Risk, Insurance, and Small Business

Owning a business presents opportunities for personal financial success and satisfaction in a particular occupation. However, it also comes with several different types of risk. These include economic, compliance, security and fraud, operational, reputational, financial, and competition risks. Risk managers are engaged in identifying risks and deploying proven techniques to treat each of these types of risks.

Today we will consider the operational risks of a business and the treatment technique of risk transfer. This post is for informational purposes only and nothing here should be taken as advice or direction. Any purchase of insurance should be discussed in detail with a qualified licensed insurance professional.

Operational risk can happen internally or externally or involve a combination of factors. Something could unexpectedly happen that causes a loss of business continuity. That unexpected event could be a natural disaster or fire that damages or destroys a physical business. It might involve a server outage caused by technical problems, people, or a power cut. Many operational risks are also people related. An owner or an employee might make mistakes that cause injury or damage that will, at a minimum, cost time and money. Whether the result of a people or process failure, operational risks can adversely impact a business in terms of money, time, and reputation.

Getting a third party to bear the costs of operational risk is called a risk transfer. To get a third party to accept the risk will require something in return. Insurance is a common example of a risk transfer. When individuals or businesses buy insurance policies, the risks of unknown severe financial losses are transferred to an insurer for a smaller and predictable expense: an insurance premium.

There are four fundamental insurance coverage contracts or policies that are applicable to most small businesses, depending on the nature of their specific operations. Here is a brief description of each with some suggestions on how to shop for coverage and what to ask an insurance professional when seeking an insurance risk transfer.

The Business Owner’s Policy (BOP)

A BOP combines business property and business liability insurance into one convenient policy. The property coverage part protects a business from losses resulting from fire, theft, or some other covered disaster causing damage to business owned property. The liability coverage part protects against claims involving bodily injury, property damage, or personal or advertising injury that could arise from regular business operations.

Businesses can tailor a BOP to help meet their unique needs by adding optional coverages like data breach, business income for off-premises utility services, and other specialized coverages.

Consider buying a business owner’s policy if:

  • Your business has a physical location, whether it is out of your home or in a rented or owned office, retail space, or similar workplace.
  • There is a possibility of being sued–for example, by a customer who was injured because of your negligent act.
  • You have assets that could be stolen or damaged–whether digital assets, customer data, equipment, furniture, cash, or inventory.
The Business Auto Policy (BAP)

Business auto insurance protects a business against financial costs resulting from an auto accident if you or an employee is found at fault. The BAP will pay for property damage and bodily injury resulting from use of the business’s vehicle. The BAP can also cover medical expenses for the people in the business’s vehicle and physical damage caused to an owned vehicle.

The BAP will pay for claims such as these:

  • An employee injures a pedestrian while driving a company vehicle and the injured pedestrian requires medical treatment.
  • An owned vehicle swerves off the road while being driven to work and causes property damage to structures or other vehicles.
  • An employee driving on a work-related errand accidentally hits another car, causing damage.
The Commercial Umbrella Policy

Commercial umbrella policies provide an extra level of liability protection over the policy limits of underlying coverage. Significant assets can be at risk when businesses are the target of lawsuits. If the cost of a claim exceeds the limits of a business’s underlying primary insurance in the BOP or BAP, for instance, then the umbrella policy will cover the amount of claim that exceeds those limits. Without commercial umbrella insurance, business owners could be obligated to pay out of pocket for legal fees, medical bills, and damage expenses that exceed the limits of their underlying primary business coverages.

Consider purchasing an umbrella policy if:

  • The work performed in your business has the potential of causing significant damage or injury.
  • The characteristics of your expected customers suggest potentially higher financial value of injuries or property damage you may cause (e.g., you perform work for celebrities or high-net worth clients).
The Workers’ Compensation Policy

Workers’ compensation insurance provides benefits to employees for work-related injuries or illnesses, including medical care, lost wages, and more. Workers’ compensation insurance also provides a deceased worker's family with a financial benefit. If a worker's family decides to sue the company, the employer’s liability coverage part found in all workers’ compensation policies can also help cover related legal fees incurred by the business.

Workers’ compensation insurance can help protect your business and employees in events such as these:

  • An employee slips on ice while walking up the stairs to the office, causing injury that requires an emergency room visit and weeks of recovery time.
  • An employee’s back is injured when lifting a box of printer paper and requires a doctor’s attention, medication, and physical therapy.
  • An employee returning to the office from visiting a client is injured in a car accident and requires hospitalization.

We have only discussed four basic policies here, but there are many different insurance policies for just about everything you might imagine. If other coverage is needed, an insurance professional can describe additional policies intended for situations involving employee theft, professional liability, and product liability, as well as fidelity and surety bonds.

Business librarians, NaperLaunch coaches, and SCORE mentors are available for one-to-one mentoring sessions on these and other topics. They are also discussed in the NaperLaunch Academy Workshop series.

Tuesday, March 9, 2021 - 08:45