If you solely rely on the Internet or what you hear from others to understand what business insurance can and can't do, chances are you've inadvertently collected a few myths along the way. For the sake of clarity (and your sanity), let's clear up some of those misconceptions once and for all. Here are some puppies to help you sniff out the difference between small business insurance myths and facts.
1. Insurance companies never pay out.
Think you have to beg for scraps from your insurance provider so it makes good on a claim? Think again, Fido. The nice thing about an insurance policy is that it's a contract. If your provider has already agreed to cover certain types of damages caused in specific types of situations, it would have a very difficult time wiggling out of its contractual obligations.
But here's the catch: you must make sure you draw on the appropriate coverage to cover the claim, otherwise your provider can most definitely dispute it. For example, you can't rely on your General Liability Insurance to cover the cost of a data breach in most cases – you'll usually need Cyber Liability Insurance for that. Read more on that subject here: "Why Your General Liability Insurance Doesn't Cover Data Breaches."
2. Only big companies need insurance.
Not so – small businesses get sued, too. In fact, according to the US Chamber Institute for Legal Reform, small businesses bore 81 percent of business tort liability costs in 2008 and paid $35.6 billion of their tort costs out of pocket because they didn't have insurance.
You know what else insurance can cover? Data breaches. And that just happens to be a big deal for small-business owners, considering that 71 percent of cyber attacks target small businesses, and, according to a report by Experian, 60 percent of small businesses that suffer data breaches go out of business within six months. (Read more here: "Top 8 Data Breach Misconceptions.")
Plus, natural disasters and freak accidents don't discriminate between large and small businesses. The only difference is that after a disaster hits, small businesses are more likely to close their doors for good than their large counterparts. According to FEMA, almost 40 percent of small businesses never reopen after a natural disaster because even a little bit of structural damage can cost tens of thousands of dollars in repairs.
3. I don't need insurance if my business is incorporated.
It's true that certain business structures (e.g., a limited liability company) can limit your personal liability exposure by creating a legal distinction between you and your business. But that doesn't mean your business can't still be sued and held accountable for its losses. Moreover, you can still be held personally liable for professional negligence and malpractice even if your business is a LLC.
4. I can't afford insurance.
There's a common misconception that small business insurance is expensive, but the fact remains: the cost of coverage pales in comparison to the price you may pay out of pocket if you're hit by a sudden disaster or lawsuit. Without insurance, you stand to lose your livelihood, all your savings, and maybe even your personal assets.
That comparison aside, insurance can be objectively affordable. For example, you can bundle your policies together to cut down premium costs. Many very small businesses may be eligible to purchase a Business Owner's Policy (an insurance bundle that offers both General Liability and Property Insurance coverage) for as little as $500 a year. Of course, your rates may vary depending on the size of your business and other factors that we will touch on a little later. But if you want an idea of how much you'll pay for insurance, check out Business Insurance Cost Analysis.
Another way to save? Practice good risk management. "Risk management" can refer to any step you take to identify and reduce the likelihood of your business facing a loss. For example, if you notice your business's sidewalk is icy, that's a potential risk. If someone slips and falls on your sidewalk, they can hold your business responsible for the ensuing medical bills and damages. You can mitigate the chance of that happening simply by shoveling and salting the offending area.
The fewer losses you experience, the fewer claims you make on your policy and the lower you can expect your premiums to be. For more tips, check out our insurance savings blog series.
5. My insurance covers my property against all types of loss.
Au contraire. This pup would like to remind you that certain types of property loss (e.g., your dog eating your Very Important Business Stuff) may not be covered by your Property Insurance policy. Most standard Commercial Property policies only cover loss or damage to business property caused by:
- Certain weather events (e.g., a windstorm).
If you have a named-perils policy, that means only the events explicitly listed in your policy trigger your coverage. An open-perils policy means all events except for those explicitly excluded in your policy trigger your coverage. Common exclusions are flood, earthquake, and hurricane damage.
Check your policy to be sure that it covers what you think it does.
6. Full coverage is a thing.
Yeah, not so much. You can get pretty close by purchasing several policies designed to cover different types of liability and losses, but this can't be stressed enough: there's no such thing as a silver bullet when it comes to insurance. Every policy has exclusions (i.e., situations or losses it won't cover). Read your policy carefully so you understand what it can and can't do. If you need help, talk to your insurance agent.
7. My insurance rates solely depend on my claim history.
Don't let this myth fool you. Your claim history does play a role in your insurance rates, but it's not the only factor insurers consider when pricing your coverage. Providers also consider:
- The size of your business
- Your industry
- The years of experience you have in your industry
- How many employees you have
- How much revenue your business generates
- Where your business is located
- And more
Some states allow insurers to look at your credit history because low credit scores are associated with a higher chance of claims.
8. Purchasing insurance online saves me money.
You can find a bottom-barrel insurance policy online for dirt cheap, but is the insurance carrier financially solvent? Does the policy even offer the coverage your business needs? If you do your research, maybe so. But more often than not, shopping for coverage based on the premium price alone can leave you underinsured.
To ensure you get reliable coverage at a competitive price, compare quotes from multiple top-rated insurance providers. You can collect quotes one by one from carriers you trust or you can apply for coverage through an independent insurance agency (ahem, Insureon), and it will do all that legwork for you.
9. Personal insurance covers me while I'm operating my own vehicle for business purposes.
First things first: don't let your dog drive your business vehicle – there's no way to insure him. Now that that's cleared up, here's something else you should know: if you drive your personal vehicle to haul supplies or meet with clients, a personal auto insurance policy may not cover you for accidents that happen on those trips. You may need Commercial Auto Insurance to cover that kind of driving.
Similarly, if your vehicle is in your business's name, you must have Commercial Auto coverage.
10. I have Workers' Comp coverage, so my employees can't sue over work injuries.
If you live in a state with exclusive remedy rules, that may be true, but not all states have such laws. For reference, an exclusive remedy rule means that if you have Workers' Comp Insurance and it can cover an employee's injury, then that is their only source of reimbursement.
But if you live in a state that doesn't have those laws and your employee waives their Workers' Comp benefits, your small business can be sued over the employee's injury. For more on that, read the post, "Florida Court Upholds "Exclusive Remedy" Rules for Workers' Comp Insurance."
Like what you read here? Share these sage pups with someone who you think can benefit from these tips.