"Risk" can strike fear into the heart of even the most savvy of business owners. It's right up there with "budget" and maybe even "taxes." But risk isn't just a scary word - it's also a real issue faced by all businesses, no matter their size.
Many types of risk faced by businesses can be addressed by purchasing business insurance. But making sure you're getting the right kind of coverage can be challenging, and even more of a challenge is making sure you have the right amount of coverage.
Underinsuring your business can have drastic consequences - if you don't carry enough coverage, something happens to disrupt your business in any way, and you don't have the funds to make up any financial shortfalls caused by a gap in your coverage, you might be looking at having to make some tough decisions. At the same time, over-insuring your business could cost you as well - in the form of wasted money on premiums. Finding that insurance "sweet spot" can be tricky.
There are many factors to consider when deciding on the right amount of insurance coverage for your business. Here are 5 that you should definitely investigate. It's always advisable to work with a professional, trusted insurance broker when determining final coverage amounts and types of insurance to carry, but it definitely pays to educate yourself, as well.
1. Inherent Risk
Certain types of business are inherently riskier than others, and therefore might need more coverage. For example, a company that manufactures and sells infant car seats has a very different risk profile than an independent IT consultant. Is your business involved in activities that could lead to significant liability issues, chances are you might need to carry more insurance.
Coverage can also be dependent on the way your business is structured. If your business is incorporated, it may have lower levels of liability risks than a sole proprietorship (if your business is a corporation and gets sued, only the assets of the business can be seized. If you operate as a sole proprietor, you might be personally responsible for judgements against the business).
2. State or Local Requirements
Certain states or regions might have specific requirements regarding types of insurance you need, as well as how much insurance you need to carry, so it's always wise to check on this before you decide on your final coverage amounts.
Some states require minimum levels of coverage, and these could be influenced by what type of business you're operating. Your insurance agent will be able to help you with this information, and you can also contact your state insurance commissioner.
3. The Value of Your Business
"Value" can be defined several ways here, and all of them should be looked at when determining coverage amounts.
There's the value of your business in terms of what you paid for it, or what someone else would pay for it if you sold it. There's also the value of the assets of your business, and also the value of your business if you had to replace property, inventory, or other assets.
It's wise to be sure all of these values are adequately covered.
Additionally, if you owe money to a bank or commercial lender, they may require you to maintain certain levels of coverage to protect their investment in your company.
4. Deductible Amounts
While the amount you choose as your deductible isn't directly a factor of how much coverage you need, it still can be added into the mix, as it can affect the cost of your overall insurance. For example, if you can afford to carry higher deductibles on your policies, your premiums will be lower, and you might be able to afford more coverage. Conversely, if you need lower deductibles, your premiums might be more, and could affect how much coverage you purchase. Just something else to consider as you determine coverage needs.
5. Your History of Losses
The more careful you are, and the more you know your business and its strengths and weaknesses, the more you can possibly save on your insurance. More losses equals higher premiums and possibly higher coverage requirements, if you engage in a type of business that's considered higher risk.
It's true that attempting to navigate the often complicated world of business insurance coverage can be daunting - but it's always comforting to remember you don't have to go it alone. Working with a trusted, professional insurance agent or broker can make the process so much easier. Finding a reputable insurance partner will free you up to do what you do best - running your business.