Knowledge Base - Cost Controls
Managing Insurance Costs for Small Companies
by David Gilroy, Scale Finance
Every business, large or small, needs to be covered by various forms of insurance; however, it’s often misconceived that small companies do not face the same exposures and risks, and therefore do not generally require certain forms of insurance. This is not necessarily true. In fact, a small company will have a far more difficult time rebounding from an unfortunate event (and insurance coverage blunder) than a large company will.One approach for small companies is to consider different kinds of insurance, with different limitations, specific to the nature of the risks faced by the business and purchase what is really needed at any particular point in time.
A carefully considered focus on identifying and securing the right level of the right insurance coverage is critical. Of course, a well-versed insurance agent or broker can help CEOs navigate the turbulent seas of insurance options and considerations that a small company needs to consider, which include:
- General Liability Insurance – covers legal debacles associated with injuries, accidents, and other claims which result in payments made by the company for bodily injury, medical expenses, property damage, slander, lawsuits, etc.
- Product Liability Insurance – covers financial loss should a product manufactured by the company defect, bringing the company under safety lawsuit fire.
- Professional Liability Insurance – (also known as Errors & Omissions Insurance) covers financial loss from employee error, malpractice, and negligence; used by businesses that offer a personal service, rather than a product. Physicians, for example, are required by law in some states to carry some form of malpractice insurance.
- Commercial Property Insurance – covers anything and everything related to the company’s property assets, including loss and damage in fires, storms, and civil disobedience; these policies can cover everything from lost income due to business disruption to contents theft or damage.
Costs Associated with Small Business Insurance
- Premiums: The cost a business must pay in order to be covered by the policy, typically monthly. Premium costs vary from insurer to insurer and fluctuate from policy to policy. Some factors that will affect the cost of the premium include: coverage amount, deductible amount, and associated risks.
- Deductibles: Cost out-of-pocket that a business must pay before the insurance company will step in and pay the lion’s share, once a claim is filed. For example, if a small business were to have $10,000 worth of inventory stolen from their facility, the insurance company would only take care of $9,000, with a $1,000 deductible paid for by the small business.
- Losses Exceeding Benefits: Cost out-of-pocket that a business must absorb should a claim, or loss, exceed the benefits allotted to them by the insurance company. For example, if a small business losses a lawsuit for $6M and their policy only covers up to $5M, the business is responsible for coming up with the outstanding $1M.
- Compliance Costs: Cost out-of-pocket that a small business may have to take on just to be able to receive coverage from an insurance company. For example, if a company’s location is hazardous in any form, to where the risk of customers or employees sustaining injuries is too high, the insurance company may require a solution before they’d be willing to insure.
Insurance Cost-Management Strategies for Small Companies
- Regularly Review All Policies: There are two reasons to review and adjust the insurance policies held by your small companies on a regular basis. For one, you want to always be certain that the needs of your business are being met and fully covered. As a company grows, its assets change and become bigger; you want to make sure everything gets covered. Second, it’s also important to make sure that you’re notover paying due to having insurance coverage that the company doesn’t need anymore.
- Keep Insurance Expenditures Low: Every time your company files an insurance claim, you become more of a risk to the insurance company and as a result, costs will go up. Just because your company has insurance, doesn’t mean that risks shouldn’t be avoided as much as possible. By doing so, you’ll keep the insurance costs down for longer periods of time, without frequent hikes. Implementing company-wide risk-management efforts can be very helpful here.
- Modify Insurance Policy Options: Depending on the insurance policy, there are certain modifications that can be made in order to lower the monthly premiums. For example, you can opt to pay a higher deductible at the time of claim, which will lower the premiums on a monthly basis. Sometimes it’s better to only pay the extra when something happens, instead of preemptively, when it may never. Also, and this is where reviewing your policies frequently makes a difference, you can lower premiums by lowering your coverage amounts – if you no longer need certain aspects of coverage, remove them from the policy and lower your premiums.