What small businesses need to know about insurance coverage

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When you’re starting up a small business, it’s easy to underestimate the power of insurance.

You have enough going on without worrying about the next hurricane, fire or flood or being sued by a disgruntled customer. But if you don’t have the right kind of coverage – and enough of it – you could lose your business and more.

Few of us have $10-million in the bank if something were to happen. Beyond essential property and liability insurance, there’s a myriad of choices from cybersecurity coverage to crime insurance to specialized policies tailored to your industry.

Seek out advice

“Look at insurance like a partner,” says Sean Lichty, a business insurance professor at Conestoga College in Kitchener, Ont. “[The insurance industry] is there to keep you in business and help you recover from the unexpected. Insurance takes on the risk when you don’t have the finances to absorb those losses on your own.”

Mr. Lichty recommends talking to an insurance broker since they deal with multiple insurance providers, as opposed to insurance agents, who only sell the policies their company carries.

“For a standard business, such as a boutique, restaurant or a tech startup, the industry has some very good package policies with 95 per cent of the coverage you need bundled together, making it an easy one-stop shop,” says Mr. Lichty.

“Make sure to read your policy so you know what you’re buying – what’s included and what’s not – and if you rent your location, read your lease! You need to get coverage that aligns with your legal responsibility in your lease.”

Read the whole policy

Warren Ting, a business professor at Seneca College in Toronto, says when most people buy an insurance policy, they look at the front page to see how much they pay and when the policy is effective. Then it goes into the filing cabinet – until they have a loss.

“Then they’ll pull out the policy and say, ‘Hey, am I covered?’” Mr. Ting says. “That work needs to be done beforehand. Most insurance policies have a section which states the responsibilities for the insurance company and you, the insured. For instance, if you own a jewellery store and the stipulation states that the alarm needs to be armed and it wasn’t when robbers broke in, the insurance policy wouldn’t trigger because you didn’t do what you were supposed to do. Don’t be caught by surprise in the event of a loss.”

With today’s technology, the bigger threat to your business may be online. Mr. Ting says that cyber insurance is really a requirement for all businesses. Consider the cost of a lawsuit if there was a security breach of your client’s personal data.

“From an insurance standpoint, it’s not a matter of if, it’s a matter of when, because it can hit any of us who are on social media,” he says. “Right now, cyber insurance for small businesses is still cheap.”

Health insurance is a must

The other stream of insurance that’s essential for small business is providing health insurance for your employees, now seen as a “must-have” for any competitive enterprise. A good benefits package not only improves the health and well-being of your workforce, but can help you attract and retain the best. According to the 2023 Blue Cross Small Business Benefits study, most Canadian employees would choose health benefits over raises.

“That was one of the surprising elements of the study, given today’s high rate of inflation,” says Tim Bishop, managing director of Blue Cross Canada. “We found there were different levels of increases for small business employee preferences. For example, more than a third of [respondents] said they would rather have workplace health plans available over a $40,000 raise. We thought that was particularly interesting in this current context.”

The study also showed that comprehensive benefits help to attract and retain top talent for Canadian small businesses as well as demonstrate the strong value Canadians place on health benefits.

“It’s a competitive labour market right now and it continues to evolve,” says Mr. Bishop. “And we know that expanded health benefits are crucial for prospective employees. We found that 80 per cent of new candidates would consider benefits before accepting a new job and that 84 per cent of employees with a health benefits plan wouldn’t consider taking a job that doesn’t offer benefits. It’s an excellent recruiting tool.”

The risk outweighs the cost

In Canada, most small businesses already offer health insurance plans to their employees. So, what’s stopping the rest?

“In our study, 39 per cent of Canadian small businesses cited cost as a key barrier,” says Mr. Bishop, noting that the average cost of a health benefits plan, when split 50/50 between employers and employees, is $1,822 per employee per year.

Given that most Canadians would choose health benefits over a raise, that cost is not very significant when it comes to attracting and retaining talent. Clearly, there’s a great ROI for employers and peace of mind and a sense of security and well-being for employees.”

As well, despite the risk on the property and liability side, many small businesses underinsure or even go without because they feel they can’t afford it.

“When people say they can’t afford the insurance bill, my response is you can’t afford to be in business,” says Mr. Lichty. “That’s just as crucial as buying inventory.”

He recommends that a business should aim for the insurance premium to be approximately 1 per cent of revenue.

“At the end of the day, how we price our policy is claims plus expenses plus a small profit margin,” says Mr. Lichty. “If claims go down, premiums go down.”

Mr. Ting points out how having insurance far outweighs its cost in the event of a lawsuit.

When you buy a commercial insurance policy, there’s one element that’s more important than the actual limits for liability and property, he says – the duty to defend.

“If someone were to [sue] you as the business owner, the insurance company has a duty to defend you in a court of law – and you know how expensive lawyers can be. So, if someone were to sue you in any shape or fashion, the insurance policy will cover all your legal expenses.”

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Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.