You have a lot riding on your small business. You have invested your money, time, and sweat equity to build a company that will be successful for years to come. Even if you make all the right business moves, unexpected costs can arise at any time. Accidents, natural disasters, data breaches, and other unexpected occurrences are an ever-present, yet hard to predict, risk to business owners. Small business insurance provides additional protection for your enterprise and could be the difference between a bump in the road and a door-closing catastrophe.

Small Business Insurance Can Increase Resilience

Businesses that were operating during the COVID-19 pandemic need no reminder of how a disaster can strike out of nowhere and inflict a potentially fatal blow.

Many small businesses survive on razor-thin margins. A typical business with more than $10,000 in monthly expenses has only about two weeks of cash on hand. This financial fragility makes small businesses susceptible to any unexpected change from business as usual.

Although many businesses were beginning to bounce back from pandemic shutdowns and restrictions, they are now grappling with new challenges caused by price increases and a tight labor market. At a time when there are significant known risks to business, the threat of the unknown looms even larger. For example, an unexpected disaster or cyberattack could result in significant loss that threatens a business’s continued existence:

• The Federal Emergency Management Agency (FEMA) claims that an estimated 40 percent of businesses will not reopen after a disaster such as a hurricane. Another 25 percent of businesses fail within a year of a disaster.
• By some estimates, at least 25 percent of businesses that close in the wake of a common disaster (e.g., a structure fire) do not reopen.^[1]
• More than half of small businesses that suffer a data breach or cyberattack go out of business within six months.^[2]

Common Types of Business Insurance

Is your business prepared for an unexpected cost or operational interruption? It very well may not be if you do not have adequate insurance. While most types of business insurance are optional and simply provide an extra layer of protection, others may be required by law, including: workers’ compensation; unemployment, disability; professional malpractice; auto insurance; among others.  In addition to federal and state laws, often cities and counties have their own requirements.

There are many factors which may impact what insurance coverage is most beneficial to your business, including whether the business:

• has employees
• operates out of a physical location
• owns/leases valuable equipment
• operates in a dangerous location or entails dangerous work
• provides in-person products or services
• performs contract work (contractors may require specific insurance policies)
• operates in a high risk industry
• rents its workspace
• plans to apply for a business loan

Given the complexity of insurance types and governmental requirements at multiple levels, Businesses that are just starting up should consult with a local business attorney and insurance professional to ensure that they have structured their business operations properly and purchased all legally required insurance.  Businesses who have operated for many years should meet regularly with their lawyer and insurance professionals to ensure their corporate structure, operating agreements and insurance coverage are adequate for the risks inherent in operating their business.

At a minimum, business owners should regularly consider each of these common types of business insurance:

• General liability Insurance. This type of insurance protects businesses against loss resulting from injuries to a person or their possessions, for example, bodily injury, property damage, and reputational harm. It is a must-have for in-person businesses and is highly recommended for those that advertise or own intellectual property because it generally covers judgments arising from libel, slander, or copyright infringement. General liability insurance may be required in some industries or if you rent a commercial space.
• Malpractice insurance. Malpractice insurance, or professional liability insurance, is often necessary for physicians, lawyers, and other professional service providers. Malpractice insurance protects the business if a professional is found to be negligent in delivering their services. Professional liability insurance can cover lawsuit damages, legal defense costs, loss of earnings, and more.
• Property insurance. Commercial property insurance covers damage that occurs to an owned or rented building and the equipment inside it. It usually covers damage from fire, smoke, wind, hail, vandalism, and civil disturbances but not from earthquakes or floods.
• Home business insurance. A growing number of small businesses are started at home, and many established businesses continue to operate out of the home. Home-based businesses are usually not covered under a homeowner’s policy. Home-based business insurance solutions, such as general liability insurance or an endorsement, can be added to a homeowner’s policy.
• Business interruption insurance. Also known as business income insurance, this type of insurance covers costs related to an interruption of the business’s operations resulting from property damage. Business interruption insurance pays for losses like lost income, rent payments, employee payroll, and tax and loan payments. It supplements property insurance, which pays for physical damage to the building but not the secondary costs of a temporary shutdown.
• Data breach insurance. The internet opens new doors for small businesses, but those doors can sometimes admit unwelcome visitors. Small businesses are targeted in cyberattacks with alarming frequency. And these attacks cause billions of dollars in damages per year.^[3] Data breach insurance can cover costs associated with a cyberattack, including the costs of sending out notices, hiring a PR firm, offering credit monitoring services to affected customers, replacing lost income, and even paying ransoms.
• Other Types. Additional types of insurance that may be appropriate for a business include: Commercial flood, employment practices liability insurance; management liability insurance; commercial auto insurance; and a commercial umbrella policy.

Inadequate Business Insurance Coverage – Owners’ Assets May Be at Risk Too

Opening a business is inherently risky. There is no guarantee that things will go as planned. The thrill of striking out on your own, with few assurances, might be part of why you decided to open your own business.  But there is a difference between taking calculated risks and recklessness. Not having the right insurance coverage falls in the second category. While insurance cannot insulate you from all risk, it is a fail-safe that most businesses cannot afford to go without.

An inadequately insured business can not only lead to business loss but can also subject a business’ owners to liability as well.  When a business causes harm and is inadequately insured and otherwise lacks the capital to compensate the harmed party, then the harmed party may very well look to the business’ owners to satisfy its claim.  This is called piercing the corporate veil.  One of the factors a court may consider is whether a business was adequately capitalized and insured for risks common to the business. For example, if a business provides services which require its employees to drive and the business fails to purchase commercial auto insurance (or only buys the bare minimum), it is leaving itself open to a piercing claim when, inevitably, a loss occurs due to an auto accident.

Bottom Line

The bottom line, a business – whether new or existing – should: 1) regularly evaluate its operations; 2) have a firm understanding of the risks inherent in the business; 3) find out what insurance is available to insure against these inherent risks; and 4) follow through by purchasing adequate insurance to cover these inherent risks.  If a business is inadequately capitalized and insured not only are the business assets at risk, but the business owners’ assets may be at risk too.

Call Us for Help with Your Business’s Legal Needs

We cannot prevent natural disasters or other unexpected challenges, but we can assist you in optimally structuring and maintaining your business to protect it against legal risks. Nielsen Law PLLC provides family-focused estate and business planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area.  For more information, and to learn about our firm, please contact us. We look forward to working with you.

[1] Diana Farrell & Chris Wheat, Bend, Don’t Break: Small Business Financial Resilience after Hurricanes Harvey and Irma, JPMorgan Chase Inst. (Feb. 2018), https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-bend-dont-break.pdf.

[2] Robert Johnson III, 60 Percent of Small Companies Close within 6 Months of Being Hacked, Cybercrime Mag. (Jan. 2, 2019), https://cybersecurityventures.com/60-percent-of-small-companies-close-within-6-months-of-being-hacked/.

[3] Maddie Shepherd, 30 Surprising Small Business Cyber Security Statistics, Fundera (Jan. 23, 2023), https://www.fundera.com/resources/small-business-cyber-security-statistics.