When small business owners buy commercial insurance policies, they probably assume that they won't have any losses. Sure, accidents happen but they don't occur very often, right? Unfortunately, that assumption may be wrong. A claims study performed by The Hartford, a financial services company, shows that losses occur more often than many people think. It also provides some insight as to which types of claims are filed most often and which cost the most.
Key Findings of the Hartford Study
In recent years, The Hartford analyzed data from claims filed by small business owners over a five-year period. The claims had been filed under more than one million property and liability policies. The analysis indicated that 40% of small businesses would likely incur a property or liability loss within the next 10 years.
The Hartford's study showed that unexpected events occur more frequently than many small business owners realize.
Claim Frequency vs. Claim Severity
A primary purpose of The Hartford's study was to determine which types of claims were most common and which were the most costly. The study highlights two important insurance concepts: claim frequency and claim severity.
Claim frequency concerns the number of claims that occur in a given time period. Some types of losses happen frequently. For example, gravel haulers can incur numerous property damage claims by vehicle owners whose windshields have been cracked by flying stones. Small claims are expensive for insurers to adjust. Insurers can reduce the frequency of the gravel haulers' claims by requiring that a property damage deductible be added to their auto liability insurance.
Claim severity refers to the average size of a claim. Some claims have low frequency but high severity. An example is medical malpractice claims. A surgeon may perform thousands of surgeries with no malpractice claims, but when a claim is eventually filed, it's likely to be substantial.
Most Frequent Claims Against Businesses
When The Hartford conducted its analysis, it grouped business insurance claims into categories, such as Fire and Product Liability. It then ran calculations to determine which categories of claims had the highest frequency. The 10 categories of claims that occurred most often are listed below in descending order. The percentages reflect the percent of business owners affected by each type of loss within the previous five years.
All of the claims included in the 10 categories outlined below are covered (at least to some degree) under standard business liability and property policies.
Burglary and Theft (20%)
Burglaries and thefts may be committed by insiders (dishonest employees or company principals) or outsiders. To prevent such claims, The Hartford recommends using background checks, fences and gates, adequate lighting, and devices to control access to the premises.
Water and Freezing Damage (15%)
Businesses can avoid freezing losses by clearing roofs of snow and ice, training key workers how to shut off the water, and maintaining an adequate temperature indoors so pipes don't freeze.
Wind and Hail Damage (15%)
Businesses can mitigate losses by maintaining trees properly, anchoring outdoor equipment, and protecting windows from flying objects.
To minimize fire losses, The Hartford recommends that business owners implement an emergency preparedness plan. They should also conduct periodic fire drills, and test fire detection and suppression equipment regularly.
Customer Slips and Falls (10%)
Businesses can prevent many slip-and-fall accidents by practicing good housekeeping and proper maintenance.
Customer Injury and Damage (Less Than 5%)
Customers can sustain injuries at business locations in ways other than slips and falls. Example are a burn from a hot liquid (like coffee) and a broken wrist inflicted by an overzealous security guard.
Product Liability (Less Than 5%)
Businesses that manufacture products may be vulnerable to product liability claims. To avoid claims, businesses should engage in hold harmless agreements with suppliers, keep good records, and monitor complaints from customers. They should also manage their supplies and imported goods carefully, and ensure their products comply with industry and government safety standards.
Struck by an Object (Less Than 5%)
A wide variety of moving objects can cause injuries. Examples are cars and trucks, grocery carts, mobile equipment, and falling construction tools.
Reputational Harm (Less Than 5%)
Businesses may be sued by third-parties for acts like libel and slander that allegedly damaged the plaintiff's reputation. To avoid such claims, businesses should refrain from criticizing competitors publicly. They should also obtain permission from content owners before posting content on their website.
Vehicular Accident (Less Than 5%)
Businesses can help prevent accidents by instituting an automobile safety program. They can also ask their insurer or agent to review employees' motor vehicle reports.
The Most Costly Claims
In addition to the most frequent claims, The Hartford also determined which were the most costly. Here's the insurer's ranking listed in descending order based on severity. The dollar amounts reflect the average claim size.
- Reputational harm: $50,000
- Vehicular accident: $45,000
- Fire: $35,000
- Product liability: $35,000
- Customer injury or damage: $30,000
- Wind and hail damage: $26,000
- Customer slips and falls: $20,000
- Water and freezing damage: $17,000
- Struck by an object: $10,000
- Burglary and theft: $8,000
The Hartford found that liability claims are likely to be larger if a lawsuit is filed. Of the general liability claims the insurer analyzed, about 35% resulted in a lawsuit.
- About 40% of small business owners will sustain a loss within the next 10 years.
- Claims vary in frequency and severity. Burglary and theft claims have a high frequency and low severity. The reverse is true for reputational damage claims.
- Claims occur more frequently than many business owners realize.
- Many claims can be prevented through proper risk management.
Frequently Asked Questions (FAQs)
What types of claims does liability insurance cover?
There are many types of commercial liability insurance but the most common is general liability. A general liability policy covers third-party claims against the business for bodily injury, property damage, or personal and advertising injury.
What types of claims raise your rates?
Many small claims will have a greater impact on your rates than a single large claim. Your rates could also go up if a loss indicates a problem like poor maintenance or lax housekeeping that the insurer wasn't aware of previously.
What types of claims are covered by a commercial auto policy?
The standard business auto policy (BAP) is a flexible policy that includes auto liability and physical damage coverages. Many other coverages may be added, such as an uninsured motorist and auto medical payments.