Survey: 1 in 3 small businesses faced top hazards last year

Insureon Staff.
Insureon conducted a survey to determine the rate of insurable incidents at small businesses.
A woman holding an open sign in a flower shop.

We already know that 75% of U.S. businesses are underinsured, and 40% of small business owners have no insurance at all. When faced with a disaster or lawsuit, many small businesses don't have insurance to cover their costs.

But how often do top risk events happen? We recently conducted a survey of more than 1,000 small business owners to find out which, if any, incidents occurred at their businesses in 2016.

Of the small business owners who responded, more than a third (35.2%) experienced an event last year that could have led to an insurance claim. The other two-thirds (64.8%) experienced no incidents.

Here's a snapshot of the most common incidents small business owners experienced in 2016, all of which can be covered with the appropriate small business insurance policy:

22.2%: Client complaint or contract dispute. Professional liability insurance can cover claims related to client dissatisfaction, including alleged work mistakes, undelivered work, or negligence.

10.6%: Employee injury. Workers' compensation insurance can pay for medical bills and partial missed wages when employees are hurt at work.

8.8%: Burglary or theft. Commercial property insurance can help pay to replace stolen business property.

6.6%: Fire, storm damage, or cracked pipes. Property insurance can also pay to repair property damaged by fire or certain weather events.

2.4%: Customer injury. General liability insurance can help cover costs when customers are injured on business property.

2.3%: Product that caused injury or damage. The product liability portion of general liability insurance can pay for legal expenses associated with damage from goods you sell.

Note: Some respondents reported experiencing more than one type of incident.

About our methodology: A total of 1,002 small business owners participated in the survey, which was conducted via Google Surveys. Fifty-two percent were male and 48% were female. Google claims its surveys are typically more accurate than other online surveys; however, online surveys have some inherent bias because internet users tend to be younger, have more education, and earn more than the average U.S. adult.

As we analyzed results, there were three data points that stood out as notable:

  • The number of small business owners who experienced an insurable event was greater than anticipated.
  • Women were 18.6% more likely to report no incidents in 2016 than men.
  • Client complaints and contract disputes were the most common incident, and they can be one of the costliest for a business owner. They are also among the easiest to resolve if handled properly.

We'll examine each point, but let's start with the biggest takeaway: more businesses than expected experienced a claim-worthy incident in 2016.

Point of interest 1: Small business owners had more insurable events than expected

Insurance carrier The Hartford's much-cited 2015 report on claims data predicted that 40% of small businesses would make a business insurance claim in the next 10 years. Assuming the average lifespan of a small business is about 4.5 years and there are roughly 4.5 million active businesses with between one and 10 employees at any given time, we can estimate that The Hartford's number translates to about 8.8% of businesses making claims in any given year.

But our survey showed that in a 12-month period, 35.2% experienced an incident that insurance might have covered. That's a lot higher than The Hartford's number.

Small business owners are facing the kind of risk events that could trigger insurance claims, and some are even experiencing multiple events. But they aren't filing claims. This could be for several reasons:

  • They don't have insurance or don't have the right policy to cover the claim.
  • The cost of the incident is less than their deductible, so they deal with it out of pocket.
  • They worry that filing a claim will cause their premiums to go up.
  • They prefer to handle the matter on their own rather than wait for resolution from an insurance company.

For example, Dylan Gallagher, owner of tour company Orange Sky Adventures, has commercial insurance, but says he does everything in his power to avoid filing an insurance claim.

"We had our van broken into by a robber the other day and I had two choices: pay the $300 bill myself or go through my insurance company," says Gallagher. "I chose to pay the bill myself to avoid bureaucracy. Besides, I'd rather keep my insurance premiums low and just get on with business."

We reached out to a few experts who work with small businesses for their take on the reluctance to file claims.

Experts weigh in: Why more small businesses aren't filing insurance claims

Steve Whitmarsh is the U.S. and Canadian director for McLarens, a global claims services provider. Whitmarsh has noted a recent trend in "notice-only" claim reporting. This is when a business owner lets their insurance carrier know an incident occurred without actually filing a claim. He says some do this because the amount they pay to fix the damage is lower than their policy's deductible. He also noted that business owners are very sensitive to the potential premium increase if they do file.

"I have seen a number of instances where the adjusted claim exceeds an insured's deductible by a slight amount, and the insured elects to withdraw the claim, citing that it isn't worth pursuing, even when a payment for the claim is valid," says Whitmarsh.

Translation: business owners are choosing to pay money in one-off instances rather than potentially increase recurring expenses down the line.

Attorney Andrew Thompson of Thompson Law Office specializes in business law. He said small business owners might make fewer claims because they're used to handling problems themselves.

"I think they expect to have to take care of things on their own without the involvement of an insurance carrier, a claims department, or an attorney," says Thompson. "From the phone calls I get about prospective litigation, I think that some business owners are doing their best to work things out on their own where they can before a claim is filed."

Cost analysis: The cost of a claim vs. the cost of coverage

Claim costs can give us a ballpark figure for how much a business owner might pay out of pocket for some of the incidents our respondents experienced. Keep in mind, these figures are for incidents that were reported and became claims.

According to The Hartford, the 10 most expensive types of claims are:

  • Reputational harm: $50,000
  • Vehicle accident: $45,000
  • Fire damage: $35,000
  • Product liability: $35,000
  • Customer injury or property damage: $30,000
  • Wind and hail damage: $26,000
  • Customer slip and fall: $20,000
  • Water and freezing damage: $17,000
  • Struck by object: $10,000
  • Burglary and theft: $8,000

With the cost of a potential incident so high, why are 40% of small business owners uninsured? They worry they can't afford insurance.

