14 Disastrous Insurance Mistakes New Business Owners Make

Business owners can’t ignore the importance of commercial insurance in their measures to ensure the longevity of their organization. Business insurance is one of the most important guardrails a business can have to ensure long-term success while staying compliant with state laws. Even small business owners need coverage.

While many types of business insurance are optional, others, like workers compensation, are required by law for businesses that have more than one employee. So, if you started a business and have one employee, that person needs workers compensation coverage. Commercial auto is not required by law but if you use a vehicle for work purposes and have an accident, an insurer may not cover the losses with your personal insurance policy.

Avoiding common insurance mistakes, such as choosing the wrong type of coverage or not reviewing policies once a year, can help safeguard your business from potential risks. Understanding the policy or policies before you buy is most important and so is implementing risk-prevention strategies to help you mitigate future risk.

Let’s explore the most common commercial insurance mistakes business owners make and see how to avoid them.

1. Not Buying Insurance Coverage

What if a fire burns down your office, shop or inventory? How about a terrible storm that wreaks havoc on your business? Many new entrepreneurs focus on getting their business going and neglect the potential risks that could derail their efforts.

No insurance or inadequate insurance coverage is a classic business insurance mistake that can lead to significant losses, heavy out-of-pocket costs if legal representation is needed, or even business closure due to insolvency.

The first step to preventing financial disaster is to learn about specific risks your type of organization faces.

Next, learn about the different types of insurance products designed to protect against common losses. There are 15 common types of business insurance, so see which ones fit your type of business and which don’t.

• General liability insurance protects against claims of bodily injury or property damage.
• Commercial property insurance covers damage to your business property due to fire, theft, or other perils.
• Workers' compensation insurance, also known as “workers comp,” is required by law, as coverage for employees' work-related injuries or illnesses. If you have 1 or more employees, it’s essential coverage to have to stay in compliance with federal laws.
• Business interruption insurance will keep payroll going if the business must shut down due to a covered peril.
• Business owners policy (BOP) combines coverages that include property insurance, general liability coverage and business insurance coverage at a discounted bundle.
• Commercial auto is necessary for any vehicles used for work purposes, including open houses and regular trips to Home Depot. A personal policy may not cover you if you’re in an accident.
• Cyber security insurance is important for many industries that rely on technology. The cost of a data breach or ransomware attack is expensive and so is restoring privacy and data exposure.
• Directors and officers liability coverage pays for expenses if key high-level executives are found liable for wrongdoing that requires legal services.
• Product liability coverage pays for legal fees if a customer claims that a product you sold or manufactured led to an injury or to property damage.
• Optional coverages include commercial umbrella insurance, which extends liability limits, and life insurance, as a legacy to continue operations upon your passing.

2. Choosing the Wrong Type of Insurance

The reason for knowing what types of dangers others in the same business face is because new business owners often choose the wrong type of insurance without doing the research. Find out what specific risks are associated with your industry. For instance, a real estate agent will need commercial auto insurance, with all the driving needed to show homes, while a financial services company will need cyber liability insurance, in case their clients’ personal data gets exposed.

Working with an insurance broker who specializes in your industry can help you buy the right types of insurance, or you could do the research yourself, to be as thorough as possible. Just make sure you end up with a tailored policy that meets all your business needs.

3. Failing to Review and Update Policies Regularly

An outdated policy may mean that you get paid out a claim that is far less than what you need to keep your business running. Many new business owners make the mistake of purchasing insurance policies and then forgetting to review each section annually. However, as your business continues to grow, your insurance needs will change. For instance, your personal property coverage may be insufficient with all the new equipment you bought or the increased inventory. Or, you may have more foot traffic in your retail shop and are exposed to more foot traffic and accidents. Make sure to schedule an annual review of your business insurance policy with your agent, making sure to update any changes in your business operations, revenue or assets, to ensure that your policy status is current.

4. Not Reviewing Exclusions and Limitations

Do not make assumptions about coverage. In fact, review the exclusions and limitations so that you can see if there are other insurance products that will patch the gaps, if necessary. Not reading what’s not covered can lead to unexpected out-of-pocket expenses or a smaller payout than you were anticipating.

