Common Business Insurance Mistakes and How to Avoid Them

Business insurance can ensure a company’s survival and growth. However, common mistakes pave a rocky road with gaps in coverage and financial pitfalls.

Let’s go over the top ten business insurance mistakes, their consequences, and how to avoid them.

1. Underestimating Coverage Needs

Common Mistake

Businesses often underestimate the amount of coverage needed. Commercial insurance is limited by coverage type and coverage limits.

The coverage type refers to what your policy actually covers. It might not be enough for your business to get basic business insurance (e.g. general liability insurance and commercial property insurance).

Consequences

Insufficient coverage can lead to significant out-of-pocket expenses. These can result in business interruptions, debt, and other financial challenges.

How to Avoid

Assess your company’s risks and cash flow to determine how much coverage is enough for you. Different companies often require industry-specific coverage. For example, the professional service industry (e.g. accounting) benefits greatly from errors and omissions insurance. Meanwhile, the construction industry requires comprehensive liability insurance.

Other than obtaining suitable insurance initially, businesses should also regularly review their coverage and risks. By updating your coverage as your business grows or changes, you can ensure your insurance suffices.

2. Not Understanding Policy Exclusions

Common Mistake

Many businesses fail to understand the exclusions within their insurance policies. Knowing the exclusions in a policy is just as important as seeing what is covered.

Common exclusions in a standard business insurance policy include:

• Wars
• Military actions
• Floods and earthquakes
• Pandemics
• Contractual breaches

Consequences

If your claim falls under excluded events or circumstances, it will likely be denied by your business insurance company. This means your business would need to pay out-of-pocket or obtain a loan to deal with the financial consequences of the incident.

How to Avoid

Never skim through the exclusions. Read each line of your commercial insurance policy carefully so you’re fully aware of policy exclusions and limitations.

If you need coverage for an excluded peril, business insurers usually offer endorsements and add-ons. Customize your insurance policy to cover events that are relevant to your needs. For example, if your business operates in a flood-prone region, seek out flood insurance add-ons.

If you are confused or concerned about anything, reach out to the insurance provider or agent for clarification on any unclear terms.

3. Failing to Bundle Policies

Common Mistake

Small business owners often forget to consider bundle options. Before purchasing separate policies, look into insurance packages and bundles that offer protection at a better price.

Consequences

Failing to look into business insurance policy bundles can lead to higher overall insurance costs.

Businesses in certain industries can also benefit greatly from bundles because of the more comprehensive, specialized coverage. For example, hotels can look into hotel insurance.

How to Avoid

Small business owners should consider a Business Owner’s Policy (BOP) for comprehensive coverage at a reduced cost. A typical business owner’s policy includes:

• Commercial property insurance
• Business liability insurance
• Coverage for fire, theft, and other perils

4. Not Keeping Policies Up-to-Date

Common Mistake

After business owners finish obtaining all the recommended insurance policies, they often believe that they don’t need to do anything except pay the premiums each month. Even as the business grows and changes, no insurance updates are made.

Consequences

Failing to update your insurance policy based on shifting needs and risks can lead to inadequate insurance protection. If you hire new employees, expand your business, or change your operations, not having the right insurance policy can be a costly mistake.

How to Avoid

Businesses should schedule routine reviews of their insurance policies. This is particularly necessary after significant business changes, such as:

• Expansion
• New products/services
• Relocation

5. Ignoring Workers' Compensation Requirements

Common Mistake

Workers’ compensation insurance is critical for any business with employees. It covers medical bills and lost wages for an employee who gets injured or sick on the job, regardless of the severity of the injury. For example, if your employee slips and injures their back while on the clock or gets burned by a chemical, workers’ compensation will cover their medical expenses and other financial losses.

Consequences

If you fail to comply with your state workers’ compensation regulations and laws, your business may be subjected to legal penalties and financial liabilities. A company that fails to comply with workers’ compensation laws can be given civil penalties based on each day that went uninsured. Penalties vary from state to state.

How to Avoid

Make sure you are in full compliance with state-specific workers' compensation laws. This means having enough coverage for all of your employees.

Any time your business changes payroll, alters job classifications, or changes your number of employees, you might need to update your workers’ compensation policy. Larger workforces require greater workers’ compensation coverage.

Ensure all employees are covered, including part-time and seasonal workers. If you have any volunteers, you may want to procure volunteer insurance since workers’ comp usually excludes them from coverage.

6. Choosing the Cheapest Policy

Common Mistake

Many businesses opt for the lowest cost insurance policy in order to save money. While this can reduce short-term expenses, it compromises insurance quality. The cheapest policy may exclude key points of coverage, have high deductibles, or be restricted by coverage limits.

Consequences

Inadequate coverage can mean your claim gets denied in the event of an incident, or you can’t get enough compensation to cover all your expenses.

Low cost insurance policies also usually have higher deductibles. This means that you would need to pay higher out-of-pocket expenses before insurance kicks in, which may not align with your company’s financial needs.

How to Avoid

Businesses should balance the insurance cost with the scope of coverage. Choose affordable insurance policies that have sufficient coverage for your needs. It is common for small businesses to spend over $1000 a year on insurance premiums. While this may seem high, especially for new start-ups, having the right commercial insurance can save your business in the long run.

