There are dozens of different types of insurance products for businesses, designed to protect them from physical damages, theft, and even liability.
Within those policies, there’s room for practically unlimited coverage.
But most businesses in the U.S. are noticeably underinsured.
If they face a major disaster like a flood or earthquake, they may not have a policy that can replace their losses. They may not even have a policy to protect them from product-based liability claims.
So why is it that most businesses are underinsured, and what can they do to resolve this shortfall?
Types of Insurance
First, most inexperienced business owners are overwhelmed by the number of types of insurance available to companies. While some insurance companies offer an umbrella policy that covers many different areas (or coverage above and beyond what individual policies are currently covering), it’s still important to understand these individual areas. For example, most businesses will need to have workers’ comp insurance, general liability insurance, product liability insurance, property insurance, life insurance, vehicle insurance, and more, based on their industry and how they operate.
Unless they’re already familiar with the insurance industry or are partnered with someone who is, this can all seem intimidating — not to mention confusing. If you purchase general liability insurance, you may mistakenly believe that you’re covered for any and all legal claims about your business. If you’ve never heard of cyber insurance, you’ll never investigate to learn more about it.
Requirements vs. Recommendations
Business owners are also inclined to purchase and maintain insurance policies based on what’s required, rather than what’s recommended. On a personal level, you’re likely familiar that to drive in a particular state, you’ll need a certain minimum amount of insurance coverage. However, this minimum coverage isn’t enough to provide you with suitable protection in most situations.
This concept also applies to businesses, but it’s less noticeable. For example, your business is likely required to have workers’ comp insurance in place. Depending on how you buy your business’s property, you may also be required to have a commercial property insurance policy. However, what’s required generally isn’t enough to sufficiently protect your business from most financial threats. Accordingly, many businesses end up with insufficient coverage.
Gaps in Coverage
Few people take the time to fully read their insurance policies, or understand the limits of their coverage. This ultimately leads to gaps in coverage for most businesses. For example, you might have a policy that covers your property in the event of damage or losses, but you may not know the extent of this coverage. For example, many property insurance providers specifically offer no coverage for natural disasters that are common in the area; if the area is heavily prone to flooding, business owners may be required to have a separate flood insurance policy.
Determining the Right Level
It’s also difficult for business owners to accurately assess how much insurance they truly need. Will a million dollars of liability coverage be enough to suitably protect you from a lawsuit? What about three million dollars? These are big questions that are hard to answer, especially when each tier of coverage is tied to a proportional increase in premiums. Most business owners take a shot in the dark, guessing what level of coverage they need, and they end up underestimating their needs because they judge the situation optimistically.
The better avenue here is to ask a professional, or consult with other, more experienced business owners. Buying insurance is always about balancing risks and rewards, but too many business owners fail to estimate these factors accurately.
People have a tendency to believe that they’re inherently less likely to experience a negative event than other people; this is known as optimism bias, and it’s why so many people believe they’re never going to be the victim of a crime, or develop a deadly disease. In a business setting, small business owners may believe that because they operate ethically and with a small number of clients, they could never face a liability issue.
Other business owners may severely underestimate the number and severity of risks they face on a regular basis. They buy insurance policies based on what they believe, rather than what the statistics are telling them. Accordingly, they end up underinsured.
Insurance needs vary tremendously from business to business, based on risk profiles, industry, clientele, and dozens of other variables. And despite the multitude of insurance options available to business owners, most businesses still end up woefully underinsured.
The best way to avoid this is to learn more about your specific risk profiles and work hard to better understand your policies. Even then, there’s a degree of subjectivity to consider in what constitutes sufficient coverage.
Larry Alton is a professional blogger, writer, and researcher. A graduate of Iowa State University, he's now a full-time freelance writer and business consultant.Currently, Larry writes for Entrepreneur.com, Inc.com, and Forbes.com, among others. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing. Follow him on Twitter (@LarryAlton3), at LinkedIn.com/in/larryalton, and on his website, LarryAlton.com. To read more of his reports — Click Here Now.
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