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Using Personal Insurance to Protect Your Small Business Is Like Not Having Insurance at All

The worst way to learn about your insurance policy is when they explain why your claim has been denied.

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The concept of insurance is easy enough to understand. You make payments now so you can receive compensation in the future if an adverse event occurs. We all know we need insurance, yet 75 percent of businesses in the United States are underinsured by 40 percent or more, according to Marshall & Swift/Boeckh. What's more, 40 percent of businesses never reopen after a disaster, based on data from SCORE.

Emilija Manevska | Getty Images

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So why aren't small-business owners getting proper insurance? Is it because the small-business products are difficult to understand? Do I need general liability, professional liability or errors and omissions? Or is it because the value is often unrealized? Will I have a significant hazard? Will the product I bought cover that hazard?

For whatever reason, we know small businesses are woefully unprotected from hazards and catastrophes, should they take place. Based on a survey from Insureon, at least one in three small-business owners experienced an event in the last 12 months that could have led to an insurance claim. Clearly, the likelihood that small-business owners need insurance is quite high.

How SMBs think about insurance.

According to new research by FreshBooks that surveyed 1,100 small-business owners in the U.S., 63 percent say they're generally aware of the risks to their business. These risks often include theft, getting sued, car accidents and contract disputes.

A full 60 percent of small-business owners say they have insurance. Yet more than 40 percent believe their personal insurance is sufficient coverage -- even for business claims. Putting it all together, more than 80 percent of small-business owners don't have small-business insurance or rely solely on their personal insurance for business protection.

Common ways SMBs are at risk.

Among the 1,100 small-business owners surveyed, below are the top 10 most common ways in which small-business owners are exposed to business risks.

  • 84 percent have a home office
  • 64 percent use a personal vehicle for work purposes
  • 53 percent spend time on client premises
  • 50 percent keep sensitive/personal information on clients
  • 37 percent have inventory/supplies
  • 36 percent have work that is publicly associated with a client's business or brand
  • 29 percent own specialized equipment
  • 22 percent have dedicated office space
  • 20 percent have employees on payroll
  • 7 percent operate commercial vehicles

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For example, if you have a home office, it's important to recognize that a typical homeowner's policy contains many business-related exclusions and limitations, such as damage to business data or loss of income resulting from a shutdown of the business.

If you use a personal vehicle for work purposes, such as hauling tools and equipment, you won't be covered by personal auto insurance. The insurance industry is catching up to many new types of jobs -- a growing number of insurers now offer ridesharing insurance to Uber and Lyft drivers.

Another example: Small businesses account for 71 percent of all cyber attacks, yet 42 percent of small-business owners admit they don't know what cyber liability insurance is. Given the various small-business risks, it's no surprise that less than half say they're confident that they're properly insured.

The cost of small-business protection.

The cost of small-business insurance is less than you might think. This is the breakdown of cost for small-business owners who purchase business insurance:

  • More than half spend less than $1,000 annually
  • About a quarter spend between $1,000 and $2,000 annually
  • Just under a quarter spend more than $2,000 annually

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Additionally, expense claims typically exceed $5,000 to $10,000, which makes the cost-to-benefit ratio attractive.

As insurance becomes increasingly accessible through online channels, we should expect to see more small-business owners take advantage of relevant insurance products. Perhaps the products themselves will be better designed for modern small businesses as well, including coverage specific to clients, projects and professions.

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