Majority of Small Businesses Lack Basic Business Bankruptcy Protection

While 92 percent of small business owners say they have never filed for bankruptcy, many revealed they lack key business insurance policies that could pay for lawsuits and incidents that often lead to bankruptcy, according to a recent survey.

In a partnership with leading small business listing platform Manta, Insureon surveyed nearly 1,200 small business owners to learn more about their bankruptcy history and how they protect their businesses with small business insurance policies.

Only 28 percent of respondents have a Business Owner's Policy, which bundles General Liability Insurance (slip-and-fall lawsuit protection) and Commercial Property Insurance. Even fewer respondents reported carrying several other common small business insurance policies.

When asked if they ever filed for bankruptcy, 8% of small business respondents said yes, 92% said no. Of the small business owners who filed for bankruptcy, 51% filed for Chapter 7 (liquidation), 27% filed for Chapter 13 (reorganization for sole proprietors), and 22% filed for Chapter 11 (reorganization).

 

Highlights from our survey results:

  • 92% of respondents haven't filed for small business bankruptcy.
  • Of the 8% who did file for bankruptcy:
    • 51% filed for Chapter 7 (liquidation)
    • 27% filed for Chapter 13 (reorganization for sole proprietors)
    • 22% filed for Chapter 11 (reorganization)
  • Of the 8% who filed for bankruptcy:
    • 64% filed because of personal issues
    • 18% filed because of lost customers
    • 18% filed because of lawsuits
  • 98% of respondents were not concerned that they will need to file for bankruptcy in the next six months.
  • Respondents reported having the following commercial insurance policies:
    • General Liability Insurance: 0%
    • Cyber Insurance: 2%
    • Business Interruption Insurance: 6%
    • Workers' Compensation Insurance: 17%
    • Professional Liability Insurance / Errors & Omissions Insurance: 21%
    • Business Owner's Policy: 28%

* The poll margin of error is +/- 2.85 percentage points.

Business Bankruptcies Are on the Rise

Only 8 percent of small business owners surveyed have filed for bankruptcy. However, business bankruptcy filings nationwide are on the rise. Commercial bankruptcy filings increased by 26 percent in 2016, according to a report by the American Bankruptcy Institute. A total of 37,771 businesses filed for bankruptcy that year.

Of the small business owners who filed for bankruptcy, 64% filed because of personal issues, 18% filed because of lost customers, and 18% filed because of lawsuits.

The majority of respondents who filed for bankruptcy did so for personal reasons. The poll also revealed 51 percent opted for Chapter 7 liquidation. This could mean that personal reasons for filing for bankruptcy also led to the decision to shutter their business rather than restructure their debt.

The remaining 49 percent opted for either Chapter 11 or Chapter 13, which allows business owners to restructure and repay debt while keeping their business open.

Eighteen percent who filed for bankruptcy did so because of a lawsuit. While we don't know what types of lawsuits led to the filings, in many cases small business insurance can protect business owners from the high cost of a lawsuit. Based on the poll results, the majority of small-business owners are under-insured or uninsured.

Small Business Insurance Provides a Financial Buffer from Lawsuits

Of the commercial insurance policies, 28 percent of respondents have a Business Owner's Policy. The Commercial Property Insurance portion of this policy can help pay to replace or repair damaged or stolen business property, while the General Liability coverage can help pay for lawsuits when business owners are sued over visitor injuries. It typically costs $20,000 to settle a customer slip-and-fall injury. It's easy to see how a small business could face bankruptcy if it needed to shoulder that expense on its own.

If a client sues over business discrepancies or negligent services, Professional Liability Insurance can pay for a business's attorney fees and settlements. Only 21 percent of business owners reported having this coverage, which means four out of five small business owners are vulnerable to the high cost of a professional liability lawsuit.

As we covered in our previous poll "Only 18% of Small Business Owners Think They Are at Risk for a Cyber Attack," most respondents don't seem overly concerned about cyber threats. In fact, only 2 percent of poll respondents protect their business against cybercrime and data breach lawsuits with Cyber Liability Insurance. That could be a risky move that can cost small businesses tens of thousands of dollars.

Fewer than 20 percent of small business owners who filed for bankruptcy did so because of a lawsuit, and only 2 percent of all respondents anticipate filing for bankruptcy in the next six months. However, one of the best ways to reduce your chance of small business bankruptcy in the first place is to protect your company with business insurance.