Calculating Risk: How Much Insurance Do You Need?
Entrepreneurs have been buying business insurance for a very long time. The act of managing risk by paying a premium to a third party in advance of any loss dates to at least 1780 B.C.: The Code of Hammurabi notes that Babylonian merchant marines paid their lenders an additional sum to ensure the loan was forgiven if their ship and its cargo was lost or stolen at sea.
Although the concept remains the same, business insurance has become quite a bit more complicated in the past 3,800 years. So, how do small-business owners today know what types of insurance to buy and in what amounts? Here’s what a few experts recommend.
Identify Your Business Risks
“It’s all about the risk,” says Loretta Worters, vice president of communications for the Insurance Information Institute. “Depending on the type of business you have, number of employees, each business is exposed to different risks that would determine the type of coverage you would need.”
Those risks typically take several forms: liability, loss, and legal requirements. As a small-business owner, you have to ask yourself, “What will my liability exposure be?” says Karol Payne, president of San Jose Insurance, which has been selling insurance in Silicon Valley for 40 years.
You need to answer a few other questions, too. “If you’re leasing space, what does the landlord require of you? If you sell a product, how might it hurt someone or damage property? If you’re a professional selling your services, can you be sued for those services or for providing your professional opinion? If you have inventory or equipment, you will want to consider what happens if it gets damaged or stolen and how that impacts your ability to continue doing business,” Payne says. “And, if you have employees, what do laws, such as worker’s compensation, in your area require?”
Mark Sinatra, CEO of Staff One, a 50-employee HR staffing firm in Dallas, recommends that small-business owners take two things into account when weighing their insurance needs: how often you may have claims against your business for the types of insurance you’re considering and how large the potential liability is. Those factors will help you determine how much insurance you need, he says.
Re-Evaluate at Least Once a Year
A couple of types of insurance coverage are becoming more popular among small-business owners of late.
“Employment practices liability insurance mitigates the risk business owners have as employers, such as EEOC claims,” Sinatra says. “This may be a particularly good policy for businesses with at least 15 employees.”
“I’d also make sure the business has ordinance or law coverage,” Worters adds. “It provides coverage to rebuild or repair the building in compliance with the most recent local building codes.”
Because any business is dynamic, the rule of thumb for re-evaluating your insurance needs is once per year. “But,” Payne notes, “any event can trigger a re-evaluation.” This could be anything from a new contract or employee to a new vehicle or location. She suggests scheduling a semiannual “check-in” with your agent, especially if your business is growing rapidly.
“It’s always a shock to receive a large bill for an audit on the year that has already passed,” Payne says. “It’s best to pay the insurance expenses as they’re generated and not have to go back and pay a large audit along with an increase in the renewal premium.”