For most, if not all new start-up businesses, cash flow is top of mind. However, a reported 40% of small businesses will sustain a claim-related loss by 2025 (The Hartford, 2015). Business insurance may seem like an unnecessary cost to calculate into your overhead so early on. Still, with general liability claims averaging $75,000 (including legal services, as 35% end up in court), the majority of small business owners can’t afford to add insurance to their ‘nice-to-have’ lists.
As a business owner, you may be sued by others for damages you haven’t even considered, such as a mislabelled product or an unhappy customer. Business insurance is an umbrella term that refers to coverage for costs associated with third-party liability issues, such as property damage or bodily injury. By insuring their business from the very beginning, entrepreneurs can position themselves for success, knowing their assets are covered.
What insurance coverage should a small business consider?
A comprehensive insurance policy for a new business will typically include the following types of coverage:
1. Commercial General Liability (CGL) Insurance
The type of insurance you’re probably the most familiar with. CGL is the foundation of most insurance policies, as it covers common risks you may encounter in your day-to-day business operations. These may include bodily injuries, property damages, personal and advertising injuries (e.g., libel, slander, defamation) up to the policy limit. You can anticipate spending approximately $450 a year on a CGL policy with a $2M limit for a small start-up business.
2. Product Liability Insurance
Product Liability Insurance is essential for any start-up developing, manufacturing, or selling a product, as it covers third-party injuries or property damages caused by your products. Design defects or incorrect safety features typically cause these types of damages. Your policy’s price and limit will vary depending on the type of product, volume sold, and your role in the distribution process.
3. Errors & Omissions (E&O) Insurance
Also known as Professional Liability Insurance, E&O Insurance is critical for those who offer services, design products, or provide advice for a fee. This type of insurance covers allegations of negligence or failure to deliver a service as promised (as well as errors and omissions, of course). In addition to professional services, E&O also covers product failure and advertising services. For a $100K limit, you can anticipate spending approximately $250 a year.
4. Cyber Liability Insurance
As businesses continue to move into the digital space, Cyber Liability Insurance has become increasingly relevant. Cyber Liability Insurance covers costs associated with cybercrimes involving your network and data. If your data is stolen, held hostage, or hacked, this form of insurance will cover the fees to notify your clients, crisis management, and system restoration. For most businesses, the cyber coverage (~ $50K limit) included in your E&O policy will suffice. However, if your start-up stores sensitive data, such as client health information, or you require a higher limit, it is recommended you opt for a standalone policy (~ $750 – $1K/year).
It is recommended that you add Cybercrime Insurance to your Cyber Liability Insurance policy. Cybercrime Insurance protects against loss of funds due to a cybercrime (e.g., hacking, phishing, social engineering), as well as coverage for notification costs, data restoration, and legal fees.
5. Commercial Property Insurance
Whether your own or rent your business property, Commercial Property Insurance is critical. This coverage pays for property damages listed in your policy, as well as the contents (e.g., stock, inventory, electronics, furniture) inside. Like product liability insurance, your policy’s price and limit will vary based on determining factors such as location, size, and type of business. Most commercial property policies, or as an add-on, is Business Interruption Insurance, which covers income lost, overhead expenses, and payroll during the time it takes to restore your business following a covered loss.
Important note for home-based businesses – most home policies do not cover loss or damages to property used for business purposes; speak to your broker to see if a commercial property policy is right for your business.
What to consider before buying insurance for your business
For those unfamiliar with the purchasing process, buying insurance can be overwhelming. In addition to identifying what type of coverage you need, you must also consider limits, inclusions, and exclusions. Understanding the process helps you avoid buying a policy that does not provide adequate coverage. Three helpful tips for successfully navigating the commercial insurance process:
Understand your risk exposure
Insurance is a critical component of your business’s risk management strategy. When determining which policies you need, the first step is assessing and understanding your business’s risk exposure. For example, a financial consultant may require more professional liability insurance than a landscaping company, which may require more commercial general liability insurance than an online company storing confidential information (cyber liability), etc.
To understand your risk exposure, research claims, and risks common to your industry and use those as a baseline. This process is also an opportunity to reduce your risk exposure and see if there are areas to protect your business (i.e., encryption, security services) and ultimately reduce your premium. Speak with your broker about identifying and implementing risk management solutions for your business.
Calculate your policy limits
Your policy limit is the maximum amount of money your insurance company will pay out following an insured loss. Most policies begin with a $1M, $2M, or $5M liability limit. To determine your policy limit, identify the worst-case loss scenario for your business, and estimate the recovery cost. When selecting a limit for your property insurance, include overhead costs, furniture, stock, inventory, and equipment in your calculations.
It is common to assume you won’t lose everything and choose to insure a percentage of your business. Your premium is calculated based on the probability that you would suffer a partial loss. However, a percentage is set aside in the rare likelihood that you suffer a total loss.
Review and adjust your policy
You do not need to accept the first policy you are offered. When reviewing a policy, you should, of course, ensure you have adequate coverage, but also take the time to review the exclusions and sub-limits. If one of your top exposures appears on the exclusion list, either have it removed or take it as a sign to look for another policy. With insurance, quality is as important as quantity. There is no point in purchasing a cheaper policy that will cost more in the long run.
If you already have an insurance policy, review and adjust as necessary. You may be covered for risks and not even know it. For example, commercial property insurance often covers employee theft. As a rule of thumb, review your policy every year upon renewal to ensure your business doesn’t outgrow your policy. When reviewing or purchasing a policy, always ask your broker to explain the limits and restrictions so you have a full picture before you buy your policy.