Small business Tip of the Week: Do you have too much or too little insurance?

July 19, 2010 at 2:19 a.m.
Updated July 20, 2010 at 2:20 a.m.

Almost every business owner asks at one point: Do I have too much or too little insurance for my business?

The question comes up often in our counseling sessions. What is the proper amount of insurance and what kind of insurance should the business have? The answers to these questions are different for every business. However, by answering a few simple questions, the owner can help narrow the proper coverage down for their business.

Before buying or changing insurance coverage, business owners need to first understand insurance is a form of risk management. Essentially the business is mitigating a potential risk by buying insurance. When looking at coverage amounts and premiums, you need to assess what is the benefit by mitigating the risk compared to the cost. This answer should be unique to each business owner as some will be risk averse while others are risk seekers.

The second question is to decide which threats you want to cover by identifying potential threats through a business impact analysis. For example, a potential threat would be a natural disaster since all of the businesses in our area have the potential of being impacted by a natural disaster.

Businesses would want to assess the impact of this threat and possibly consider some form of business interruption insurance to mitigate the risk of lost profits and fixed expenses if the business was shut down temporarily because of a natural disaster.

Insurance is just one risk management tool. There are other tools that can be used to mitigate risk. For instance, in the natural disaster example, if the business owner decided business interruption insurance was too costly, the business would want to have an alternative plan in place. This way, the business could get up and running immediately after a disaster in order to mitigate the potential loss of profits due to the business being closed. This might include having a business savings account or line of credit with a lender.

Remember when assessing business insurance options, you need to first identify and understand the risk you are trying to mitigate. Then, you should consult an insurance agent that specializes in that type of insurance coverage. Make sure the agent answers and explains all of your questions and informs you of the types of coverage you have - and the time frame for making claims and receiving payment.

The burden of proof lies with the policyholder, so you need to know the proper way of documenting your losses so you won't have the potential possibility of being denied. After gathering all facts, you must then weigh the cost versus the benefits, advantages and peace of mind of the coverage to do what is right for you and your business.

Stephen Kilgore is a business advisor with the University of Houston-Victoria Small Business Development Center.



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