Home November 2018 Small Business = Risky Business?

Small Business = Risky Business?

Even for businesses that are considered “small,” the challenges loom large

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Entrepreneurs are often referred to as “risk takers.” And for good reason. Running a business is a risky proposition and not for the faint of heart. As every resilient business owner knows, the entrepreneurial world is not about being prepared to take risks; it’s about mitigating and managing them. Successful entrepreneurs make calculated and mindful decisions.

In today’s litigious society, there are seemingly endless options for coverage that provides optimum protection. While insurance won’t reduce a business’ risks, it can be used as a financial tool to protect against loss. Business policies have evolved and expanded over time to cover virtually any risk a company could face and provide some financial compensation when the unimaginable happens. Solopreneurs working from home and leaders with a full-time staff must consider all facets of risk – operational, strategic, financial and compliance.

A business owner’s best bet for decreasing what the business stands to lose is smart risk management. A tailored insurance plan should be put in place once potential hazards such as natural disaster, lawsuits, damage and theft are properly assessed. Anything that could cause an interruption in day-to-day operations must be covered.

But navigating the insurance landscape can be a challenge in and of itself. While many small business owners know they need the basics – property, liability, workers’ compensation – there is no one-size-fits-all. The reality is that many entrepreneurs rely on personal experience and intuition to manage risks. However, an effective risk management plan is more than simply spotting the common hazards and implementing the obvious preventions. That’s where an insurance broker can help navigate the right direction.

“Protecting your biggest asset is ultimately most important and that’s your ability to earn an income,” says Lachele Wickens, associate, World Financial Group. “Personal life insurance is key for any household income earner with dependants who rely on them. Once that is established, the next step is to get ‘key person’ and ‘buy-sell’ coverage to protect the business partner(s), if applicable.”

Partnership insurance allows a business partner to purchase the shares of another if he/she passes away. Wickens stresses that it’s critical if the company requires each partner to be actively involved in order to earn revenue.

“Buy-sell can often be included in the same policy,” she says. “If there is a key person (who is not a partner) and the business relies on that income, it’s smart to take out and pay for policies on him/her as well.”

Beyond the basics, other factors must be considered when purchasing insurance for a business, namely the industry it operates in, the location and the appetite for risk. Although there are commonalities across the board, the risks a coffee shop faces are vastly different from those of an engineering firm or HVAC company.

Down The Drain is a new plumbing and heating business based in Calgary. Owner Mike Giesbrecht worked with an insurance broker to choose the right coverage for his services and equipment. One of the four options he opted for is general liability which will protect against property damage, injury and being sued for faulty installations.

“We opted for life insurance, general liability, disability and critical illness,” says Giesbrecht. “Since we are a small business just starting out, we went with what we need. Some things just didn’t apply to us right now.

“Our business insurance is roughly $3,500 per year. I anticipate that as we grow, we’ll require more coverage, specifically for our equipment.”

In the case of consulting and engineering firms, insurance requirements can get a little more complex. Typically, policies are project-specific and require additional coverage for things such as employee or contractor site visits.

Phoenix AMC, a plant asset management consulting firm, has operated in Calgary since 2004 and employs three full-time staff as well as 16 contractors. Registered with APEGA (Association of Professional Engineers and Geoscientists of Alberta), its insurance requirements are common amongst oil and gas consultants.

“In this type of business, we have to tailor our coverages to meet the requirements of each of our contracted clients,” says Eduardo Neira, director of corporate operations at Phoenix AMC. “The most common are general liability, professional liability, errors and omissions, permanent disability, intelligent property-copyright infringement and employee life insurance.

“Eighty per cent of the work we perform is done in the office,” explains Neira. “But for those projects that require field visits, we’ve had to acquire such things as dishonesty of employees, contingent bodily injury and property damage policies.”

For small businesses like Phoenix AMC, keeping up with both industry-required and project-specific insurance policies can be costly. On average, Neira pays $12,000 per year to protect his business, but is confident he has all the coverage he needs.

That’s not always the case with entrepreneurs, many of whom don’t fully understand the risks and don’t have disposable capital. In these situations, anything that isn’t mandatory often gets missed.

“The most overlooked policies by far are critical illness and disability insurance, based solely on the fact that people never picture themselves getting sick and feel that it’s not worth the money. A lot of insurance companies have recognized this and have come up with a solution,” advises Wickens. “There is now an option to have your premiums returned if a client doesn’t get sick, which I think is huge in the industry because it makes a product that often gets overlooked a little more attractive and brings awareness to the need.”

In terms of cost versus coverage, there are options for lower rates out there. And while the cost savings could translate into more capital to spend on other essentials, choosing an insurance company based solely on the price may cost an owner more in the long run. That new “affordable” policy won’t offer the same level of protection and the onus could put a dent in personal coffers in the event of an incident.

SOURCENikki Gouthro
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