Insurance is a necessary evil for most people. And if you own a business, things get even more complicated. You must think about different types of insurance: workers’ comp, health coverage, property damage protection — and how much you’re willing to spend on each. There are so many options to consider that it can be overwhelming.
It doesn’t help that the insurance industry doesn’t exactly have the best rep. We have all heard a story about someone’s neighbor/grandma/cousin who got sold a policy that was too expensive, too shady, or just plain unnecessary. Nobody wants that, and it’s no surprise that people don’t get excited about needing to talk to an insurance broker.
With all that out of the way, here’s what you need to know.
There are two things you can do with risk: lower (or eliminate) the probability of something bad happening, or lower (or eliminate) the damage if something bad happens.
Business owners can do a lot of things (changing the toner in the copier, negotiating a better deal on rent, finding an amazing team member, etc.) — but eliminating all risk is outside of their superpowers. Now, the idea of lowering the risk and the resulting damage is something that can be done. However, it’s not going to be free. Take heart — we at TreMonte are business owners, too! It is never fun to fork over insurance premiums, but it is a responsible and wise move to reduce potential damage to you and to the business.
So, how do you as a business owner minimize the financial impact of something going wrong at a reasonable cost? This short guide will help you look over your current coverage and identify possible gaps.
Insurance for Small Business Owners: Types of Insurance
To kick things off, you and your business are not invincible. Conceding to that reality is the first step in managing risk.
Here is another part nobody likes: The kinds of insurance your business needs will vary depending on the nature of what you do. In other words, there is no universal checklist for a “hypothetical business owner.” It is important to work with an experienced financial planner who can guide you through the right insurance products to consider — and to keep costs and risks top of mind.
Here are some of the more common types of insurance for small business owners:
- Professional Liability (Errors and Omissions): Also known as “E&O” insurance, this policy guards against lawsuits brought against your business. It helps pay for legal battles in the courtroom and settlements. Attorney fees, settlements, and judgments are covered under an E&O plan.
- General Liability: This type of policy insures against the risk of bodily harm and property damage that might happen during your business operations. It also protects against personal and advertising injury, damage to premises rented to you, and medical payments.
- Umbrella: Umbrella insurance can be used after you have other risks covered. It is a policy that provides additional coverage for claims brought against your business and may be suitable for higher-risk businesses. The plan essentially supplements your other policies. It can insure against slip-and-fall injuries, car accidents, employee injuries, and property damage.
- Property: Capital-intensive enterprises should consider business property insurance to protect physical building and machinery assets. Commercial property insurance can be helpful whether you own or rent capital equipment. Should the items be stolen or damaged, this policy will keep you protected. Tech-focused firms should consider property insurance if high-end computers and mission-critical documents are key to their operations. (We will discuss cyber insurance later; read on for more.)
- Workers’ Compensation: In Michigan, any business that employs one or more individuals is required to carry workers’ compensation insurance. It covers work-related mishaps. There are many details on how the state law Sole proprietors since they do not employ other people, are not required to have workers’ comp insurance.
- Commercial Auto: This one is rather straightforward. A commercial auto policy insures vehicles used for business purposes. Damages to both the vehicles and driver’s injuries are included.
- Company Owned Life Insurance (COLI): Coverage for the death of an insured employee is captured under COLI. The benefit is paid to the business to help cover the expenses related to replacing the deceased employee. Some requirements must be met to in order to receive a tax-free death benefit.
Insurance for Small Business Owners: Amounts of Coverage
As if there were not enough types of insurance, determining the proper coverage amount is part art and part science.
There is no single right number. In my experience, the key is to find the balance between coverage and premiums. At certain reserve levels and for certain risks, it may be financially smart to self-insure (i.e., set aside a cash reserve to fix the possible damages) or to maintain a minimal amount of insurance. In other situations, more coverage may be warranted, even if it means higher premiums.
A good start may be to sit down with us at TreMonte to review your business revenue, cash reserves, the value of your assets and property, as well as your landlord’s minimum requirements in your lease. Once we have a gauge of your ability, willingness, and need to cover these risks, we can help you determine an ideal deductible per-occurrence, the per-occurrence limit (the amount a policy will pay for a single claim), and the aggregate limit (how much a policy will pay over its duration).
Insurance for Small Business Owners: Specialty Insurance to Consider
The world is changing fast. Due to the evolving nature of business, technology, and litigation, there are a few new special types of insurance that a business owner may consider.
- Terrorism Coverage: These plans pay for expenses related to damage or destruction of buildings, equipment, and inventory. They can also cover claims brought against you related to a terrorist attack. The Terrorism Risk Insurance Act (TRIA) was passed in 2002 in response to the September 11 attacks to form a partnership between the government and the business world for such events. While the original law expired, the Terrorism Risk Insurance Program Reauthorization Act of 2019 has been extended through 2027.
- Cyber Insurance: Businesses that deal with valuable data may consider acquiring cyber insurance to protect against electronic threats. A cyber insurance policy covers damages due to misuse of sensitive information and technologies. If you handle Social Security numbers, medical records, or credit card information, then cyber insurance could be right for you.
Insurance for Small Business Owners
Did we scare you straight? No doubt, it’s a lot to consider and may even cause you a little anxiety.
But fear not! Knowing your risk is among the first steps to effectively managing a successful business. Insurance is an important financial planning area for all small business owners.
Reducing the risks to your business is a key component of your business being able to survive and grow. TreMonte is available to help guide your insurance review and decisions: click on this link to reserve a brief call with a member of our team!
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