Why don’t small businesses buy insurance?

With commercial bankruptcy filings on the rise, it’s “remarkable how many small businesses are underinsured,” says president

Why don’t small businesses buy insurance?

Insurance News

By Bethan Moorcraft

A fresh rash of store closings and commercial bankruptcy filings is expected to hit the US retail industry in 2018. Data released by Cushman & Wakefield suggests more than 12,000 stores could close in the coming year, up from roughly 9,000 in 2017.

It’s not just major retailers like Gap, Walgreens and Gymboree that could potentially file for bankruptcy in 2018. The American Bankruptcy Institute (ABI) has confirmed that businesses of all shapes and sizes are being forced to shut up shop, with commercial bankruptcy filings increasing by 26% last year.

Small businesses are the backbone of the US economy. A new joint poll from Insureon and Manta found that only 8% of the 1,200 small business owners questioned have ever filed for bankruptcy and 98% of respondents didn’t think they would need to file in the next six months.

Despite this positive small business confidence, the poll also revealed a distinct lack of key business insurance policies that could pay for lawsuits and incidents that could lead to bankruptcy. Only 28% of respondents have a business owner’s policy (bundle of general liability insurance commercial property insurance), and even fewer respondents reported carrying several other common small business insurance policies, like business interruption insurance (6%), workers’ compensation insurance (17%), and cyber insurance (2%).

“It’s remarkable how many small businesses are either uninsured or underinsured,” said Jeff Somers, president of Insureon. “Small business owners are literally pouring their blood, sweat, tears and hard-earned dollars into building their businesses, and yet many of them lack appropriate protection for the unlikely event that something does happen to their business.

“Attached to this protection gap is an interesting dynamic in which 98% of small business owners don’t believe a bankruptcy will hit them. However, when you look at ABI data from 2016 when almost 38,000 businesses in the US declared bankruptcy, you realize these business owners are perhaps overly optimistic about the risk. It is something that does and can happen – and there are appropriate steps you can take to protect against it.”

It typically costs $20,000 to settle a customer slip-and-fall injury, which is a difficult burden for a small business to expense alone - but a business owner’s policy can cover that. The commercial property insurance portion of the policy can help pay to replace or repair damaged or stolen business property, while the general liability coverage can help pay for lawsuits when business owners are sued over visitor injuries.

“The problem is, not all small businesses truly understand their insurance needs. There’s a lack of awareness and education, which insurers and brokers must try to resolve,” Somers told Insurance Business. “One reason for this protection gap is a misplaced anxiety around how much insurance actually costs. But when you compare the small price of business insurance to the potential risks it protects against, the math is very straightforward.

“There’s real risk out there in running a small business. Many think if anything were to happen to them, it won’t be a big deal because they’re only a small business – but in reality, these risks can be a big deal. As small businesses they’re particularly at risk because they can’t afford to take any kind of major hit to their business. The risk/reward profile is so skewed in favor of the small business when they elect to take insurance that it’s a really smart thing to do. Our job is to make sure they know that.”

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