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When it comes to insurance, it’s been a rough year for small business, from pandemic-related losses that weren’t covered to scrambling to file claims for looting and fire damage. There’s never been a better time, then, to take stock of your business insurance, to be sure it’s up to the job.
An additional incentive to review coverage is the outlook for the cost and availability of business insurance. While 2020 premium increases have been minimal for most types of commercial insurance, according to Christopher J. Boggs, executive director of risk management and education at the Independent Insurance Agents & Brokers of America, some policies have become more costly, such as those for commercial vehicles. With natural disasters and rioting costing the industry billions in claims, as well as some spillover from the pandemic, Boggs says rates are likely to continue going up. He also thinks that underwriting standards could tighten, making it harder for some businesses to get policies.
Insurance, including business interruption coverage, is a must for most small businesses, as those who were uninsured or underinsured in 2020 discovered the hard way. Read on for some moves to avoid when shopping for business insurance, as identified by experts.
Be familiar with your coverage before you need it
Failure to know in advance what your business is covered for, and what’s involved with filing a claim, can too easily leave you digging out insurance documents as you cope with a business catastrophe. (Witness some coverage by insurance-industry publications of storeowners discovering claims requirements as they sifted through looting damage.)
Indeed, understanding what is and what is not covered in their policy was among the top challenges faced by small business owners, according to a recent study by Nationwide. If it’s a while since you purchased your coverage, take time to familiarize yourself with your policy’s coverage and claims procedures.
Among the details to explore are possible waiting periods, co-insurance requirements, and civil authority limitations, says Hubert Klein, a partner and practice leader for the Financial Advisory Services Group in EisnerAmper LLP’s Iselin, N.J. location. He offers the real-life example of a business owner who expected to claim up to his $4 million coverage limit for damage from Superstorm Sandy. But he overlooked that his policy restricted loss for each business location to no more than $300,000. The per-location limit meant he received $2.2 million, barely half of his coverage limit.
Don’t scrimp on supposed extras
Given the cost of business insurance, it’s tempting for owners to forgo certain coverage, perhaps in an attempt to save money or because they feel it’s an unlikely risk, says Boggs of the Independent Insurance Agents & Brokers of America. Experts advise erring on the side of including coverage, unless the cost truly becomes prohibitive.
A common error, Boggs says, is basing coverage on faulty assumptions. As an example, he cites a client who opted not to buy theft coverage, because he felt his employees wouldn’t steal from him. But one did, and the losses weren’t covered by his policy.
In other instances, businesses pass on adding what are known as endorsements to the policy, to handle specific perils that could be catastrophic. As an example, Boggs cites a manufacturer that depends heavily on a buyer or a supplier, and yet fails to add an endorsement that protects the manufacturer should that other business be unable to fulfill its requirements. “When the business has a specific need that is covered by an endorsement to the policy, not taking the coverage for sake of a few premium dollars can be very costly,” Boggs says.
Don’t prioritize premium cost over coverage level
It can be equally risky to purchase insurance based on what you want to pay, and then tailor the policy to that number, regardless of the financial risks that may remain uncovered.
To avoid that error, advises Klein, start by doing a risk analysis that takes into account your potential exposure and what your needs could be. “People chasing premium prices often sacrifice tens of thousands of dollars in possible coverage recovery for minimal premium dollars,” Klein says. He cites the example of a business owner who tries to shave off $1,000 or so from his or her premium, without sufficient thought to how drastically the insurance coverage might be compromised.
For his part, Boggs says he used to tell clients, “‘I can always get you a lower price, but wouldn’t you like to have the proper coverage when something bad happens?’”.
Think ahead, and widely
Smart insurance planning for a business should go beyond the policy that’s in the company’s name, and further than present needs, says Richard Whitworth, head of business consulting at Cetera Financial Group Inc., a California-based network of investment advisory firms. Entrepreneurs should also think holistically about the ways their personal and professional insurance needs intertwine, he says, and ensure key staff have adequate life insurance, among other needs.
They also shouldn’t put off covering insurance needs that are deemed to be premature, like coverage that will help minimize upheaval in the event of an owner’s sudden death, disability, or departure.