To save on insurance without compromising coverage quality, it’s helpful to compare policies from multiple providers. Obtaining numerous quotes can lead you to find the best value insurance policies.

7. Not Having Cyber Liability Insurance

Common Mistake

Cyber crime is at an all time high. Whether you’re a small business, a large enterprise, or anything in between, cyber crime poses a serious financial and reputational risk. Small businesses in particular often fall under the misconception that they won’t be targeted by cyber criminals. Because of this, they disregard cyber liability insurance.

However, this is a grave mistake. Cyber security is critical for any business that uses digital systems or stores sensitive customer data. Data breaches can easily cost a business thousands of dollars, and smaller businesses typically lack the resources needed to protect themselves against liability claims.

Consequences

The average cost of a data breach for small businesses (<500 employees) is around $2.98 million. As you can see, cyber attacks should not be taken lightly. Without cyber liability insurance, your business may suffer significant financial losses. Customers may also distrust you in the future, believing your cyber security measures to be lacking.

How to Avoid

Assess what cyber risks are specific to your business to ensure you’re obtaining the right coverage. Since the cyber threat landscape is constantly evolving, it can be difficult to obtain suitable cyber insurance right off the bat. Consider what sort of data you are storing (e.g. private medical information, financial account data) and what risks your business faces.

In general, it is a good idea for businesses to invest in cyber liability insurance to protect against digital threats. To reduce your overall cyber risks, it is also recommended to:

• Train your employees in cyber security awareness
• Keep software up-to-date
• Restrict sensitive data access to company devices
• Implement cyber security best practices

8. Failing to Document and Report Claims Promptly

Common Mistake

It’s normal to be overwhelmed by business operations, especially after an incident occurs. However, this unfortunately causes businesses to delay the filing of insurance claims, putting them off for later. Many business insurance policies come with timely filing limits of 90 days.

Consequences

Delaying the reporting of incidents or failing to document them properly can lead to an insurance claim getting denied. In some cases, it may lead to reduced claim amounts.

How to Avoid

Even before you need to file a claim, set up a clear protocol within your business for documenting and reporting incidents. Find out what deadlines and timely filing limits exist for each type of claim you might need to file.

In addition, train employees on the importance of timely reporting. Encourage them to report workplace injuries and other incidents promptly. Depending on company culture and other factors, employees may be hesitant to report incidents. However, timely reporting of professional errors, injuries, property damage, and other work issues can ultimately protect your business interests.

To improve the quality and smoothness of your claims process, ensure that all communications with your insurer, customers, and other companies are well documented. The right documentation can support your insurance claim, improving claim outcomes.

9. Overlooking the Need for Business Interruption Insurance

Common Mistake

Businesses can be interrupted for countless reasons. Natural disasters, fires, vandalism, supply chain disruptions, and other issues can hurt your business continuity. Many businesses fail to realize the benefits of business interruption insurance.

Business interruption insurance can cover:

• Operating expenses
• Payroll
• Loan payments
• Taxes
• Relocation costs
• Rent and lease payments

Consequences

Stopping business for a week or longer can cause significant financial strain, especially if there are pressing expenses that need to be paid. In the event of a long business interruption, the business’ financial obligations can pile up.

Without business interruption insurance, it can be challenging for businesses to recover from an interruption. Payroll, repairs, relocation, and lease payments can overwhelm a company.

How to Avoid

To mitigate the harmful consequences of business interruptions, consider obtaining business interruption insurance or supply chain disruption insurance. Investing in the appropriate coverage can help your business recover from negative events. Make sure your chosen policy covers a suitable period of business recovery time.

10. Not Consulting with Insurance Professionals

Common Mistake

Entrepreneurs and business owners are passionate and great at what they do. However, it is often a mistake to solely rely on internal knowledge about insurance without seeking expert advice. Commercial insurance often works differently from personal insurance, which can lead to gaps in coverage when an individual looks for business insurance by themselves.

Consequences

Not consulting with an insurance professional for business insurance can lead to missed opportunities for better policies and premiums. Since premiums need to be paid every month, finding competitive insurance policies can help you save a meaningful amount of money in a year.

How to Avoid

Consider working with experienced insurance brokers or agents who are knowledgeable about the risks of your industry. For example, if your business is in the hospitality sector, consult with an insurance broker familiar with the risks faced by a hospitality company.

It’s also advisable to review policies with professionals to ensure optimal coverage. Businesses of all sizes can benefit from a consultation with an insurance professional.

Conclusion

Let’s recap the 10 most common business insurance mistakes:

• Underestimating coverage
• Not understanding exclusions
• Failing to bundle policies
• Not updating policies
• Ignoring workers’ compensation
• Choosing the cheapest policy
• Missing cyber liability insurance
• Filing claims late
• Overlooking business interruption insurance
• Not consulting with insurance experts

Don’t make these insurance mistakes. Proactively assess and manage your insurance needs to protect your business from risks.

Here are some of the best business insurance providers to get you started.

• Hiscox
• Tivly
• Simply Business
• The Hartford