Risk management and
insurance are two of the most important considerations when operating in any business environment. They are even more important when considering the needs of a
small business. Risk management and insurance can be
costly but properly utilized they can also save a small businesses a lot of money and avoid many
headaches. One way to achieve a
competitive advantage is to spend less money than your competitors on administrative costs. This can be achieved through proper selection of risk management techniques and insurance.
In order to address these concerns, I spoke with Deborah Gant,
CPCU ARM CLU CFC. Mrs. Gant has been in the insurance field for many years and has seen the changes progress over the years. We spoke at length regarding the issues and types of insurance that most concern small business
owners and
managers. She stated that one of the most important things to remember when deciding on insurance is that each individual company is going to have very different needs according to the services and products they are providing. For instance, a small business that has company vehicles is going to need special liability insurance according to how the vehicles will be used. However, a company without company vehicles wouldn't need such a policy. For the purposes of my interview with Mrs. Gant I stayed on a track of questions related to a
consulting business. This seems to be a popular form of new venture and is also something that interests me personally. We discussed three main concerns for small businesses, which were
worker's compensation liability,
errors and omissions liability and
property insurance.
According to Mrs. Gant, one of the most important and one of the most expensive parts of insurance for a small business is worker's compensation liability. In the state of
Georgia, the state has mandated that any company with three or more employees obtain worker's compensation liability insurance. This is true for many other states. Illnesses and accidents related to work happen in all lines of work whether you are a consulting firm or a firm that provides blue-collar labor. Worker's compensation insurance will provide a small business the means to treat an employee in the case of an
injury or
illness that is a result of the work they perform. This is obviously an important issue because it is legally mandatory but it is also related to the
ethics of a small business. The law was created because an employer is ethically responsible to pay for injuries and illnesses acquired through work. Thus, worker's compensation insurance was created so that employers would not have to handle the expense of these injuries and illnesses. The small business essentially pays the insurance firm based on the
present value of future risks.
I enquired as to the cost of this insurance while speaking with Mrs. Gant. She explained several issues that affect the cost of worker's compensation insurance. One of the obvious factors is the number of employees. The most important factor, according to Mrs. Gant, is the nature of the work being done. Employees who are at higher risk for injury and illness as a result of work are going to result in a higher premium for the employer. However, this cost can somewhat be offset with appropriate safety measures so as to create as safe a working environment as possible. These
safety measures will reduce the cost of worker's compensation insurance for any small business but these measures are of utmost importance to high-risk employers. Mrs. Gant could not provide specific measures but did state that the cost of the insurance was far outweighed by the cost that would be occurred to finance the illnesses and injuries of employees (not to mention the high legal cost that would be imposed in fines).
Errors and omissions insurance, more commonly known as E & O, is akin to
malpractice insurance for surgeons. E & O insurance is primarily for businesses whose main purpose is to provide consultation and advice. Two of the largest groups that purchase E & O are actuary and web consultant firms. The primary purpose of E & O insurance is to provide protection to the policyholder in case of a
lawsuit or other legal recourse that is taken against the policyholder as a result of an error or omission in the course of business conducted under the pretense of a consultant position. In other words, if a consultant or company who provides consultants makes a mistake and it costs the customer money the customer may in turn bring suit against the consultant and consultant's company, in which case, the E & O insurance would handle the expense. Insurance companies themselves often have E & O insurance in case one of their agents makes a mistake in insuring a customer and the customer in turn seeks legal recourse.
Mrs. Gant stressed that E & O insurance was important for small business owners that are at risk for this sort of situation. Many types of small business won't require this type of coverage such as retail stores. However, Mrs. Gant explained that the cost of not having E & O could be so high that it can drive a small business into
bankruptcy. The courts can very sympathetic toward consumers and this can lead to very large settlements. In a case where a customer sues a small web consultant operation over such an offense, E & O insurance would pay the settlement and the company can continue to do business as usual. If the company does not have the insurance and has to enter bankruptcy it not only affects the assets of the business but also, depending on the structure of the business, affects the personal assets of the owners. Mrs. Gant feels that E & O insurance is far more valuable than the premiums that are paid to the insurance agency.
Another important insurance to consider when starting or running a small business is property insurance. Any property owned by the company needs to be protected against
theft,
fire, and other unforeseen problems. Mrs. Gant felt that this is important insurance but also explained that it is not always necessary. She explained that many times if a small business owner is the only employee of the company and works out of home then property insurance is not very useful. Property insurance provides much the same protection as homeowner's insurance. Thus, if a business owner has all of their business assets in their home, the assets are covered under the homeowner's policy. She also pointed out that even though double coverage sounds like a great way to collect extra money in the event of a loss, it is in fact illegal. Most insurance companies check and will not allow someone to collect twice on the same loss. Even if an individual is able to collect twice as a result of a home owner's and business property insurance policy, they can be heavily fined and serve
jail time if caught. The one instance in which double coverage can result in a positive outcome is if one of the policies does not cover the entire amount of the loss in which case the other policy may cover the excess. Mrs. Gant explained that this is rare and is more likely to occur when dealing with personal insurance.
This leads into one of the issues that Mrs. Gant also mentioned during the interview. She explained that often times insurance for small businesses can become costly because of the state of the
market. The concept of adverse selection often leads to higher prices. Adverse selection is the idea that people who need insurance immediately are more likely to purchase it thus increasing the amount of pay outs from the insurance company. In order to combat this, the insurance companies include wording in the statements such as waiting periods so as to reduce the effect that adverse selection has on the price of the insurance. This is how she illustrated that there are some situations in which a small business owner has no control over the cost of their insurance. She also emphasized that more business owners who operate in an ethically and legally responsible manner would lead to lower
premiums.
To conclude the interview I asked Mrs. Gant if she had any overall advice on purchasing insurance for a small business. She explained that one of the best things that a small business can do is look for a
comprehensive package plan. Many insurance companies offer package plans that are tailored to fit small businesses. There are many incentives for insurance companies to offer these packages to small business. These package deals are easy to rate. Mrs. Gant explained a simple version of how an insurance company rates their insurance policies. Due to the number of different policies that are included in the package and the fact that the package is easy to sell, the insurance agency can rate the package with a lower premium. This lower premium means that the small business owner will pay less overall for the package than if they attempted to purchase all of the policies separately. The one caution that Mrs. Gant offered was to carefully read through what is included in the package. One of the worst things that can happen to a small business is for the owners to find out the hard way that their comprehensive package doesn't cover a liability that they are facing. One of the major liabilities that she said was most likely not included in comprehensive packages was the E & O insurance.
Mrs. Gant's last
admonition was that all small businesses should practice risk management at some level. Risk management is important to protect the customers as well as the employees. Customers will respect a small business that is well prepared and it will help build a positive community perception, which is one of the ways that a small business can differentiate itself and get a competitive advantage. It is what she referred to as just "good business sense" to practice risk management techniques that allow the owners of the company to be prepared for the worst and minimize the consequences. She stated that even if they didn't purchase all of the insurance that pertained to their industry, they should at least purchase minimal insurance to at least protect their employees and stakeholders. If an owner wants to take chances and bite the bullet when it comes to the consequences that is their decision. However, it seems all too common that an owner takes chances and not only do they pay for their mistakes but the employees and stakeholders who rely on their judgment pay for the mistakes. The owner may not be rich, but often times the employees feel the
negative effects far more heavily than the owner.
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