Small Businesses Without Insurance Take Dangerous Risks

Why it’s risky if small businesses don’t have insurance

Small businesses and startups often work on a tight budget. As a result, it might be tempting to forgo certain types of business insurance that aren’t required by law.

Unfortunately, such a risk could end up costing your business way more than the monthly premiums would. Consider the following scenarios: 

• Natural disasters: For example, if your business is hit by a natural disaster, such as flooding or a fire, the costs for damages and repairs will fall directly on you. 
• Financial losses: Additionally, you won’t have a financial buffer to support you if you run into financial losses from injuries, medical expenses, accidents or libel or slander accusations. For example, if a customer slips and falls on your property and sustains injuries, settling a subsequent lawsuit typically costs up to $20,000.
• Legal trouble: Additionally, small businesses are vulnerable to legal trouble. If your business is sued, legal and judgment costs can derail your organization if you don’t have insurance to help. 

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Jamie Dokovna, a shareholder at Becker & Poliakoff, says not purchasing insurance because it isn’t legally required is unwise. “It’s often a case of being penny wise but pound foolish,” Dokovna cautioned. “For some small businesses, they look at the cost [of insurance] and they say, ‘Well, it’s a little expensive, so I’m willing to take the risk.’ But it’s not cheaper to forgo insurance when you need it and wish you’d had it.”

Instead, Dokovna said, it’s best to make strategic decisions about which insurance policies your business needs and which it doesn’t. To make this call, you must know your industry intimately.

Types of insurance coverage important for small businesses to have

Some insurance coverage types are required by law once your business reaches a specific size. For example, the Affordable Care Act mandates employer-sponsored healthcare coverage for businesses with 50 or more employees. Failure to retain legally mandated insurance coverage exposes small businesses to risks and repercussions for violating the law.

Other types of coverage aren’t required by law but may be wise to have, depending on your line of business.

Liability insurance

General liability insurance helps protect your business if someone claims your business caused bodily injury or property damage or if your business is responsible for committing libel or slander. In the slip-and-fall example, general liability insurance would cover attorney fees and lawsuit settlements.

However, some businesses might deem it a remote risk that someone visits their property at all, let alone injures themselves, so they don’t purchase coverage. This is a strategic choice and likely an acceptable risk compared to a retail store that sees customers daily and chooses to roll the dice anyway.

Workers’ compensation

Workers’ compensation insurance provides benefits to employees who injure themselves on the job or suffer from illness due to their work. These benefits help the employees pay their medical bills, replace their wages or pay for ongoing care like physical therapy. Most states require employers that reach a specific employee threshold (it varies from state to state) to maintain workers’ compensation insurance and policies.

Professional liability insurance

Also known as errors and omissions insurance, professional liability insurance helps cover your legal costs amid claims that your business made mistakes. This insurance is especially helpful if you provide a service to clients. Claims of late, incomplete or inadequate work can lead to costly lawsuits.

Commercial property insurance

This insurance is for brick-and-mortar businesses. It helps cover costs resulting from fire damage, theft and natural disasters. However, this insurance doesn’t cover damage from flooding or earthquakes, which requires a separate policy.

Business income insurance

Business income insurance helps cover the lost income that results from property damage. It can go toward rent, utilities or payroll.

Employment practices liability

Employment practices liability insurance protects against potential employee lawsuits or complaints about the following:

• Sexual harassment 
• Workplace harassment
• Wrongful termination
• Timesheet discrepancies
• Breach of an employment contract
• Failure to employ or promote
• Wrongful disciplinary action
• Discrimination 

Tips on choosing business insurance

When buying small business insurance, consider several crucial factors. You want to find the best insurance specifically for your company to minimize risks. Without the right coverage, your company or personal assets could take a major hit. 

Keep the following tips in mind when choosing your business insurance.

1. Determine the insurance coverage you need.

Many types of business insurance exist, so you must consider your specific needs before shopping for a plan. A general liability or business owner’s policy is good for umbrella coverage. However, depending on your business or industry, other policies might better protect your organization.

Jeff Kear, owner of event-management software Planning Pod, says business owners who work from home should consider separate home-based business insurance to cover their business assets fully.

“Don’t assume that your homeowner’s policy will cover your business assets because many policies do not cover most home-based business losses,” Kear cautioned. “They may not cover all assets and probably won’t cover any kind of business or professional liability.”

Kear also recommends obtaining business interruption insurance to help keep your business afloat in the event of natural disasters, data loss or theft.

2. Know your business and industry risks.

With so many insurance providers and types of business insurance on the market, it pays to understand your business’s biggest insurance risks. For example, if you’re starting an e-commerce business, protecting your data is vital to your company’s overall well-being. On the other hand, if you’re a brick-and-mortar business, losing tangible products or facing damage to your business’s physical structure can significantly impact your livelihood.

Only you know the extent of the risks your company faces. It’s essential to examine each risk to ascertain your business’s unique situation. However, consider getting a risk assessment from an independent agent or company to help you determine final price points and insurance details.

3. Compare insurance quotes.

Choosing an insurance provider is like any other significant business decision: You should consider all your options before deciding. Comparing business insurance rates from multiple providers can help you find the most comprehensive coverage for the best price.

4. Find a reputable insurance agent or broker.

The insurance agent or broker you work with is responsible for helping you protect your business. You may even want to consider using one of the best professional employer organizations to obtain insurance if your needs are diverse. Consider all your options ― the best choice isn’t necessarily the one closest to you.

“Look for an agent who specializes in business insurance and can be a long-term partner,” advised Mike Wolfe, president of marketing agency WAM Enterprises. “It’s important to establish a relationship with your agent. Research online and ask other business owners who they work with. We have several agencies in our town, but [we] decided to do business with an agent who is farther away because we developed a relationship and trust.”

When working with an agent, broker or professional employer organization (PEO), ensure they understand the ins and outs of your business. “When you’re sitting down and talking with an agent, make sure the agent understands your business, what you do and how many employees you have,” Dokovna recommended. “Most good agents will know what you need.” According to Dokovna, PEOs can be cost-effective for business owners who must tap into a larger insurance resource pool. 

5. Regularly review your policy needs.

Most insurance policies must be renewed annually. Before signing on for another year of coverage, it’s wise to review your policy’s fine print and account for any changes in your business or the provider’s terms of service.

“Coverage and policies change all the time, so review your business with your agent every year,” suggested Paige Dawson, founder and owner of marketing firm MPD Ventures. “Your business may have changed during a coverage year and [your policy] may no longer be adequate. Adding or dropping employees, services, products, physical locations, etc., can have an impact on your policy.”

If your business goes through a significant change or transition in the middle of coverage, discuss it with your insurance agent as soon as possible and ask them to walk you through your options. Depending on the change, you may even be able to save money on your business insurance.

Should you get insurance for your small business?

While you might assume your small business doesn’t need insurance, it’s always better to be safe than sorry. Legally, you might not be required to purchase specific coverage for your company, but failing to do so can land you in financial trouble down the line. Any damages or losses will fall entirely on you, meaning you’ll be responsible for covering full payments rather than having insurance assist you.

Rest easy by browsing different insurance options and choosing the right one for your brand. Investing in insurance does not have to break the bank.

Sammi Caramela contributed to this article. Source interviews were conducted for a previous version of this article.