It can be rewarding for business owners to watch their establishments flourish over time. Such success makes all the hard work that goes into running a business worthwhile. Nevertheless, as businesses grow and evolve, their commercial insurance needs and risk management considerations will follow suit. After all, many scenarios can give businesses reason to revise their business insurance coverage throughout the years, whether due to expansion, property updates, workforce adjustments or industry-specific changes.
Some circumstances will require businesses to do more than just increase their existing policy limits upon renewal. They may need to secure new or additional forms of coverage. Yet, many business owners don’t take the time to revise their insurance selections when these changes occur, thus resulting in coverage gaps. In fact, an estimated 75% of U.S. businesses are underinsured by 40% or more.1
With this in mind, it’s critical that businesses ask the question, what types of business insurance do I need? Failing to do so can lead to elevated exposures and financial concerns when the unexpected happens. Here are some best practices to help businesses successfully navigate commercial insurance coverage revisions over time.
Before making insurance adjustments, it’s important for businesses to understand how the coverage selection process begins. Generally speaking, most business owners are mindful of costs when opening their establishments and are almost constantly busy maintaining smooth operations. This means that new businesses often can’t allocate significant time toward making their initial risk management programs and selecting insurance solutions.
As a result, these businesses usually uphold more informal risk management efforts, focus on securing any required coverage and decline additional insurance offerings. Specifically, many businesses start with a business owners policy (BOP). What is a business owners policy? A BOP is a bundled insurance offering that provides multiple essential policies—including commercial property coverage, general liability coverage, equipment breakdown coverage and business income coverage—within a single package.2
Businesses are typically eligible for BOPs if they have fewer than 100 employees and generate less than $5 million in revenue.3 These packages are commonly utilized among owners of small- and medium-sized businesses who are looking to fulfill their coverage needs in one place and at an affordable price. However, remember that workers’ compensation insurance—required by most states for any business that hires employees—is not included within a BOP.4
Knowing when to make insurance adjustments
Some businesses may be able to remain protected under a BOP throughout their lifetimes. However, businesses that encounter expansion during their first few years of opening are likely to outgrow these packages at a certain point. Specifically, businesses can no longer utilize BOPs after surpassing the aforementioned eligibility requirements.
“Businesses have to recognize that when they reach a certain threshold, their insurance strategy may need to change. As businesses grow, expand and hire more people, they need to get out of the mentality of being so cost-conscious with their coverage and realize the importance of being more proactive in managing their risks.” – Jack Blair, Nottingham Insurance
As businesses start bringing in higher profits, maintaining financial stability and reaching greater levels of success, it will become increasingly important for them to prioritize effective risk management procedures and safeguard their growing assets with proper commercial coverage. Even if businesses are still eligible for BOPs at this stage, they are likely to need additional, customized forms of insurance to protect against new exposures. In particular, businesses should review their coverage needs when:
- Hiring employees—Most states require businesses to carry workers’ compensation insurance once they hire their first employee. Depending on where the businesses are located, they may be subject to further workers’ compensation requirements. Upon hiring more employees or developing a larger workforce, businesses should review all applicable standards and update their workers’ compensation coverage as needed.5 Also, as businesses hire more employees, they should seriously consider securing employment practices liability insurance (EPLI). EPLI can provide protection against the resulting expenses if businesses experience employment-related allegations—such as wrongful termination, harassment and discrimination, among others.6
- Conducting property renovations—When businesses make changes to their commercial properties—whether this entails adding extra space, installing new equipment or updating certain structural features—their associated property insurance policies must reflect those changes. Seeing as such renovations can increase overall property value, additional coverage and risk transfer considerations for property owners may be necessary to maintain full protection against potential losses.
- Moving to or adding another location—In some cases, businesses may decide to relocate to new, larger properties as they grow. While doing so can certainly benefit operational success, a different property will require updated commercial property insurance coverage. The size and location of the new commercial property will determine how much extra coverage is needed. Such policy adjustments are also vital for businesses that expand into multiple commercial properties.
