An entrepreneur who made and sold quilts from her residence added an endorsement to her homeowner’s policy she believed included some business-liability protection. But it didn’t. All it added was coverage for business personal property. So when a customer came to the home and slipped on ice, causing soft-tissue damage, the business-related injury wasn’t covered. In the end, the quilt-maker had to use $26,000 of personal funds to pay the customer’s medical bills and her own legal defense costs, recounts Robert Enderson, an agent at Cole Harrison Insurance Agency in Kittery, Maine, whose firm handled the client.

This wince-inducing case illustrates the fact that most common commercial-insurance blunders result in inadequate coverage, one way or another. A significant uncovered loss can bankrupt a business, obliterate the client’s investment in it, and wreck plans.

“Jury verdicts can be unpredictable, so having enough coverage to protect the policyholder, and the right coverage, is important,” says Joel Lasky, vice president and chief claims officer at Nautilus Insurance Group, an excess and surplus lines insurer in Scottsdale, Ariz.

Bottom Feeding
A gaffe Lasky regularly sees entrepreneurs commit is choosing a policy based on cost and little else. “Price certainly matters. But business owners sometimes don’t realize that going for the cheapest rate may leave them with a risk they thought was covered but is not,” he says.

Many entrepreneurs show their present policy to a new agent and ask for a competing, hopefully lower, quote. “It might be apples to apples, but if your current insurance is missing something, you could still have a problem,” says Brandon Morgan, president of Bradshaw & Weil Inc., an insurance agency in Paducah, Ky.

Increasingly, owners hunt cheap policies online. A casual search on “commercial insurance quotes” returns a bevy of websites promising a low premium. But they typically gather limited information from the owner.

“Often this results in the small business owner being underinsured due to unfavorable limits, exclusions and exceptions. This can be devastating,” says Ben Lemann, the Baton Rouge, La.-based president of Gallagher Small Business, a unit of insurance and risk-management consulting firm Arthur J. Gallagher. In one case Lemann is familiar with, a boutique owner who purchased a policy online, basing it only on annual sales and the shop’s location information, was forced to close her business because the policy limits did not include the total value of inventory damaged during a fire.

Too Little
Relying solely on a business owner’s policy, or BOP, is another frequent faux pas. A BOP combines general liability insurance and commercial property insurance in a single policy. Yes, that can be convenient and cost effective. “But it doesn’t necessarily fully protect the business owner,” Lemann says. “Depending on the type of business, an owner may need additional policies [beyond a BOP] for professional liability, employee discrimination, failure to protect sensitive information and other types of risks.”

Consider the wine and cheese shop that was sued for fraud after an employee sold client credit card information. The result was more than $125,000 of financial damages. “The owner’s BOP did not include crime insurance, and the business had to be liquidated,” Lemann says.

Purchasing the minimum required insurance is a well-trodden path to insufficient coverage. On a commercial auto policy, for instance, some entrepreneurs choose the lowest limits their state allows, leaving them vulnerable to a large claim. “Or they insure a building only for what the bank requires for a loan instead of the cost to replace the building, which is what they should insure it for,” says Morgan, the Kentucky agent.

Widespread-but-faulty employment practices create gaps in coverage under workers’ compensation insurance. When an owner hires help off the books, or inappropriately treats workers as independent contractors rather than employees, their job-related accidents aren’t covered. Ouch.

No Checkup
A routine oversight is neglecting to revisit limits and coverages. Financial advisors should encourage clients to speak with their insurance advisors at least annually to talk over changes that may warrant coverage updates, such as a new product, location or operation. Morgan advises owners to work with an insurance professional who is experienced with their type of business and has a process for identifying the coverage it needs. “You want an agent who’s going to ask questions, because a business can have a lot of moving parts,” Morgan says.

Business owners should feel comfortable speaking with their agent or broker, adds Enderson, the agent in Maine. “If they don’t, then they’re not working with the right professional.”