Insurance Industry Advises Small Businesses Not to Skimp on Coverage

By | February 23, 2009

Insurance coverage is an expense that many small business owners might be tempted to cut back on or even forgo as they try to cut costs during the recession. They’re making a bet that they won’t need the coverage, but it’s a bet they could lose.

Spring floods aren’t too far off in the future, to be followed inevitably by tornadoes and the hurricane season. And there are the more mundane disasters that can also threaten a business — fire, theft, power outages, even someone being injured on the premises.

Loretta Worters, vice president for communications of the Insurance Information Institute, a New York-based trade group, said insurance may seem like a lower financial priority for some small business owners right now.

“They’re facing all these challenges today: rents are rising, financing hard to get,” she said. “Things are daunting to them, but one thing they have to think of is the whole issue of being underinsured.”

An underinsured business doesn’t have adequate coverage for disasters or incidents like fires, thefts or accidents. But even companies that aren’t cutting back their coverage might be unwittingly uninsured. Worters noted that a business might have made improvements to its building or bought new equipment, and if an insurance policy isn’t adjusted upward, payments could fall well short of the replacement costs.

At the same time, she noted, real estate values have fallen and so it might make sense for some companies to reduce coverage.

Still, an owner uneasy in this economy might decide to play the odds and either cancel a policy or cut it back too far. Or, make a mistake out of ignorance, by buying insurance to cover damage from forces such as wind, rain, hail and fire, and not checking to see what isn’t covered. For example, damage from flooding or earthquakes isn’t covered in such policies. That coverage has to be purchased separately.

Some owners might also decide against business interruption insurance, which is available in what’s known as a business owner’s policy, or BOP, which also includes property coverage. Business interruption insurance makes the coverage more expensive, but it can mean a company’s survival when it can’t operate because of a disaster; this type of policy covers a company’s expenses and lost profits.

Many workers who have been downsized over the last year have decided to start businesses out of their homes, and many are likely to be underinsured because they mistakenly assume their homeowners coverage will protect them. The same can apply in the case of a vehicle used for both business and personal purposes.

Worters said some homeowners or standard auto policies may include a small amount of business coverage. For example, she said, someone who does freelance writing at home might not need an additional policy. But, the important thing is to check — nobody wants to find out there is no coverage when a client coming to visit, trips over the family dog and falls.

And, Worters said, the additional coverage may come in the relatively inexpensive form of an endorsement to your homeowners’ policy.

Owners of businesses in certain industries should also be aware of policies tailored to their line of work — for example, restaurant owners might want to take out policies to cover food spoilage.

The Insurance Information Institute has information on its site, www.iii.org/individuals/business. It explains different kinds of general business coverage such as businessowners’ policies and business interruption insurance. It also has sections describing the insurance needed by specific industries such as retailing, manufacturing, farming, food service and lodging.

The National Association of Insurance Commissioners, which represents state insurance officials, also has a Web site, called Insure U for Small Business at www.insureuonline.org/smallbusiness.

Information about flood insurance can be found at the federal Web site www.floodsmart.gov.

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