Business insurance is often one of the required but unpopular parts of running a business. Regardless of the owner’s viewpoint, most business owners should understand their business insurance and properly insure against certain risks to the company. Liability insurance is perhaps one of the most important, and even these policies are misunderstood. Taking the time to understand how insurance policies work and what liability insurance covers can help business owners protect the things that matter most.
Key Takeaways
- Understanding how your coverage amount, policy terms, and price interact will help you determine whether traditional or self-insurance makes the most sense for your business and ensure you close gaps and avoid overpaying for coverage.
- Business liability insurance covers three areas: general liability (physical injuries or damage), professional liability (errors, bad advice, service mistakes), and cybersecurity (data breaches and digital threats). Understanding what each area covers is critical to avoid gaps that typical policies may neglect.
- Year-end is an ideal time to review and assess each component of your liability and bundled policies (e.g., Business Owner Policies) to be sure that your coverage doesn’t have gaps and is competitively priced.
How Business Insurance Works
For anyone who has dealt with insurance carriers in the past, there are three main components to any insurance policy that you must understand: the coverage amount, the terms, and the price. At the end of the day, the reason you purchase an insurance policy is to receive a predetermined amount in the unfortunate case that life happens to your business. Some policies are more straightforward than others, like car insurance, for example. If you total your car, you receive a check for the price of the car to turn around and get another one. The problem is that many of the business insurance policies are not as cut-and-dry, and most owners are not taught how much liability insurance they need for the business side.
Equally important to the amount of insurance are the terms of each policy. Said another way, each insurance policy you purchase (on the personal or commercial side) will have defined rules about what is covered and what is not. The liabilities that a typical business owner may face could span from as simple as a customer falling to as complicated as a major data breach. The entire game of insurance is to make sure there is coverage if an unforeseen event occurs and you need financial support as a result. Therefore, reviewing each policy and recognizing the gaps in your coverage could change the game dramatically.
Finally, the price of each policy is important as well. Theoretically, every purchased insurance policy comes with the hope of never needing to claim it. Doing so means whatever the risk was did actually occur, which is obviously undesired. It can easily feel like a waste of money to buy insurance. This is why you must always compare the amount and terms of your policy against your current situation. Depending on the specifics of a business, as the cash flow and assets of the owner grow, it could potentially make sense to reduce (or drop) some policies and instead self-insure. Think about it in terms of deductibles: the higher the deductible, usually the lower the cost/premium of the policy. You can still cover against catastrophic events, but choose to self-insure the smaller risks.
The Core of Liability Insurance
In terms of what liability insurance could cover, the primary risk factors could be broken down into three categories: general liability, professional liability, and cybersecurity. The first, and perhaps the most common, is generally what most owners think about when they are discussing business insurance. General liability insurance on the business side generally covers the physical damage that could result at a business. Property damage, or a slip-and-fall accident, are examples that most people recognize fall under this general liability coverage.
Outside of bodily injury or physical damage is when policies like Professional Liability (PL) take over. PL is a type of insurance that mainly protects you against a lawsuit resulting from bad advice or mistakes related to a client or service. Also known as Errors and Omissions Insurance (or E&O), this policy is more for the service-side of a business which generally is not covered by your general liability insurance. However even certain mistakes would not fall under this policy, especially related to technology.
That brings Cybersecurity insurance into the picture. It has recently become one of the most important liability coverages, especially in the modern age of online data. Many general liability or PL policies do not cover events like data breaches, scams, or the release of private personal information. Cybersecurity insurance is, to some degree, designed to help you fight against a financial loss as a result of a cyber issue. These policies are very specific in terms of coverage, so make sure you understand what is and what is not covered under your policy.
How to Review Your Liability Insurance
With your year-end review, take the time to diagnose your current liability policies and identify any coverages you are missing. Pulling up a summary of each policy can give you direction on the three parts of each policy. Walk through whether you are comfortable with the amount of the policy, the terms associated, and how much you are paying for it. If needed, reach out to your advisor or insurance broker for clarity on exactly what policy you have. This is the time to ask those “what if” questions that you may still have.
Likely, most business owners have wrapped different policies into one Business Owner Policy (BOP). The BOP is more of a bundle of policies, so understanding which policies are included is essential. Most owners, when talking about their business insurance, are likely referencing this. However, most BOPs do not include PL or cybersecurity policies. So it is still important to break down what coverages actually exist within your business and ask yourself if anything is missing.
Find the Right Insurance For You
At the end of the day, insurance is designed to help you manage the risks you face. The fact that we live in an economy where we can mitigate these risks for fractions of what it would cost us if it happened, is a positive thing. Take the time to understand not only what risks your business is taking, but how much of those risks do your insurance policies actually cover. Taking a proactive approach to your level of risk can make the mental side of business much more manageable, knowing where you are covered from a certain catastrophic event.
TC Falkner 