But small business insurance costs less than many business owners realize. For example, the median price Insureon's customers pay is…

  • $428 per year for general liability insurance
  • $920 per year for professional liability insurance

Compared to a $20,000 bill for a customer slip-and-fall accident, most business owners would probably rather pay $428 for general liability to pick up the tab.

Point of interest 2: Female business owners are less likely to have insurable incidents

Our data shows female business owners were 18.6% more likely than male business owners to report that they had no insurable incidents in 2016.

One explanation could be that women are more risk-averse in business than men – at least in the way risk is traditionally defined, according to Harvard Business Review. This also supports our earlier findings in our Small Business Outlook 2017: 25% of female business owners have no growth plans for 2017, compared to only 11% of male business owners. So if women are less likely to take on risk like growth, new debt, or employees, it makes sense that they experience fewer incidents.

Another consideration: 48.3% of women run home-based businesses, according to a study by Experian, compared to 44.8% of men. That could contribute to why they would be less likely to have, say, a customer injury.

In addition, women are more likely to run solo businesses because they choose not to add employees. If female business owners tend to work alone, this eliminates another one of the biggest incidents reported in 2016: employee injuries.

"In my experience of researching and coaching women at all stages of business, I've found that very often women do have different business goals," says Christy Wright, a certified business coach and the creator of Business Boutique. "For example, 90% of women-owned businesses do not have team members, not because they can't have them, but because they don't want them. Their definition of success is not necessarily measured in traditional growth metrics such as team members, revenue, or expansion."

Point of interest 3: Client complaints / contract disputes are the most frequently reported incident

Of all the incidents our survey respondents experienced in 2016, the most common was a client complaint or contract dispute. More than 22% of business owners report having this issue. Given that the median cost of a contract lawsuit is $91,000, according to the Court Statistics Project, small business owners may be better off working with customers to resolve issues rather than risk squaring off in court.

For example, in his practice, Thompson frequently has clients whose customers refuse to pay full price for a product or service that didn't meet their expectations. Thompson says if both sides are willing to work with a mediator, they can often avoid a lawsuit and subsequent insurance claim.

Mediator Nancy Gabriel of Mediation Around the Table offers some advice on how business owners can smooth things over with an angry customer.

"I suggest that you invite the disgruntled customer and the appropriate company representative to meet with a neutral third party," says Gabriel. "In the invitation, list three objectives: to understand, to be understood, and to brainstorm a solution."

Peri Berger, an attorney at Harris Beach PLLC, adds, "At the end of the day, resolving complaints has a lot to do with the motivation of the customer and the flexibility of the business. Every situation is different, but we recommend that clients have a good policy in place for handling customer complaints. That does not necessarily end a problem, but it is a good starting point for resolving an issue, especially if your policy has been vetted by legal counsel."

Even if a customer appears to be making an unreasonable demand, it's generally best to find some middle ground rather than face a professional liability lawsuit. Enough bad feelings over a soured business deal can prompt customers to seek out legal solutions, even if they don't have a particularly strong case.

Client complaint resolution tips from small business owners

Really, no one's more of an expert than the people actually dealing with client disputes. So we asked some small-business owners how they handle these misunderstandings.

To resolve a customer complaint, the small business owners we interviewed say to keep these five points in mind:

  • Get everything in writing, from initial contracts to requests for changes.
  • When a customer complains, take the time to really listen to what they have to say.
  • Acknowledge their frustration.
  • Propose options for a solution – but not necessarily a refund.
  • If you can master complaint resolution, these customers can end up being some of your greatest cheerleaders.

Here's a closer look at each.

"Back everything up with written confirmation, including conversations," says Marie Hale, cofounder of @revenue, a boutique sales and marketing collaborative. "When you have the uncomfortable conversation about ending a contract, be very specific without being accusatory in your review of the discrepancies and where things went off the road."

If a client is upset with your work, try to remain as calm as possible when discussing the issue.

"The first thing I do when dealing with an angry client is take a deep breath," says Christiana Datubo-Brown, an entrepreneur with a master's degree in marriage and family therapy. "When someone is complaining about a product or service that you lovingly created, it's easy to take it personally and get defensive. But it isn't personal. The second thing I do is listen."

Datubo-Brown says she first acknowledges the customer's frustration, and then offers them the choice of two solutions – neither is a refund. 

"Refunds, especially with clients and customers I want to keep, are always the last resort," says Datubo-Brown. "This way I maintain control of the situation and empower my client at a time when they may be feeling less than powerful. This simple process has turned angry clients into happy and loyal clients who go on to give me rave reviews and tell others about my products / services."

Steve Benson, founder and CEO of Badger Maps, agrees.

"When a customer has firsthand experience with you listening to their pain, recognizing that there is a problem, and then solving the problem for them, they become satisfied customers and brand ambassadors," he says. "There is no greater way you can prove your competence to a customer and no greater way to win their trust."

Final thoughts

Small business owners are generally adaptable and good at solving problems – they have to be. These traits help many business owners resolve matters themselves and avoid filing claims, but that doesn't mean they won't face incidents that could hurt their business. The best way to protect your business is through a combination of risk management and the appropriate insurance coverage.

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