In the previous sections of this series on risk management,
we looked at the main
types of risk a business can face, how to measure
risk in your business, and some effective
risk management strategies.
As we saw in the previous tutorial, the main strategies for
dealing with a risk in your business are:
Avoid it.
Reduce it.
Transfer it.
Accept it.
In this final tutorial in the series, we’ll take a more detailed
look at the third option, transferring a risk. As we saw, the main way of
transferring a risk is by buying insurance. When you buy an insurance policy,
you’re taking some risks off your plate and transferring them to your insurance
company, so that if something goes wrong, it’s the company that pays. In return
for this transfer of risk, of course, you pay an insurance premium.
But what kinds of insurance do you need for your business?
How do they work, and what do you need to take into account when buying them?
We’ll cover all of that in this tutorial. We’ll look at some of the main types
of business insurance in turn, before wrapping up the key lessons from this
tutorial and from the series as a whole.
1. General Liability Insurance
We’ve all heard about those multi-million-dollar lawsuits
against coffee shops for serving hot coffee, fast-food joints for making people
fat, and so on.
Claims like this happen all the time, and of course they’re
not all frivolous. What would you do if a customer got seriously injured in
your store, and sued you for damages?
That’s where general
liability insurance comes in. It covers your company for legal expenses and
payouts due to accidents, damage, and claims of negligence. They can also cover
you for things like libel and slander.
For a small business, even just paying to defend a
protracted lawsuit can be financially crippling, and if a major ruling goes
against you, it will almost certainly put you out of business. So a good
general liability policy is a must for most businesses.
The more dangerous or risky the business, of course, the
more important it is to have good coverage. If you run a skydiving club, you’ll
probably want to pay for very comprehensive coverage. If you sell soft
furnishings, there’s less obvious risk.
But no matter what line of business you’re in, it’s worth
considering some form of general liability coverage. Ask at your trade
association or speak to other people in the industry to get an idea of what level
of risk there is, and how much coverage you need.
2. Product/Professional Liability Insurance
Depending on what type of business you run, you may also
want more specific liability policies.
If you manufacture a toy, for example, you’re responsible
for its safety. If it’s covered with a toxic paint that makes children ill when
they play with the toy, you’re facing a huge financial liability. Or if the
design is fine, but just one individual toy has a faulty electrical connection
that causes a fire, you’re also in trouble.
And it’s not only manufacturers who have to worry. Companies
at other stages of the supply chain—wholesalers, distributers, and
retailers—can also be held accountable for faulty or dangerous products.
A good product
liability insurance policy will protect you against financial loss as a
result of a defective product that causes injury or bodily harm. The more
products you deal with, and the riskier they are, the more coverage you’ll
need.
If you provide services, on the other hand, you have a
different kind of risk. You don’t provide physical products, but you could make
errors in your service that cause serious losses to your customers.
If you’re an accountant, for example, and you give a client
bad tax advice, that client could end up facing massive penalties from the tax authorities,
or even going to jail. In that case, the client will have a good case against
you for compensation.
Most service-based businesses can cause similar losses due
to errors or negligence, so it’s worth considering professional liability insurance (also known as errors and
omissions insurance). This will cover you for claims of negligence, just as the
product liability insurance covers you in case of a faulty product.
In some industries, there will be particular policies
tailored for you. In the medical industry, for example, it’s standard practice
for doctors to take out malpractice insurance to cover them if a patient claims
they made the wrong diagnosis or provided the wrong treatment. This malpractice
insurance is designed to meet the needs of doctors and other medical
practitioners. In other industries, a more general professional liability
insurance policy may be sufficient.
3. Commercial Property/Vehicle Insurance
These are the types of insurance that will be most familiar
from your personal life.
If you own a home, you likely have a homeowner’s insurance
policy to cover the value of your home and its contents, and if you own a car,
you have auto insurance. The same applies in business. You’ll need to insure
your property, buildings and vehicles for possible losses (and also, in the
case of vehicles, for any damage caused to others).
