Confused about why small businesses don’t with small premiums?
Why is business insurance so expensive? Allow us to untangle it for you.
There are few things more exciting than a new business. 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 is business insurance so expensive?”
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 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.
More Risk Exposure
One of the main reasons why business insurance is so expensive is that businesses carry a lot of risk.
Your business sees a lot more people than your home does. All of those customers, vendors, and employees all mean more opportunities for a claim.
When you purchase an insurance policy, it’s not the same as buying a product off the shelf (that’s a longstanding myth!). Rather, insurance is a contract where both parties agree to shoulder a certain amount of the financial risk in the event of a loss.
And when you do the math, 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 legal fees as well. 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.
For the most part, higher risk = higher premiums.
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. That’s just how insurance works.
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).
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 hardware store and breaks her wrist. She turns to your General Liability coverage 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, Betty may not be satisfied with medical care alone. She might even 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 than personal policies? It usually covers more!
Commercial insurance policies typically cover more situations and have higher limits than personal policies. For example, a commercial auto insurance policy protects your business assets if an injured third-party sues your company (something your personal policy won’t do).
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.
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 Insurance
- Business Interruption
- Cyber Risk / Data Breach
- Error & Omissions
- Workers’ Compensation
- Employment Practices Liability
- Commercial Auto Insurance
How To Reduce Your Small Business Insurance Cost
So, what can small business owners do to lower their insurance rates?
For starters, use an independent insurance agent to get advice and multiple quotes based on your unique risk profile and budget.
Because they aren’t limited to a single insurance company, independent agents are able to give you more choice when it comes to coverage, limits, and insurance rates.
Second, to lower your insurance premiums, consider higher deductibles. By assuming a bit more of the financial risk, you free the insurance carriers up to offer you lower rates.
Finally, don’t use the average cost of commercial insurance to set your insurance budget.
Averages don’t tell you what industry those businesses are in, the number of employees they have, where they’re located, what policies they have, what those policy limits are, their claims history, or even their credit situation. As a result, they are too inaccurate to give you an idea of what to expect.
Your budget should be an important piece of the puzzle, but it should never take precedence over good coverage.
Here For Your Insurance Needs
Getting a new business off the ground is challenging enough. You shouldn’t keep yourself up at night asking, “Why is business insurance so expensive?”
Understanding the ins and outs of commercial insurance might be difficult for you, but at Harry Levine Insurance, it’s what we do best! Whether you’re looking for coverage for a new business or it’s time to renew your policy, our friendly agents can help.