“I have a small business…so why does my insurance cost so much?”
Why does small business insurance cost so much? Allow us to untangle it for you.
There are few things more exciting than a business startup. Picking your company name, designing a logo, signing a lease, hiring your first employee, selling your first widget…you’re ready to hustle, baby!
Something that’s probably not so exciting? The commercial insurance quote.
“Wait a minute,” you say. “I have a small business. Why does small business insurance cost SO much?”
There are actually a LOT of different ways to answer that question!
In this article, we’ll try to give you a better understanding of why small business insurance is priced the way that it is, why you shouldn’t base your decisions purely on cost, and a simple way that you can make sure you’re getting the most out of every dollar you spend on your insurance.
What Does Small Business Insurance Cost?
This is impossible to answer through a blog post.
Even knowing the “average” small business insurance cost won’t give you enough information to make an educated decision for you. Averages don’t give you background on what type of industry those business owners are in, how many employees they have, where they’re located, what policies they have, what those policy’s limits are, their prior claims, or even their credit situation.
The best way to find out your exact small business insurance cost is to get a quote from an independent insurance agent that’s based on your business and your unique risk profile.
There are a lot of factors that go into calculating your business insurance premiums; a professional insurance agent (one that’s not tied to a specific insurance company) will be your best bet at capturing multiple quotes so that you have more say over your insurance coverage.
With that in mind, here are some policies you should ask your agent about (if s/he hasn’t already mentioned them):
- Business Owner’s Policy (BOP)
- Property Damage / Liability
- General Liability
- Business Interruption
- Cyber Risk / Data Breach
- Error & Omissions
- Workers’ Compensation
- Employment Practices Liability
- Commercial Auto
This is all good business advice but it doesn’t help you understand why small business insurance costs what it does.
Don’t forget that your thoughts on price are closely related to how much value you believe you are getting. If your agent is just throwing numbers at you, get a new one.
Make sure you understand:
- WHO your agent is,
- WHAT insurance protections they recommend,
- WHEN you might need certain protections/what claims could happen to you,
- WHERE your risk is coming from/what causes claims you might have
- WHY you do or don’t need certain insurance products.
Then you can feel good about your premium dollars instead of just viewing them as cash thrown at a pile of paper you’ll likely never read.
Overall, commercial insurance policies are more expensive than their personal insurance counterparts. Why is that?
More Risk Exposure
One of the main reasons that business insurance costs more than, say, your homeowner’s insurance, is that your business carries more risk.
Your business sees a lot more people than your home does. All of those customers, vendors, and employees all mean more exposure to risk.
When you purchase an insurance policy, it’s not the same as buying a product off the shelf (that’s a longstanding myth!). It’s actually a contract, where both parties agree to shoulder a certain amount of the financial risk in the event of a loss.
The insurance company has a lot more at stake than you do. Even if you pay $4,000 in premiums over the course of a year, you could experience a $50,000 loss at any point, and the insurance company will have to fulfill their promise to reimburse you (minus your deductible) or an injured third-party.
Don’t forget that they’ll also pick up the attorney and court costs on top of that hypothetical $50,000 in covered claims. They might pay someone $50,000 for a slip and fall in your waiting room, but it might actually cost them $150,000 to settle. Without proper Business Insurance, that money would be out-of-pocket.
The more likely you are to experience a loss (i.e. the higher your risk), the more your insurance premiums will be. Things like increased foot traffic, more square footage, and higher payroll & gross sales are GREAT! They are also indicators that you have more activity, and more activity means more risk. (Ever hear the phrase, “It’s the cost of doing business?”)
Your risk profile is—for all intents and purposes—theoretical. But it’s based on a very real number: actual claims across millions of like businesses.
Whether they are fraudulent or legitimate, more claims equal more payouts. And when insurance companies have to pay out, they need to take more in.
This isn’t as greedy as it sounds. An insurance company’s entire business model is built on being able to provide their policyholders with financial compensation after a covered loss. If they ran out of money, they wouldn’t be able to pay future claims.
Over time, this leads to higher premiums for everyone (not just the ones who filed a claim).
There are no two ways about it: we live in a very litigious society.
When an experience with a company goes wrong—bad or misunderstood advice, defective products, a slip and fall—many customers’ first instinct is to sue.
Say that Betty trips over a dolly inside your Mom-and-Pop hardware store and breaks her wrist. She turns to your General Liability policy to cover her medical bills. A few weeks later, her cast comes off and she’s none the worse for wear.
A few decades ago, this scenario would be fairly plausible. Nowadays (the spring of 2020), Betty wouldn’t be satisfied with medical care alone. She would use her recovery time to contact a lawyer and file a lawsuit against you.
You now have to turn to that same General Liability policy to cover the cost of your own legal representative (not to mention any damages you might have to hand over to Betty if she wins).
Regardless of anyone’s feelings on the subject, this is the business landscape in the 21st century. And because businesses typically see more people than homes do, they’re also hit with a lot more lawsuits.
Lawsuits are costly, even the ones that are eventually thrown out of court. The person bringing a questionable suit might not get a dollar, but their attorney AND YOURS certainly will. Insurance doesn’t just pay damages. It covers legal fees, too.
Another reason small business insurance costs more that personal policies? It usually covers more!
Commercial insurance policies typically cover more situations and have higher policy limits than personal policies. For example, a commercial auto policy protects your business assets if an injured third-party sues your company (something your personal policy won’t do).
For example, Business Auto often has $1 million policy limits available, while most personal insurance tops out at $500,000. You’d have to buy an additional policy like a Personal Umbrella to get up to $1 million for personal coverage purposes!
It all comes down to your needs as a business owner. Your higher risk profile may come with an increase in premiums, but it also (usually) means higher limits and coverage for a wider range of scenarios.
It’s like paying twice as much for a box of cereal but getting twice the cereal as well.
In fact, when you look at what you’re getting out of it, you’ll probably find that your small business insurance doesn’t cost as much as you thought. Remember to keep an eye to value and work with your agent to make sure you understand your policies.
At Harry Levine Insurance, we always urge our clients to shop based on coverage first. Your budget should be an important piece of the puzzle, but it should never take precedence over coverage. Basing your decisions solely on cost will result in higher deductibles, lower limits, and more exclusions (things that aren’t covered under your policy). You know the old dollar wise and penny silly saying, right?
How To Reduce Your Small Business Insurance Cost
While commercial insurance does typically cost more than personal policies, there is one easy way to reduce your small business insurance cost: call an independent insurance agent.
Rather than shopping around yourself and calling agent after agent, an independent insurance agent acts as a one-stop shop to offer multiple quotes (and advice) based on your unique risk profile and budget.
In fact, calling every agent that pops up on your search engine actually works against you.
Many agents have a lot of overlap in the companies they can get for you. In commercial insurance, companies often “block the market.” That means that if three agents ask for a quote from XYZ Insurance, only the first one in will get it; the other two will be blocked.
When you call 10 agents and they all start getting “blocked,” it becomes impossible to do their best job for you. Many just give up.
We recommend calling no more than three agents when you’re first starting up. Pick the ONE Independent Insurance Agent who you believe you can work well with, grow with, and consider to be a part of your team of advisors (along with your banker, accountant, realtor, and attorney).
It’s perfectly OK to ask your agent to shop the market for you if things change. It’s their job to do that or to counsel you that your current policies are the best for you. If you develop a long and trustworthy relationship with your agent you’ll have a true advocate in your corner!
Getting a business startup off the ground is challenging enough. But finding the best small business insurance for you doesn’t have to be.