Insurance for small businesses: prudent management of risk
As a litigation lawyer, I regularly see businesses facing serious financial exposures whether it be the result of a devastating fire loss, a significant errors and omissions claim, or as a victim of fraudulent activity by a trusted employee. One of my first inquiries is with respect to the availability of insurance coverage to respond to the claim. Insurance not only provides potential indemnification for the loss, but also can provide coverage for the legal defence costs of associated claims brought against the business. In my experience, many small business operators have very little knowledge of their insurance coverage and unfortunately, in many cases they are significantly underinsured. It is part of the prudent management of risk for small business owners to review their insurance policies and obtain advice from a knowledgeable insurance broker, risk management specialist or lawyer. The only way to know what insurance is required for a business is to look at the specific circumstances and determine the size and the scope of the potential risk exposures to the business. While all businesses by nature are required to absorb some level of risk, the failure to ensure that the business has adequate insurance coverage can have a devastating impact on a business. While incorporating a business is a prudent step to limit liability, it does not replace the need for insurance coverage.
There is a wide variety of insurance available to small businesses. Most small businesses will require some form of property insurance to cover property and buildings owned by the business in the event of destruction or damage due to various perils such as fire. Contents insurance can respond to the damage to physical business assets. Business interruption insurance is designed to cover the loss of earnings if the business is temporarily shut down as a result of a fire or other peril, but some businesses many want to try to cover other costs during a shut down such as employee salaries (so that in a long shutdown key employees do not depart). All vehicles owned or leased by the business will require automobile insurance coverage. It is important to keep in mind that businesses which operate out of a personal home are generally not covered by typical homeowner’s policies.
Another critical type of insurance for every small business is liability insurance which would include general liability coverage and depending on the circumstances may include errors and omissions/professional liability coverage and product liability coverage.
Consideration should also be given to whether the officers and the directors of the business should have insurance coverage to protect them from their potential liability as officers and directors.
It is also worthwhile considering the need for insurance for the owners, partners and key employees of the business. The loss of a key person can be particularly damaging to a small business and to their families. Various types of insurance, including life insurance, disability insurance, critical illness insurance, key person insurance are worthy of consideration depending on the circumstances.
Not only is the scope of the insurance a very important consideration, but so are the policy limits and those are also all too often overlooked. Businesses without adequate limits face significant financial risk in the event of a major loss even if the type of loss is within the scope of the insurance coverage. In the scheme of insurance products available, liability coverage is generally very reasonably priced and yet frequently secured with inadequate limits.
It bears repeating that prudently managing risk for small businesses includes ensuring and maintaining adequate insurance coverage – both the types of coverage and amount of coverage (limits). The only way to know if a business likely has the right insurance is to carefully review the existing coverage with qualified professionals. With all of the demands being placed on a small business operator, insurance coverage is frequently not addressed until it is too late and they are facing a crisis. No one ever knows when a crisis will hit. Delay in attending to insurance coverage can be costly. Taking the time to ensure you have adequate insurance now can assist with both peace of mind and being prepared when any crisis hits.