Pitfalls to Avoid When Buying Business Insurance

While small business owners are often experts in their field, many know little about business insurance.  Consequently, business owners may make mistakes when buying insurance coverage. Some errors may be minor but others can have serious consequences. Here are 10 pitfalls to avoid when buying insurance for your business.

Always Buying the Least Expensive Policy

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Premiums can vary widely from one insurer to another so it makes sense to shop around when buying insurance. However, some business owners automatically choose the cheapest policy. This is a mistake. Buyers should understand what a policy does and doesn't cover before they decide to buy it.

When purchasing business insurance, ask your agent or broker to obtain quotes from multiple insurers. Then review the proposals in detail. Be sure you consider the types and amounts of coverage each insurer has listed in its quote. The cheapest policy is not a bargain if it affords little coverage. If you need help comparing coverages ask your agent or broker for assistance. Your goal is to obtain appropriate coverage at a reasonable price.

Buying Too Little Property Insurance

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Many small business owners insure their buildings and personal property under a commercial property policy. Unfortunately, they don't always buy adequate limits.

Like some policyholders, you may assume that a policy that includes replacement cost coverage will automatically cover the cost to repair or replace your damaged property. You may not realize that your policy won't pay more than the limit of insurance. If the cost to repair or replace damaged property exceeds the limit, your policy won't cover the loss in full. Your company will have to absorb any remaining loss.

You should also be aware that most property policies include either a coinsurance clause or an agreed value provision. Both impose a penalty for underinsuring your property. If a loss occurs and you have failed to maintain a minimum amount of insurance, your insurer will not pay the full amount of the loss. Deliberately underinsuring your property is not a good way to save money on property premiums!

Gambling on Low Liability Limits

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Virtually any business can be hit with a lawsuit. Lawsuits are unpredictable. Business owners can't predict who will sue their firm, when the suits will be filed, or the amount of damages plaintiffs will seek. No one expects to be sued but lawsuits occur nonetheless. One large claim can put a small company out of business.

When buying general liability or auto liability insurance, don't skimp on limits. If you are unsure how much insurance you need, ask your agent or broker for advice.

Note that prospective landlords, vendors, and others may refuse to do business with you unless you carry a minimum limit of insurance. Similarly, a government entity may refuse to issue your firm a permit to erect a sign, hold an event, or perform other activities on public property unless you have purchased a specified limit. Nowadays, many companies and government entities require a limit of $1 million or more.

Automatically Choosing a Low Deductible

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Deductibles are a form of self-insurance. They allow policyholders to save money on insurance premiums by paying for small losses out of pocket. They also allow insurers to avoid the cost of adjusting small claims.

When buying commercial property or auto physical damage insurance, don't automatically select a low deductible. You may be buying more insurance than you need. Instead, consider how much premium you will save by raising the deductible from, say $100 to $250, or from $250 to $500. As a general rule, you should choose the largest deductible your firm can comfortably absorb. A higher deductible will provide an incentive to protect your property from damage.

Failure to Adjust Your Coverage as Your Business Changes

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Most businesses change over time. Small companies grow, acquiring new property and hiring more employees. Some expand their product offerings while others move to new geographical areas. When businesses change, their insurance needs change as well. Thus, business owners need to keep their insurance agents up-to-date on changes that have occurred. Unfortunately, some business owners don't do this. The result can be inadequate insurance coverage.

The best time to reevaluate your insurance needs is several months before your policies renew. Meet with your agent or broker in person so you can explain any changes that have taken place at your company. Your agent should review your coverages and limits to determine whether any changes are needed.

Failing to Read Your Policies

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It's safe to say that few business owners enjoy reading insurance policies. Yet, avoidance isn't a good tactic for managing risks. You must read your policies to understand what they do and don't cover. Don't wait until a loss occurs to look at your policies. You can't buy coverage for an excluded loss that has already taken place.

While many insurance policies are written in simplified language, they still contain some "legalese." If you have trouble comprehending the wording, ask your insurance agent or attorney to explain it to you in layman's terms.

Failing to Insure Potential Income Losses

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Like many business owners, you may have insured your company's physical assets against loss or damage under a commercial property policy. However, you may have failed to consider a common consequence of physical losses, namely loss of income.

If your business premises are damaged by a fire or other peril, your company may have to shut down until the damage is repaired. Your business can't generate revenue if it isn't operating so a shutdown could be disastrous. You can help ensure your company survives an interruption by purchasing business income coverage. This coverage reimburses you for the income you would have earned if the loss had not occurred. It also covers expenses you must continue to pay (like rent or electricity) whether or not your business is operating.

Business income insurance is often provided in conjunction with extra expense coverage. The latter covers expenses you incur to avoid or minimize a shutdown of your business after a physical property loss.

Sticking With the Same Insurer Too Long

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Insurance is a people business so it's important to have a good relationship with your insurer. However, this doesn't mean that you need to stick with the same insurance company forever.

Like all businesses, insurers change over time and the changes aren't always for the better. Premiums may rise while the quality of service declines. Products may not be kept up-to-date. An insurer's financial ratings may fall. Your insurer's appetite for businesses like yours may wane. If you observe changes like these, it's probably time to shop around. Ask your agent or broker for quotes from other insurers. You can also try shopping for insurance online.

Choosing the Wrong Agent or Broker

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Your agent or broker earns commissions on the premiums you pay for insurance policies. Since you are paying for this individual's services, he or she should be meeting your needs.

Some business owners require frequent interactions with their agent. Others want a more hands-off approach. Some want face-to-face contact while others like to communicate via phone or email. Regardless of your preference, your agent should match your style. Don't stick with an unsuitable agent out of inertia or because you don't want to hurt his or her feelings by terminating the relationship. If you aren't getting what you want, find another agent.

Failing to Accurately List Entities or Locations

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Most liability policies cover, as named insureds, the people or business entities shown in the declarations. People or entities not listed on the policy don't qualify as named insureds. This rule applies to

general liability, commercial auto, and umbrella policies. Neglecting to list a business entity on a policy can have disastrous results.

For example, suppose that ABC Inc. manufactures candy. For tax reasons, ABC creates a subsidiary called XYZ Inc. ABC then transfers ownership of its factory building to XYZ. The owners of ABC purchase a liability policy that lists ABC as the named insured. They forget to include XYZ. An accident occurs at the factory, and XYZ Inc. is sued. Because XYZ is not listed on ABC's policy, ABC's insurer refuses to cover the claim.

Similar problems can occur if business locations are omitted from a commercial property policy. Most property policies cover physical loss or damage to covered property at the premises described in the declarations. If damaged property is situated at premises not shown on the policy, the damage may not be covered.