In the United States and the rest of the world, hundreds of thousands of new businesses are created every day. The vast majority of these businesses are small and local. Many are sole proprietorship's and partnerships where a person with a unique skill, desire or knowledge feels compelled to strike out on their own. Of the nearly 21 million firms in the U.S., 15.5 million of them are non-employers (firms without payrolls). Of the firms where statistics are available, 82% have revenues under $500,000 per year.
By any measure, small firms constitute a significant proportion of the business landscape. While large firms often employ entire departments dedicated to controlling corporate risk, in a small firm it often falls to the sole proprietor—advised, one hopes, by a qualified insurance professional—to determine the type and level of insurance coverage required. The focus of this paper is to introduce the operator of a small business to a few key concepts that drive the thought process of the informed insurance shopper.
Measure Your Risk
What is the value you wish to protect? While of course we do not recommend going without insurance, many small business owners are faced with a stark alternative: pay an insurance premium or collect a salary. If you have value in your business and you have exposures created by your product (which is the case in most companies), you should probably purchase some insurance against the "perils" that might confront your business.
Again, what is the size of the loss or the total value that you are trying to protect? One can purchase coverage that ranges from "loss limits" of $100,000 up to many millions of dollars. While a $1 million limit is very common, do not forget to look into smaller limits if your product has a very low risk profile, and your operations are very small.
Property vs. Liability
Before considering the coverage you might need for employees, think about the business itself.
Property coverage might include insuring your inventory, your building, or your equipment. You may want to insure them for the value that you would need to recover if they were lost or destroyed, as this might do serious damage to your business' viability.
Liability can arise from people visiting your premises or using your product. Liabilities exist while you are driving the company van, or even creating your advertisements.
Again, consider loss limits, and develop a an idea of how large a loss you could expect from each of these exposures. The larger the loss limit you seek to cover, the safer your business—and the more the policy will cost.
Business Owner's Policy
The insurance industry has been covering small business exposures for many years, and has developed a policy that is designed to cover most of the common exposures encountered by small business owners. This is the Business Owner's Policy (BOP). In most cases, the BOP combines the property and liability exposures that a typical small business might encounter into one policy form. Some BOPs are tailored for specific industries in order to apply the coverage typically desired by small businesses in each field.
Commercial Auto Coverage
Many businesses use vehicles, whether as a primary source of revenue—such as a taxi or delivery service—or as a part of broader operations. The unique exposure of a vehicle on the road demands a unique type of coverage. Commercial auto insurance coverage is expensive, and is mandatory in many states. Many small business owners who use a personal automobile to conduct business can take advantage of a special rider to their personal auto policy. In any case, vehicle-related claims are often ruinously expensive, and insurance against them deserves special consideration when calculating the costs to a small business of operating a motor vehicle.
Employees
Generally speaking, an employer's most significant risk with respect to his employees is the cost of work-related injury. Any workplace poses hazards—a box of stationary falling off a high shelf can break bones, or worse—and Workers' Compensation Insurance protects a business from such risk. Although exposures occur more commonly in heavy industries, such as manufacturing and farming, it is always a wise idea to look into workers compensation insurance for your business.
In especially risky businesses, such as various forms of contracting and building, good coverage can be hard to find. In some states where insurance companies try to stay away from such exposure, state-managed Workers Compensation Insurance replaces private plans.
Other common employee-related insurance areas include employee fidelity, employee health, employment practice liability, professional liability and malpractice coverage.
Conclusion
There is an insurance product for every type of business, no matter how obscure. In extreme cases, an insurer will create a unique policy to cover a unique situation... for a price. No business, however—regardless of size or industry—should be without basic coverage. Along with a good lawyer and an honest accountant, a qualified insurance professional should be a valued member of every small business owner's team.
Relevant Links
Risk Management Internet Services. Subscription service. An excellent resource on a variety of risk management topics related to business and industry.
Small Business Insurance & Risk Management Guide. U.S. Small Business Administration guide describes how to strengthen your business insurance program by identifying, minimizing and eliminating business risks...
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