- Adding vehicles—Although utilizing vehicles can help businesses bolster their operational efficiency, owning a commercial fleet—whether it’s one car or 100 trucks—poses numerous exposures that need to be insured. Businesses should establish a driver safety program and secure commercial auto insurance when they purchase their first vehicle to protect against the costly consequences that often accompany incidents on the road. This coverage should be updated whenever a new vehicle is added.7
- Working with third parties—If businesses are encountering greater customer demand, they may decide to hire subcontractors or create new agreements with suppliers to help them keep up. In these cases, businesses should review the legal implications of working with additional parties and determine whether further liability coverage and/or contractual risk transfer is necessary to minimize their exposures.
- Offering different products or services—After experiencing success with their current offerings, businesses may introduce new products or services to continue boosting their profits. When doing so, businesses should consult their insurance agent to determine if these added products or services require policy adjustments or specialized liability coverage.
- Implementing digital operations—As businesses flourish, they may secure new workplace technology or digitize certain functions to promote further growth. This may include utilizing electronic payment features, purchasing more advanced operational devices, leveraging digital banking options or engaging in e-commerce. While digitizing operations can be beneficial, it also comes with additional cyber exposures—thus leaving businesses at a higher risk of being targeted by cybercriminals. Therefore, businesses should enhance their cybersecurity measures and consider obtaining cyber liability insurance for protection against cyber-related losses.8
- Forming a board of directors—Lastly, businesses may implement a trusted board of directors to help manage their expanding operations. Businesses should secure adequate directors and officers (D&O) coverage to protect these individuals from possible D&O liability concerns.9
In addition to the importance of making coverage updates during periods of growth, it is equally vital for businesses to revise their insurance selections when the opposite occurs. Businesses should inform their insurers when shrinking their workforces, downsizing to smaller properties and discontinuing certain products or services to ensure their coverage can be adjusted accordingly. It is also crucial for businesses to promptly update their commercial policies with the correct named insureds after key individuals leave the company, pass away or transfer ownership to someone else.
Utilizing the right resources
Finally, businesses should keep in mind that their coverage needs will vary based on their industry. To accommodate sector-specific exposures, some industries have different insurance requirements and specialized coverage offerings. There may also be certain growth milestones in specific sectors that businesses should consider when assessing their insurance needs. For example, a restaurant may want to purchase specialty coverage to protect against potential food spoilage losses after expanding its on-site inventory capabilities.10
“Every industry’s insurance needs are different. It’s important for businesses to focus on benchmarking within their industry and identifying where those coverage growth points and plateaus are so they can make those changes and adapt.” – Jack Blair, Nottingham Insurance
To better understand their current and future sector-specific insurance needs, businesses should refer to available resources from their respective trade associations and industry groups. Apart from these resources, businesses should work with an experienced safety and risk management professional and qualified insurance professional, such as an independent agent or broker, for continued coverage assistance. These professionals should possess in-depth industry knowledge and utilize their expertise to navigate insurance revision processes successfully. Also, businesses should be sure to network with experienced business owners from their particular sector for tailored guidance and coverage best practices.
Overall, maintaining adequate commercial insurance coverage is a constant effort. Although it can seem complicated to make these policy changes and additions over time, it’s well worth it for businesses to ensure complete protection amid each stage of growth and to prosper for years to come.
Nationwide is providing this information as part of its Business Solutions Center website content and e-newsletter. The information included on this e-newsletter and the Business Solutions Center website is designed for informational purposes only. It is not legal, tax, financial, or any other sort of advice; nor is it a substitute for such advice. The information may not apply to your specific situation. We have tried to make sure the information is accurate, but it could be outdated or even inaccurate, in parts. It is the reader's responsibility to comply with any applicable local, state, or federal regulations, and to make their own decisions about how to operate their business. Nationwide Mutual Insurance Company, its affiliates, and their employees make no warranties about the information, no guarantee of results, and assume no liability in connection with the information provided.