Running a business is a complicated process, and insurance is one of the most important yet one of the most frequently misunderstood aspects of risk management. As entrepreneurs pour time and resources into growth strategies, marketing, and operational efficiency, many overlook the nuances of insurance coverage.
Such negligence can have dire ramifications financially, legally, and in a few cases, forceful business termination. Almost 25 percent of businesses don’t reopen after a major disaster, often because they weren’t properly insured, according to the U.S. Small Business Administration.
In this article, we will discuss common insurance mistakes business owners typically make & share strategies to handle and avoid those mistakes. Engaging in harmful business practices is something that can devastate an organization.
Mistake 1: Underestimating Coverage Needs
A common mistake that many entrepreneurs make is underestimating their insurance needs. A retail store owner, for instance, may get a general commercial property policy but not realize they need coverage against inventory loss around the holiday season. Similarly, A manufacturing company may feel confident that general liability insurance is all they need, but they may be leaving themselves vulnerable to equipment breakdowns or interruptions in the supply chain.
Underinsurance is frequently the result of ignorance about the risks inherent to your industry. According to the Bureau of Labor Statistics, workplace injuries happen at a rate of 2.3 cases per 100 full-time employees per year, for example. Companies in higher-risk industries, such as construction or healthcare, could need special policies like workers’ compensation, professional liability, or equipment floater insurance.
How to Avoid It:
Meet with a licensed insurance adviser to conduct a comprehensive risk assessment. Assess all your assets physical, digital, and human and plan for the worst. If a fire burns down your office, would your policy pay for the temporary costs of relocating? Does your liability insurance cover you for legal fees if you are sued by a client for negligence?
Continuously review coverage to reflect business growth, new equipment purchases, or operations change. The Arroyo South Bay website offers resources on how to customize policies to certain sectors.
Mistake 2: Failing to Review Policies Annually
Insurance isn’t a set-it-and-forget-it guardrail. However countless businesses renew policies year after year without looking at terms, exclusions, or coverage limits. Such complacency can create gaps, especially where industries evolve.
For instance, a restaurant that started offering delivery services during the pandemic may never have updated its auto insurance to include coverage for delivery drivers, which could put the business on the hook for liability if a driver gets into an accident.
Additionally, Regulatory changes can also affect the coverage requirements. The Occupational Safety and Health Administration (OSHA) regularly revises workplace safety standards, which can change the information needed to obtain workers’ compensation or liability policies.
How to Avoid It:
Book an insurance audit with a reputable broker annually. Evaluate current policies for/against changes that have occurred in the operational space: new product lines, new premises, and revenue increases.
For example, a technology startup that moves from software development to managing sensitive client information may require cyber liability coverage. Tools on the Arroyo South Bay website help businesses identify policy expiration dates and access checklists to review.
Mistake 3: Overlooking Business Interruption Insurance
Natural disasters, cyberattacks, and supply chain failures can stop operations for weeks or months. Even though 43% of small businesses never reach the financial break-even point after a disaster (Federal Emergency Management Agency), business interruption insurance is still often overlooked. This coverage makes up for lost income and pays for ongoing payments such as rent, payroll, and loan payments during downtime.
Many people think that just property insurance will cut it. But, property policies cover only physical damage, not revenue loss. A bakery that has to shut down for repairs due to a flood, for example, would need to pay suppliers and employees while the business is closed — expenses that aren’t covered under a standard property policy.
How to Avoid It:
Include business interruption insurance in your risk management plan. And Work with an advisor to model potential losses using historical revenue data and projected recovery timelines. Make sure the policy covers so-called contingent business interruptions, such as delays caused by a supplier’s inability to deliver materials.
Mistake 4: Misunderstanding Liability Coverage Limits
General liability insurance is one of the most basic types of policy for most businesses, but its limitations are also not widely understood. One scenario, for instance, is if a contractor assumes their policy covers all onsite accidents, only to find that injuries to subcontractors are excluded. Similarly, A consultant could be sued for alleged professional mistakes, which would be outside the scope of general liability — meaning they would need their own professional liability policy.
Liability risk is complicated by increased cyber ones. The F.B.I.’s Internet Crime Complaint Center noted losses of more than $10.3 billion to cybercrime in 2022, but many businesses do not have cyber liability coverage. A data breach at a marketing firm, say, could lead to lawsuits from clients, regulatory fines, and reputational damage — costs not covered by conventional liability policies.
How to Avoid It:
Be explicit about what your liability policies do not cover. For professional services, think about errors and omissions (E&O) insurance. Product liability coverage is crucial for product-based businesses. If you process sensitive data, get cyber liability insurance. Join forces with an insurance provider that provides layered solutions that combine general liability with an umbrella policy for increased protection.
Mistake 5: Ignoring Industry-Specific Risks
Every industry has specific risks, but businesses often settle for generic policies. A logistics company, for example, may neglect cargo insurance, believing that freight damage is covered under commercial auto policies. Likewise, a healthcare practice may not be aware that malpractice insurance pays absolutely nothing to cover errors on the part of non-medical staff.
Agricultural businesses contend with weather-related risks, while technology companies deal with intellectual property disputes. The U.S. Census Bureau notes that industry-specific challenges account for 34% of business closures linked to uninsured losses.
How to Avoid It:
Research coverage tailored to your sector. For instance, restaurants may require liquor liability coverage, while manufacturers should think about product recall coverage. Work with brokers who specialize in your industry sector to spot niche risks.
Mistake 6: Neglecting Employee-Related Coverage
All businesses know that employees are a company’s biggest asset — and the most significant potential liability when not properly insured. Apart from mandatory workers’ compensation, businesses may also forgo ancillary coverages such as employment practices liability insurance (EPLI), which covers claims of discrimination, harassment, or wrongful termination.
Now that remote work is so widespread, employers need to identify holes left by traditional policies. For example, are injuries incurred at a home office covered by workers’ compensation? Are thefts of company laptops taken away from work covered?
How to Avoid It:
Conduct an annual audit of employee-related risks. If you’re managing a large workforce, consider EPLI and ensure your workers’ compensation covers hybrid work environments. Use group health insurance or disability plans to help retain employees.
Conclusion: Proactive Protection for Long-Term Success
Insurance is an investment in a business’s resilience. Business owners can mitigate these vulnerabilities by avoiding common mistakes like underestimating coverage limits, ignoring policy reviews, underestimating interruptions, misjudging liability, neglecting industry risks, and underinsuring employees.
Working along with insurance professionals and staying well-versed in emerging risks is integral to keeping coverage up to the mark. To learn more about tailoring policies to suit your business, check out the Arroyo South Bay website for valuable resources that can guide entrepreneurs through the intricacies of commercial insurance.
In a volatile world, risk management is not just good hygiene; it’s a matter of life and death.
