy (BOP): A BOP bundles commercial insurance coverages such as general liability and property insurance coverage.
- Business Interruption: Business interruption insurance protects you when an event or unforeseen circumstance temporarily disrupts your ability to operate your business. It covers lost net income, temporary relocation and other ongoing expenses.
Small business owners should discuss supplemental insurance coverage to help them round out their insurance coverage based on their business’s needs. These coverages include:
- Employment Practice Liability Insurance (EPLI): EPLI covers certain employment-related legal disputes such as age, race, sex discrimination, sexual harassment, retaliation, failure to promote and wrongful termination between employers and their employees, former employees and/or job applicants.
- Cyber Liability: Cyber liability insurance protects your company against damages from a cyberattack or data breach in which customer information or confidential data is exposed or stolen by a hacker.
- Professional Liability: Professional Liability insurance protects a company against dissatisfied customers.
- Inland Marine: Inland marine insurance protects products that are being transported by boat, airplane or truck.
AmTrust Offers a Comprehensive Suite of Small Business Insurance
AmTrust offers a comprehensive suite of
small business insurance solutions from workers’ compensation policies and commercial property coverage to general liability designed to fit your business’s needs.
Contact us to find out more about our multiline or monoline insurance policies to give peace of mind that your business is covered appropriately.
This material is for informational purposes only and is not legal or business advice. Neither AmTrust Financial Services, Inc. nor any of its subsidiaries or affiliates represents or warrants that the information contained herein is appropriate or suitable for any specific business or legal purpose. Readers seeking resolution of specific questions should consult their business and/or legal advisors. Coverages may vary by location. Contact your local RSM for more information.