Businesses, like people, need insurance to protect themselves from unforeseen mishaps, but buying a policy that's wrong for your business could leave you with gaps in coverage.
Before you buy a commercial policy, it's important to determine what your risks are, then find a policy that provides adequate coverage at a competitive price, says Mark Carrasquillo, an insurance broker for the E.G. Bowman Co. in New York City.
How can you do this? Identify all your company's assets -- including equipment, property and inventory -- to gauge how much coverage you need.
If your needs change, you can add more coverage.
"The great thing about business insurance is that you can customize a policy to meet your needs," says Karl Newman, president of the Seattle-based NW Insurance Council trade group.
As you shop for a policy, here are five common mistakes to avoid.
1. Paying too much for business insurance coverage.
Having enough insurance is essential, but small businesses shouldn't pay for more than they actually need, says Kevin Foley, an insurance agent in New Jersey.
"If you have a building worth $500,000, you shouldn't buy $1 million in (property) insurance," he says.
There's no substitute for comparison shopping, Carrasquillo says. "Don't take the first quote you receive."
You typically can save money by combining your coverages into a single business owner's policy (BOP). According to the nonprofit Insurance Information Institute (III), a BOP typically includes:
- Property insurance for buildings and contents. This covers such things as fire damage, theft and vandalism.
- Business interruption insurance. This pays for the loss of income resulting from anything that disrupts your business. It can also provide money to temporarily relocate.
- Liability coverage. This covers your business's responsibility for any damage or injuries it may cause to others, up to policy limits.
2. Buying the cheapest policy you find.
Business insurance prices vary widely, depending on the carrier and what coverage you need. Carrasquillo says you should compare policy features carefully to make sure the least expensive policy you find doesn't cut corners on coverage.
Saving money on your insurance doesn't make sense if it leaves you unprotected, Foley says. For example, if you skip coverage for temporarily relocating your business and a fire forces you to close, you won't be able to reopen until your business is repaired and damaged equipment is replaced.
3. Not insuring for liability.
Liability coverage will pay any financial damages for which you're found to be legally responsible, up to your policy limits. It also will cover your attorney and court fees.
Liability claims stem from things that you or your employees do -- or fail to do -- that cause harm to others. Liability policies include coverage for defective products.
Don't skip liability coverage unless you have enough money to pay claims out of your own pocket, Carrasquillo says. Setting aside money to pay such claims is called self-insuring.
Carrasquillo says self-insuring typically isn't a good choice for small businesses, since a legal judgment could deplete cash reserves.
He stressed that no one is immune from being sued. As a business owner, you're legally responsible for the safety and well-being of everyone who comes into your establishment, including customers, vendors and employees.
4. Not having the right coverage for an online business.
If you promote or sell products or services over the Internet, you face special property and liability risks, according to the III. You'll need coverage for cyberattacks, interruption of service and the theft of customer information from your website database.
According to the III, some BOPs may provide adequate coverage for certain cyber incidents. For example, if you lose electronic data because of a computer virus or a hardware failure, this coverage may pay for the cost of recovery.
However, if you need a broader range of cyber protection, you may prefer a stand-alone cyber liability policy. These policies can be customized to fit your business.
The III says this type of policy may covers such risks as loss of data, business interruption, identity theft and the cost of efforts to restore a company's damaged reputation following a cyberattack.
III spokeswoman Janet Ruiz says choosing a BOP typically is less expensive than buying separate policies to meet your insurance needs. Any time you can "bundle" several coverages into a single insurance policy, you’re likely to get a discount.
According to a report from the National Small Business Association, a nonpartisan small business advocacy group, in 2014 the average cyberattack cost small businesses $20,752 on average, a big increase from $8,699 in 2013.
5. Not reading your policy details carefully.
Insurance policies cover you for the protection you've purchased -- and nothing more.
Before you buy a policy, it's important to read it carefully. If there's anything you don't understand, ask questions.
If the policy you buy isn't adequate and you wait until you have a loss to make changes, it’ll be too late. Carrasquillo recalls the case of a barber who wanted to buy liability insurance for his shop only after one of his employees cut a customer's ear. The answer was "no."
Foley suggests writing down any questions you have about your coverage and calling your agent before you make a purchase.