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May 9Andrew Tucker

Managing Insurance Costs

May 9Andrew Tucker
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Every business needs to be covered by various forms of insurance.

However, it’s often misunderstood that small companies do not face the same exposures and risks, and therefore do not generally require certain forms of insurance. This is not necessarily true. In fact, a small company will have a far more difficult time recovering from an catastrophic event (and insurance coverage blunder) than a large company will.

One approach for small companies is to consider different kinds of insurance, with different limitations, specific to the nature of the risks faced by the business and purchase what is really needed at any particular point in time.

A carefully considered focus on identifying and securing the right level of the right insurance coverage is critical.  A knowledgeable  insurance agent or broker can help CEO’s navigate the multitude of options that a small company needs to consider, which include:

  • General Liability Insurance – covers losses associated with injuries, accidents, and other claims which result in payments made by the company for bodily injury, medical expenses, property damage, slander, lawsuits, etc.
  • Product Liability Insurance – covers financial loss if a product manufactured by the company proves to be defective and unsafe causing harm to the user(s).
  • Professional Liability Insurance – (also known as Errors & Omissions Insurance) covers financial loss from employee error, malpractice, and negligence.  This is commonly used by businesses that provide services, rather than the sale of a product. Physicians, for example, are required by law in some states to carry some form of malpractice insurance.
  • Commercial Property Insurance – covers losses related to the company’s property assets, including loss and damage in fires, storms, and civil disobedience.  These policies can cover a wide range of losses from lost income due to business disruption to contents theft or damage.

Costs Associated with Small Business Insurance

  1. Premiums:  The cost a business must pay in order to be covered by the policy, typically monthly. Premium costs vary from insurer to insurer and fluctuate from policy to policy. Some factors that will affect the cost of the premium include: coverage amount, deductible amount, loss history and other associated risks.
  2. Deductibles:  Out-of-pocket expense that a business must pay before the insurance company will pay a claim. For example, if a small business has a $1,000 deductible and $10,000 worth of inventory was stolen, the insurance company would pay $9,000 with a $1,000 borne by the company.
  3. Losses Exceeding Benefits:  Out-of-pocket cost that a business must absorb should a claim, or loss, exceed the benefits stated in the policy.  For example, if a small business loses a lawsuit for $6M and their policy covers up to $5M, the business is responsible for paying the remaining $1M.
  4. Compliance Costs:  The expense that a small business may have to absorb just to be able to receive coverage from an insurance company. For example, if a company’s location is hazardous in any form, to where the risk of customers or employees sustaining injuries is too high, the insurance company may require additional steps be taken before they’d be willing to insure.

Insurance Cost-Management Strategies for Small Companies

  1. Regularly Review All Policies:  There are two reasons to review and adjust the insurance policies held by your small companies on a regular basis. First, you want to make sure that the needs of the business are being met and fully covered. As a company grows, its assets change and become bigger – you want to make sure you maintain adequate coverage. Second, it’s important to make sure that you’re not over paying or paying to have insurance coverage you no longer need.
  2. Keep Insurance Expenditures Low:  Every time your company files an insurance claim, you become more of a risk to the insurance company and as a result and insurance costs could go up. Implementing company-wide risk-management efforts can be very helpful to keep claims down.  By doing so, you’ll keep the insurance costs down for longer periods of time, without frequent hikes.
  3. Modify Insurance Policy Options: Depending on the insurance policy, there are certain modifications that can be made in order to lower the monthly premiums. For example, you can opt to pay a higher deductible at the time of claim, which will lower the premiums on a monthly basis. Sometimes it’s better to only pay the extra when something happens, instead of preemptively, when it may never. Also, and this is where reviewing your policies frequently makes a difference, you can lower premiums by lowering your coverage amounts – if you no longer need certain aspects of coverage, remove them from the policy and lower your premiums.

 

photo credit: Spend via photopin (license)

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