Many Small Business Owners Lack Insurance Savvy

Buying insurance is a critical part of being in business for a small company, but it’s often either overlooked or given short shrift. In the process, owners can leave their businesses vulnerable to huge payouts for something as mundane as a clerical error or something as cataclysmic as heavy flooding.

To many owners, the word “insurance” means property and liability coverage, the products contained in a standard commercial or business owners policy. If there’s a fire, for example, or someone trips and breaks their leg on the premises, the company is covered.

Many business owners stop there.

“A lot of it is denial — tomorrow will never come, or this will never happen to me,” said Kansas Insurance Commissioner Sandy Praeger.

But Praeger, who is also president of the National Association of Insurance Commissioners, said owners’ ignorance is another factor: “I think it’s just not understanding all of the different types of insurance they need.”

She noted, for instance, that employers may not realize they need to purchase workers compensation insurance although many states require it if a company has a certain number of employees.

Praeger also cited a common mistake made by people who run businesses out of their homes — they believe a homeowners policy will automatically cover them if there’s a business-related accident, like a customer tripping and being injured while arriving for a meeting.

An often overlooked form of coverage, business interruption insurance, has saved many companies from going under. Brian Drum, CEO of Drum Associates, a New York-based executive recruiter, said his company, located a block from the World Trade Center, would have failed after the 2001 terror attacks without such insurance; it helps a business pay expenses when it can’t operate due to a disaster.

Drum is an advocate of companies buying as much insurance as they can, although he acknowledges that many owners don’t want to pay another expense.

“Insurance is part of a small business person’s life, one of those burdens you have to bear for lots of reasons,” he said.

Drum said he regretted not buying what’s called employment practices liability insurance — coverage for such worker-related issues as sexual harassment, discrimination, wrongful discipline or termination and failure to employ or promote. When an employee filed suit against his company, Drum said the business had to pay legal costs that otherwise would have been covered under an insurance policy.

Another type of insurance many owners should consider is errors and omissions coverage, which is akin to the malpractice insurance that medical and legal professionals carry. It can cover legal costs and damages when a client claims that a service failed to have the expected results, or when a service wasn’t performed at all.

Mitch Frumkin, president of Kipcon Inc., a North Brunswick, N.J.-based engineering firm, said that while some engineers don’t carry E&O insurance, as it’s known, “I work with a number of clients who won’t work with us unless we have E&O.”

Having the insurance not only protects his firm, it gives the firm a competitive advantage over those that don’t, Frumkin said.

Business owners, whether they’re starting out or have been up and running for a while, should learn all they can about insurance. There are several good primers online — the NAIC, Praeger’s group, has a Web site called Insure U for Small Business. It explains basic forms of insurance such as workers’ compensation, property and liability, commercial auto and home-based insurance coverage.

The Insurance Information Institute, an industry group, also provides businesses with a good overview of many kinds of insurance on its site. It explains coverage such as business interruption and employment practices liability insurance, and also has sections describing the insurance needed by specific industries such as retailing, manufacturing, farming, food service and lodging.

A good insurance broker should know what kinds of insurance your company needs. But if he or she isn’t familiar with your line of work, you might end up underinsured. So, as with many other aspects of running a company, some of the best information can come from other small business owners.

Tola Talabi, co-owner of Bacchus Wine Made Simple, a wine and liquor store in Manhattan, noted that he needs to carry liquor law liability insurance, which among other things provides coverage in case one of his employees unknowingly sells an alcoholic beverage to an underage customer.

“We carry it to protect ourselves from potential litigation,” he said.

Company owners can also relate to one another what they’ve learned from experience, and help others avoid some insurance pitfalls. Talabi recalled being robbed when he ran a store in New Jersey, but said he didn’t make a claim.

“I would end up paying more for it because of higher premiums,” he said.