Small Business Insurance - The Real Story - Told By An Actual Small Business Owner

November 11, 2019

Let’s talk about disasters. I define disasters as unpredictable singular occurrences that can permanently put you out of business. 

What qualifies as a disaster to a small business

  • Act of God (Fire, Flood, Earthquake)
  • Serious personal problem of the founder 
  • Lawsuit
  • Loss of your largest account
  • Loss of your most productive employee and inability to rehire 

All of these are serious issues and any one of them can bring down a small business. Heck, I’ve seen any one of these bring down a huge business. 

For the purposes of this blog, let’s use an act of God as our example and let’s talk about what you can do as a business owner to prepare for the worst.

Recent statistics say that 85% of small businesses survive year one, 75% year two, 50% year five and 30% survive year 10. Current statistics also tell us that 40% of businesses never reopen after a flood or fire and of the 60% that do, half of those fail within the next 3 years. 

Let’s do some math. If you are fortunate enough to get through year 10 (30%) and you then have a disaster that claims 70% of businesses, you have a 9% chance of survival from day one. 

What are the odds of having a disaster? It would stand to reason that you may feel you will probably never have a disaster.

My experience has taught me that over the course of 12 years, disasters (big and small) are far more prevalent than you would imagine. In our 12 years, we have weathered the loss of countless important employees for a multitude of reasons, a break-in, losses of entire revenue lines, 2 weeks in the hospital with Lyme’s disease and even a fire that put us out of commission for 74 days. 

This is why we have insurance right? 

Let’s get one thing perfectly clear regarding insurance. Insurance is used to help during one time emergencies to cover large losses of a company such as when there is a fire or flood. Insurance cannot cover you for loss of clients or loss of key employees. Insurance is designed by definition to replace what was lost. In the business, they call it “making you whole”. I have found that it is VERY RARE in a small business setting to find a scenario where insurance successfully made a business whole again.

Typically when a small business bids their insurance, they are looking for the following coverages:

  • Liability - This covers accidental injury of a client while on premises
  • Contents - This insures the value of your tools and supplies in case of disaster
  • Business Interruption - This covers lost revenue in the case of a partial or complete shut-down of business due to an act of God or other insured event.    

Liability Insurance

Liability claims are generally litigated outside of the realm of the business owner. Let’s say a client slips and falls and sprains an ankle. If the claim is turned into the carrier, they would get statements from the parties involved and come to a settlement with the claimant. 

Content Coverage

When it comes to small business, Insurance does a reasonable job of replacing “things” that were lost. Let’s say you stored tools and supplies in your basement and it flooded. You simply build a list of what was lost and turn it into your carrier. They then check the list, assess the replacement cost and cut you a check. Insurance companies are very good at this job. It’s pretty black and white. This type of coverage is very similar to auto insurance where values are reasonably known and there are good and accepted processes in place. 

Business Interruption 

Business Interruption is a totally different animal and the MOST important part of this trio when it comes to surviving a large event.  Business interruption provides revenue replacement for partial or complete shut downs of a business. There are stipulations and limits listed within your policy. Your policy will probably say that there is a maximum payout time of 12 months and your carrier may require you to rent alternate space to keep operations going while repairs are made to your main office in the case of a fire or flood. All of this is totally reasonable and both parties should really be in the same business of limiting risk and generating revenue as quickly as possible. 

Insurance Reality Check

The reality of insurance vs small business is that both parties are in the business of making money and both want to win the disaster. Insurance companies want to live in a world where they collect premiums and never pay on a claim and small business wants to pay as little as possible and collect as much as they can in the event of an emergency. 

Insurance companies have massive pools of resources including adjusters, lawyers, and forensic accountants who are tasked with paying out just enough to satisfy their legal obligation on a claim. They field calls every day and have thousands of claims going on at any given time. Small businesses have very few resources and expertise, are totally overwhelmed in the event of a disaster and only go through this process once in their lifetime. 

Who do you think is more equipped for this battle?

Who do you think wins 99% of the time?

The playing field is so slanted that an entire industry as evolved called 3rd party insurance adjusting. Essentially a business owner can hire an expert to deal with the insurance company at a premium to make sure they receive everything they are entitled to. Let me say that again. A small business owner can opt to hire a professional for 20% of the money they are entitled to to make sure they get 100% of the money they are entitled to. 

This is like me hiring an automotive professional for 20% the price of my new car to double check my new car to make sure everything was included in the car. 


OK so what are best practices for a small business owner:

Bid and purchase liability, content and business interruption insurance. Make sure you are covered for what you intend to be covered for. It does no good to insure 10K of contents when you actually have 100K.

Purchase life and disability insurance on key players. Does an owner also produce revenue? If so, how much would be needed to compensate for their contribution if they became sick or injured or worse?

Bid and sign up for workers compensation insurance for all employees. There is no such thing as good and bad comp insurance. Find a reputable company and take the cheapest quote. 

**In the case of your liability, content, BI and workers compensation insurance, you should rebid them YEARLY. All of these companies give great deals to acquire new clients and then creep rates on their long term clients on the back end to pay for it. 

Insurance is just about the most boring subject on the planet. Unfortunately it's a necessary topic that deserves regular attention from a small business owner. If you are afraid that you haven't addressed your business insurance needs thoroughly and found this blog to insightful, I'd love to hear more about your business. To that end, I've set aside some time in my schedule. Just click the link below to claim your free strategy session.


More like this