Every good financial advisor should examine their small business clients’ overall business situation to help them plan for rainy days, as well as sunny ones. However, if a company is not properly insured, a lawsuit can bring a monsoon. Just as financial advisors are evaluating the current banking crisis and advising clients, a clear-eyed evaluation of insurance coverage is critical to protect companies against risk.
A study by research firm Marshall & Swift/Boeckh revealed that 75% of businesses in the U.S. are underinsured by 40% or more. Moreover, the Insurance Information Institute estimates that approximately 40% of small businesses have no insurance at all.
Why? The primary reasons cited by small business owners for not purchasing insurance are they can’t afford it, they’re uncertain about what coverage they need, or they believe no insurance is necessary. For those who are underinsured, many are unaware of financial vulnerabilities that can result from changes in their business.
While an annual review with an experienced insurance agent can provide the most comprehensive advice, advisors who have an understanding of small business insurance can provide thoughtful guidance and underscore the value of the insurance investment.
What Insurance Options Should Your Clients Consider?
Four main products make up the insurance landscape:
• General Liability Insurance is recommended for most businesses and protects against claims made by others, including, but not limited to, bodily injury, property damage or personal injury. If an accident or unexpected event occurs, the business owner may be deemed liable. For example, if someone slips or falls and is seriously injured while on premise at the business owner’s client, or a contractor accidently damages a window, a general liability policy covers these situations.
• Professional Liability Insurance, also known as errors and omissions, is important for companies that provide a professional service or give client advice on a regular basis. It covers completely different scenarios not covered by general liability insurance. These can range from alleged or actual negligence in the performance of professional services, e.g., giving incorrect advice or omitting a piece of important information; failing to deliver a service within a contracted timeframe; or personal injury claims from alleged libel and slander if the organization or an employee has said or written something damaging or untrue.
• Business Owner’s Policy is an enhanced insurance policy that combines general liability and property insurance. Many business owners mistakenly believe that general liability policies cover their own business property and equipment losses, but they do not. Notably, this policy can be customized to protect owners against fire, electronic data loss, and even business interruption.
• Cyber Security Insurance protects businesses against computer-related crimes and losses, targeted or accidental, and covers costs associated with breaches, cyber extortion or cybercrime, business interruption and data recovery. Any business that uses computers, collects customer data or uses electronic payments should have cyber security insurance.
How Do You Know If Your Client Has The Right Insurance To Protect His/Her Business?
The decision about what insurance is needed depends on multiple factors including the type of business—whether it’s an artisan or trade contractor versus a professional services firm—and the risk profile of the policyholder. For instance, architects and engineers who may be at risk of being sued for negligence or claims against previously rendered services require a different policy from trade contractors, where there is greater risk of bodily injury, personal injury or property damage.
Five Questions That Reveal If You Need An Insurance Review
Just as it’s critical to understand a business’s changing needs when evaluating a client’s overall financial picture, it’s the same with insurance protection.
1.What type of insurance do you currently have?
This will provide insight into the client’s approach to mitigate risk via insurance. At a minimum, most companies need general liability insurance, but many businesses require more. The objective is to start the conversation and help clients uncover the changing business circumstances that can create liability and require additional strategic insurance protection.
2.Has the company grown in the past year?
When small- to mid-sized businesses add services, increase revenue or hire more employees, it’s cause for celebration. But often the last thing the leadership team is thinking about is how this impacts their insurance coverage. The reality is any of these expansions can dramatically increase a company’s risk profile leaving them underinsured.
3.Have you purchased additional property/offices or business equipment since the last insurance review?
If a client has recently purchased new offices or assets, e.g., tools or computers they rely on to do their work, this can trigger the need for new coverage to help protect those assets. Business equipment and property can be covered under a business owner’s policy which includes general liability insurance.
4.Do you employ freelancers or contract workers?
An often-overlooked risk for businesses is the sharp uptick in hiring contract workers and freelancers. Many do not realize that “gig workers” who perform client work bring additional risk and liability that is assumed by the business. For example, businesses can be liable for issues caused by a freelance worker or contractor if a client sues as a result of being given incorrect advice or if there is damage to the client’s property. Many owners mistakenly believe these individuals are covered by the company’s general or professional liability insurance or that they have their own insurance, but that is often not the case. Advisors should recommend that the client check with their insurance expert to discover the best ways to tap into this freelance workforce while still protecting their company.
5.Do your employees work remotely, or do you offer a hybrid option?
The growing desire of employees, freelancers and contractors to work from anywhere—home, coffee shops, while travelling—has created a greater risk of cyberattack. Work from home/anywhere settings typically have less secure connections and provide easier access to company networks. Not surprisingly, cyber attacks are on the rise nationwide. The 2022 Hiscox Cyber Readiness Report found that nearly half of all U.S. businesses reported a cyberattack in the prior 12 months, and the median cost of a cyber attack increased 80% over the previous year from $10,000 to $18,000. Forty percent of those hit with attacks had costs of $25,000 or more with the most common point of entry being a company server in the cloud. It’s no longer a question of if, but when a business will experience an attack, and cyber security insurance helps mitigate this eventuality.
Addressing these questions can point out significant areas of exposure for small businesses, enabling them to take action against various risks. It also helps establish the financial advisor as a valued business partner. Evaluating and updating strategic business insurance coverage is an important practice for any entrepreneur—to preserve everything they’ve worked hard to achieve and help them sleep well, knowing they are protected.
Kevin Kerridge is CEO of Hiscox USA, the international specialist insurer.