Your property insurance policy covers all company property,
from buildings to equipment, documents, inventory, and money being held on the
premises. Policies vary, of course, but generally you’ll be covered for losses
from a variety of causes, like fire, storms, theft, vandalism, and so on.
Pay attention to the wording, however. There are often
exclusions, for example for certain types of natural disaster. In those cases,
you may need to take out a separate insurance policy, or purchase extra
coverage, to protect yourself.
Vehicle insurance works in a similar way to the auto
insurance you’re probably used to from your personal life: it covers you for
damage to the vehicle, and also pays any costs to other people who are injured
or suffer property damage caused by your vehicle. One thing to be aware of is
that if you use your own car extensively for business purposes, it may not be
fully covered by your personal auto insurance policy. Check with the company to
see what the situation is.
4. Workers' Compensation Insurance
In the United States, pretty much any business with
employees must have workers’
compensation insurance. Even if you’re not required to have it, it’s still a
very good idea. It protects you and your employees in case of injuries or
accidents at work.
When you have a workers’ compensation insurance policy in
place, it will pay for injured workers to get medical care, and will compensate
them for some of their lost income while they’re unable to work. It will also
protect you from lawsuits by employees who were injured while working. And in
the worst possible scenario, in which one of your employees is killed while
working, workers’ compensation insurance provides death benefits for the
employee’s dependents.
Workers’ compensation insurance is highly regulated in the
U.S., and premiums are set based on your location and how risky your business
is. For more on workers’ compensation insurance, see this Insurance
Information Institute guide.
5. Specialist Insurance Policies
So far in this tutorial, we’ve focused on the most common
types of business insurance, the ones that most companies will need. But there
are also many different policies that deal with more specialized cases, which
may be useful for particular types of companies.
For example, if you hold a lot of valuable customer data,
you may want to take out a data breach
coverage policy. That way, you’re protected against legal costs or other
expenses if the data you’re holding is stolen or accidentally released.
If you’re running a small business from your home, you may
need a special endorsement to your homeowner’s policy, or a specific in-home
business insurance policy. Many homeowners policies exclude losses
resulting from business activities, and even if they don’t, the policy limits
may be too low.
And there are policies tailored for particular types of
business. If you run a farm, for example, you could take out crop insurance to
protect you in case of bad weather, insect infestation or other disasters.
For all of these specialist insurance policies, it’s
important to read the wording of your broader insurance policies first, to make
sure you’re not duplicating coverage. There’s no sense paying for a specific
data breach coverage policy, for example, if data breaches were already covered
under your general liability policy. But if those things are excluded, it’s
worth taking out extra coverage in areas where you’re at risk.
Putting It Together
In this final tutorial in our risk management series, you’ve
learned about the main types of business insurance, how they work,
and how they can help you protect your business. The next step, of course, is
to decide on which policies you need and how much coverage you need, and to
contact insurance companies and agents for some quotes.
You may find offerings where several of the options we’ve
talked about are rolled together into a general “business owner’s insurance”
policy. These general policies can be very useful, but just make sure that you
know exactly what’s covered and what’s not; don’t assume that this single
policy will automatically give you all the protection you need.
As we saw in the earlier tutorial on effective
risk management strategies, insurance is just one way of managing risk in
your business. In that tutorial, you learned about the other strategies
available to you, and saw how you could put together a comprehensive risk
management plan to deal with any eventuality.
In the earlier parts of the series, we laid the groundwork
by covering the main
types of risk a business can face, and how to measure
risk in your business. If you’ve finished the whole series, you now know
how to identify all the risks your business faces, prioritize them based on
likelihood and impact, construct a solid risk management plan, and start taking
action to manage each individual risk.
If you need a refresher on any of those lessons, you can
refer back to the overall series page, Managing
Risk in Your Business. Otherwise, you’re ready to move forward and start
actively planning for the worst outcomes. You can never foresee every single
problem, of course, but with a well-constructed plan that you regularly review
and update, you’ll be better prepared than many of your competitors to deal
with any curveballs that come your way.