Business insurance is a crucial safeguard, providing protection against various risks that enterprises face. Understanding and mitigating these risks is essential for maintaining the stability and success of any business. In this guide, we explore the six biggest business insurance risks that entrepreneurs should be mindful of:
What is insurance risk?
Insurance risk refers to the possibility of something going wrong that would expose your business – or the insurer – to financial damages. Business risk and insurance risk often overlap. By fully understanding the different types of business risk, you can better understand insurance risk and thus how insurance can protect your business from serious problems.
Here are the four main categories of risk to consider:
- Operational: Operational risk addresses your business’s day-to-day dealings, including handling equipment, workers, customers and your overall product or service. By insuring tangible assets like equipment and property, you can mitigate risk, and by protecting your business operations from outside events, like natural disasters, you’ll be covered.
- Strategy: Strategic risk occurs when your business’s strategy is diluted or usurped by yourself or other companies. When running a small business, you have to develop a specific strategy for your product or service and stick to it. If competitors undermine your strategy by outperforming your product or service or undercutting your prices, you run the risk of falling behind in your industry. It’s critical to research your competitors and understand how you can better protect your business’s strategic assets, like your intellectual property.
- Compliance: Compliance risk pertains to your business’s ability to adhere to certain rules and regulations outlined by your industry or the government. This includes things like tax burdens, municipal zoning and property laws, distribution laws and other rules and regulations related to your business – such as HIPAA or good manufacturing practices. Eliminating compliance risk requires that you stay abreast of the latest rules in your sector. While you can’t purchase insurance related to taxes and other forms of compliance risk, you should be aware of your obligations by understanding how your business could be at fault.
- Reputational: The final type of risk is reputational. That means protecting your business from security problems, data privacy breaches and other cybersecurity issues. It also involves taking steps to protect your brand and logo. You can insure your business and customer data in the event either is compromised, you are covered.
What are the biggest types of insurance risk?
The biggest insurance risks that follow fall into one or more of the main categories: operational, strategy, compliance and reputational.
1. Data breaches
Businesses across all industries have seen a huge increase in cybersecurity problems in recent years. Chris Roach, co-founder and COO of Blackswan Cybersecurity, said data hacks have hit fast-food retailers and e-commerce businesses particularly hard. However, he focused his attention on businesses that accept credit cards.
One of the most important things you can do to prevent fraud is ensure your credit card technology meets EMV standards.
“Complying with PCI DSS protects a merchant against digital data security breaches across their entire payment network, not just a single card,” Roach said. “Failure to comply can result in penalties and fines if a data breach does occur on your end.”
Cyber insurance is also an important consideration for small businesses. Myles Gibbons, president of the commercial accounts group at Travelers, pointed out the frequency of data breaches occurring in companies of 250 or fewer employees.
“Cyber coverage has grown increasingly important to all types of businesses, and can help to protect them from the costs of data breach notification, remediation, card payment penalties, crisis management and public relations,” he added.
2. Property damage
Hurricanes, snowstorms, floods and fires can throw a serious wrench in your company’s ability to operate normally. While your storefront or office may not have been entirely destroyed, chances are you won’t be able to run your business from that location while repairs are occurring.
“Only 50% of small business owners have a written business continuity plan, according to the Travelers Business Risk Index,” said Scott Humphrey, second vice president of risk control at Travelers. “Between severe weather events and the increasing reliance on a complex network of technology and supply chains, the risks of business interruption are plenty.”
Your first line of defense against property theft or damage is insurance coverage. Gibbons noted that some companies aren’t adequately insured to their true values.
“Ask yourself if you have enough coverage to rebuild a business after a total loss,” he said. “Business owners should make sure their building and its contents – including shelving, displays, inventory and any new equipment – are properly insured. Properties should be insured to their full replacement value – not market value – including any recent improvements.”
Michael Freed, a business litigation attorney at the Gunster law firm, urged business owners to consider business interruption insurance to keep their cash flow going, even if operations have been halted temporarily.
“Business interruption insurance provides coverage for lost revenues and profits arising from uncontrollable interruptions in business operations, such as those arising from natural disasters or a building fire,” Freed said. “When that type of casualty strikes, business owners need not only to rebuild where there has been physical damage but to offset for missing revenues while they do so. This is particularly critical for businesses with limited capital reserves.”
Beyond that, Humphrey advised developing a plan so your business has a protocol to follow should such an interruption occur.
“To develop a plan, businesses should identify threats or risks most likely to occur based on historical, geographical, organizational and other factors, [and] conduct a business impact analysis [to] identify [what is] critical to the survival of your business,” he said. Then, “adopt controls for mitigation and prevention, which can include emergency response, public relations, resource management and employee communications.”
3. Human capital costs
If you have employees, you have a significant amount of risk. Whether an employee is performing a labor-intensive task, driving a company vehicle or interacting with the public, there is a risk to the company, said Bryan Robertson, partner at Hatcher Insurance.
“The need for industry-specific training and internal loss controls is apparent now more than ever,” he said. “The employee needs to understand how their decisions and actions can tremendously affect the company’s well-being, both positively and negatively.”
According to Tony Consoli – national practice leader for health care, life sciences and alternative risk at CBIZ Insurance Services – changing market dynamics can mean major cutbacks across the board, which can also be an unexpected financial risk.
“Although making changes to the workforce is inevitable … during tough times, very few business owners know the risks involved with layoffs,” Consoli said. “Unemployment insurance costs can be an expensive burden on employers.”
Workers’ compensation insurance is mandatory for businesses with employees, but there are other insurance coverages you can obtain to mitigate your risk. Robertson advised looking into management liability and employment practices liability insurance.
“This coverage protects the owners and managers from suits related to discrimination to potential, current and past employees, as well as third-party claims,” he added.
Thoroughly planning for employee departures is the best thing you can do to avoid financial and legal recourse. Consoli recommended offering benefits – such as severance packages, payment for unused time off and continuing health insurance coverage – to laid-off employees. He also advised focusing on pending workers’ compensation claims that might be affected by layoffs and on conducting midyear reviews of your resources to scale back when necessary.
4. Professional service mistakes
Service providers like accountants, consultants and web developers all face the continual risk of customers seeking legal recourse if their “product” doesn’t meet expectations. Kevin Kerridge, CEO of small business insurer Hiscox USA, said that a common challenge for many small business owners is overcoming the mindset that their work is so good that no client would need to sue them.
“A business doesn’t have to make a mistake to face an allegation,” he said. “One lawsuit, even if unwarranted, can cripple a small business in terms of time and money.”
Kerridge recommended that owners of any service-based business consider professional liability insurance.
“This coverage protects a business in the event that they receive a lawsuit alleging that they have made a mistake [and covers] defense costs and resultant damages up to an agreed limit, typically $1 million,” he added. “We see a range of claims on this, from tax preparers making a mistake on a client’s tax return to technology service providers delivering a substandard work product.”
By identifying, understanding, and proactively addressing these six major business insurance risks, enterprises can build resilience and protect their financial well-being. A strategic combination of insurance coverage, risk mitigation strategies, and continual adaptation to changing circumstances is key to navigating the complex landscape of business risks successfully.