Friday, November 11, 2016

How to Avoid the Financial Mistake 40% of Small Businesses Are Making

In the next decade, you have a 40% chance of having the kind of incident at your business that would result in an insurance claim, according to a study conducted by insurance carrier The Hartford last year.

And if you’re hit by one of the 10 most common such incidents, it’ll set you back somewhere between $8,000 and $50,000—not exactly the kind of pocket change most business owners have in their emergency funds.

These numbers are troubling enough—almost half of the nation’s small business owners will have a major, unexpected financial event in the next decade—but what’s really concerning is that an equal number, 40%have no insurance at all. For home-based businesses, the total is even higher: as many as 60% of those who work out of their homes of those who work out of their homes don’t carry commercial insurance.

So what does this mean? If you’re among the millions of business owners operating without insurance, it could translate to tens of thousands of dollars in bills you weren’t planning for.

But… I Didn’t Know I Needed Insurance!

Taken at face value, the numbers above are pretty startling. But there are good reasons the nation’s small businesses are skipping insurance coverage.

For example:

They don’t think of themselves as businesses.

A lot of small businesses start as side gigs or freelance assignments that build up over time.

Think about it: you’re working full time, someone likes what you’re doing and asks if you’d do something on the side, you see an opportunity to earn a little extra scratch, and you say yes. For most people, the next question is how to find the time to fit everything in, not where to go to make sure they’ve got liability protection in case something goes wrong.

But from a legal (and tax) perspective, you’re a business as soon as you accept money from your first client. That means you’re exposed to all the liabilities that a “regular” business is.

They think they’re covered by their homeowner’s insurance.

It’s not that surprising that home-based businesses are among the least insured in the country. A lot of business owners assume that their homeowner’s or renter’s insurance will cover a business based in their home.

But in reality, most homeowner’s and renter’s policies specifically exclude coverage for business-related work done in the home.

They think they’re covered by the company they’re contracting with.

Uber and Lyft are a great example. There’s been plenty in the news about the insurance they provide—and the gaps they leave—for drivers. But what many ride-hailing drivers don’t realize is that their personal auto insurance won’t cover them for accidents that happen while they’re driving for pay.

And while insurance provided by the company may cover legal costs if an injured passenger or pedestrian, it won’t cover damage to the driver’s car. Yikes.

(The same principle applies with other contractor-company relationships, too—it’s never wise to assume you’re covered by the insurance of a business you’ve got a 1099 with.)

How Can You Figure Out Which Policies You Need?

The good news? The underinsurance problem is an easy one to solve.

Most business owners know about their health insurance requirements, but knowledge of commercial insurance is much less common.

Here’s a quick overview of the policies that small businesses most commonly need:

  1. General Liability Insurance: Covers customer lawsuits over injuries (think slip-and-fall injuries on your premises), plus immediate medical expenses if someone gets hurt.
  2. Business Owner’s Policy: Bundles general liability and commercial property insurance to cover basic liability exposures, plus your furniture and equipment.
  3. Professional Liability Insurance: Covers customer lawsuits over the work you deliver (think faulty software or lackluster results on a marketing campaign you designed). Typically for those in “service” industries.
  4. Workers’ Compensation: Legally-mandated coverage in most states that covers workplace injuries and illnesses for employees.
  5. Cyber Liability Insurance: Covers costs related to hacking incidents and data breaches. Usually a good idea if you accept credit cards or offer certain IT services.

If you’d rather not puzzle over which policies match your business needs, the Policy Buddy tool (created by small business insurance agency Insureon) can help you figure it out in about two minutes.

The post How to Avoid the Financial Mistake 40% of Small Businesses Are Making appeared first on Fundera Ledger.

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