As with any contract, read the fine print in a commercial policy, paying close attention to any exclusions or limitations.

5. Under Insuring Business Assets

It’s very easy to under-insure business assets, especially when the coverage limits on your policy are not updated and are insufficient to replace or repair your current assets in the event of a loss. Also, inflation and shortages have caused a spike in prices across the board, so it’s important to review your business insurance limits, especially when it comes to commercial property that includes machinery or computer equipment.

Ensure that equipment, inventory and property are valued correctly in your business insurance policies. Update your policy each time your assets and revenue change as well as during times of high inflation.

6. Not Having a Risk Management Plan

Insurance is a key component of an effective risk management plan. However, there are other risk management strategies that can better prepare you and your employees for potential hazards.

Developing a risk management plan that works includes identifying potential risks, implementing measures to mitigate them and reviewing and updating the plan each year or as major changes occur.

Mitigating risk lowers the chances of having to file insurance claims later on. Deductibles still apply and are expensive, and filing a claim increases your insurance premiums. It’s best to take measures to prevent disasters before they happen, including fire hazards, storm hazards (if you live in a storm-prone region), potential accidents, vulnerability to theft and more.

7. Not Educating Employees on Insurance Policies

Employee awareness of insurance factors and training are important for any company. New business owners often neglect to share information about insurance policies and procedures. A best practices checklist should be in place so that all incidents and accidents are handled properly.

Annual training sessions to inform new employees and refresh the knowledge of existing ones is a great plan. Teach your staff about the types of insurance coverage your business has, the procedures for reporting incidents and general tips on keeping the work environment safe.

8. Choosing the Cheapest Insurance Policies

While it is important to compare rates, it’s also important to consider the financial strength of the carrier you choose and consider reviews. The cheapest policy may be missing a coverage or two, leaving you vulnerable. Make sure all your bases are covered before you buy a policy.

9. Not Saving With a Business Owners Insurance Policy

If you have to buy Workers Compensation, general liability, business interruption and commercial property insurance, it’s a waste of money when you can just buy a business owners policy (BOP), which includes a discount for bundling.

10. Not Comparing Insurance Rates

Loyalty is an uncertain thing with insurers, who base their rates on hard numbers more than anything. Even though it’s not a good idea to buy the cheapest business insurance policy, it’s also foolish to spend more than you need to, to buy a comprehensive insurance plan. See which reputable insurance company is offering you the best deal.

11. Not Contacting the Insurance Company Right Away

It’s important to contact the insurer as soon as there is an incident reported. Not reaching out right away and answering questions may delay the claims process or get your claim denied. There is usually a limit to how long you have to report the incident to the insurance company, and it can be as little as 48 hours.

12. Not Documenting Losses

If you throw away the things that were damaged in a flood or fire, how do you expect to be compensated for them? You’ll need to take photos and videos of the damage as proof for a claim. If you have to get rid of items do so only after you’ve compiled clear images or videos that show the level of damage.

13. Not Knowing if the Policy Is Actual Cash Value or Actual Replacement Cost Value

Usually, business insurance policies are actual cash value (ACV) unless you ask for a replacement cost policy, which costs more but will pay you out enough to buy entirely new replacement for your losses. ACV policies subtract the depreciation of the cost, which factors in age.

13. Admitting Fault

Let’s say that someone falls and is injured while in your office. Do not admit fault or say you are sorry because you do not yet know the real cause of the accident yet. Get help right away and tend to the injured party, but know that you are protected with general liability insurance, which will pay for medical costs and also legal costs, if that person files a lawsuit. Most likely, the insurance company will defend the case. The last thing you want them to work with is an admission that you were guilty for the injury happening when that may not be the case.

14. Not Buying Commercial Flood Insurance

If you live in a high-risk area and do not buy commercial flood insurance, you may end up having to absorb the business’s property losses without any assistance. Commercial property coverage alone will not cover damages and losses due to a flood.