Business insurance protects companies and commercial properties from risks and unforeseen events by covering potential losses, damages, or liabilities. The right insurance enables businesses and building owners to mitigate financial risks and continue operating — even in the face of adversity.
But, not all insurance policies are created equal. Understanding the most common mistakes business or property owners make when choosing their policy and choosing the right type saves time and heartache should the worst happen.
Common omissions in business insurance
The most appropriate policy adequately covers all potential risks, but sometimes, omissions can render a policy void.
- Underinsurance. Lacking sufficient coverage exposes businesses to potentially significant financial losses if there’s a claim.
- Incorrect classification: Misclassifying the business or its activities can lead to coverage gaps.
- Failure to update policies: As businesses evolve and scale, leaders must review and update the policies to meet growing needs.
- Exclusions and limitations: Some policies may have exclusions or limitations that can restrict coverage — never skip reading the fine print.
- Failure to disclose information: Businesses must accurately disclose information about their operations, risks, and claims history to avoid policy voidance.
Undervaluation is another major problem that can impact your insurance policy. In the event of a loss, your insurance might not fully cover undervalued assets. You could experience significant financial hardship, especially if you must cover the difference between the insured value and the actual replacement cost. You could also face a legal dispute with your insurance company, which may argue you’re not entitled to the full replacement because of the undervaluation.
Finally, if your insurance company uncovers a history of asset undervaluation, expect your premiums to increase and your financial protection to decrease.
Other critical mistakes to avoid
Undervaluation
You can avoid the risks associated with undervaluation by accurately assessing your assets’ value.
- Conduct regular assessments to ensure their values are up-to-date and accurate.
- Hire a professional appraiser to provide an accurate valuation for high-value assets.
- Verify that your insurance coverage is based on the replacement cost — that is, the cost to replace your asset with a similar item in the current market.
- Certain assets depreciate over time, so adjust those insured values accordingly.
- Talk to your insurance agent — they’re the best source for helping you ensure your assets are appropriately valued and covered.
Insufficient safety measures
The failure to implement safety measures like sprinklers can also significantly impact insurance coverage and potentially lead to claim denials. Many insurance policies include provisions excluding coverage for losses resulting from an insured’s negligence or failure to take reasonable steps to mitigate risk.
An insurance company that identifies concerns about safety measures will consider a business at a higher risk of loss and charge higher premiums. In the event of a loss, the company may deny coverage if it can prove the insured’s failure to implement safety measures contributed to the loss. For example, if a fire breaks out in a building with insufficient (or no) sprinklers, the insurance company could argue the low number (or lack thereof) increased the severity of the damage and, thus, deny coverage.
Business insurance components
Business insurance typically includes several essential components.
General liability insurance
General liability insurance protects businesses from claims of bodily injury or property damage caused by their operations. For example, if a customer slips and falls on a retailer’s wet floor, the store’s general liability insurance would cover the injured person’s medical expenses and any legal costs associated with their claim. Any business — like a retail store, restaurant, or service provider — interacting with the public needs this coverage.
Property insurance
Property insurance covers a business’s physical assets, including buildings, equipment, and inventory, and protects against losses due to fire, theft, vandalism, or natural disasters. For example, if a hurricane damages a business, property insurance can help cover the cost of repairs or replacement. Talk to your insurance company to ensure your coverage limits will cover the full replacement value of your business’s assets.
Workers’ compensation
Workers’ compensation insurance pays benefits, including medical expenses, lost wages, and rehabilitation costs, to employees injured on the job. For example, if an employee tripped and fell while carrying work supplies, workers’ compensation would cover the cost of recovery from their injuries. Most jurisdictions require this coverage, essential for protecting businesses from liability for employee injuries.
Commercial auto insurance
If you have a business that relies on vehicles for operations — delivery services, transportation companies, or sales teams — you’ll need commercial auto insurance, which covers accident liability and property damage. Commercial auto insurance can help cover the cost of repairs, medical expenses, and legal fees if a driver gets into an accident.
Professional liability insurance
Also known as errors and omissions insurance, this coverage protects professionals from claims of negligence or malpractice in their work. It’s essential for businesses providing professional services to others, such as lawyers, doctors, accountants, and consultants. For example, if a CPA makes an error in tax preparation or on an audit, this insurance will cover claims from their clients or any third parties suffering from financial harm caused by negligence, misrepresentation, or inaccurate advice.
Product liability insurance
Product liability insurance covers claims arising from defective products causing injury or property damage. Businesses that manufacture or sell products must purchase this insurance. It covers legal fees, product recalls, and damages a company may need to pay if a consumer sues them for harm caused by a faulty product. This insurance covers injuries to buyers, users, or bystanders, property damage, wrongful death, defective design, and failure to warn.
Business interruption insurance
Also called business income insurance, it provides coverage for lost income and expenses if the business is unable to operate due to a covered event. It’s essential for businesses reliant on continuous operations to generate revenue. The insurance can cover:
- Lost revenue that would’ve been generated had the business remained open
- Fixed expenses, like loan payments, payroll, and taxes, while the business is closed
- Moving expenses, like rent, mortgage, lease, and moving costs, if the company must relocate to a temporary location
- Claims resulting from a hang-up caused if the business relies on another company that’s been delayed (like a supplier or manufacturer).
Don’t skimp on insurance
Climate change is real. “Extreme weather has caused over $41 billion in damage since COP28,” the United Nation’s 28th Climate Change Conference held in November 2023. We’ve seen record-breaking temperatures worldwide, shifting weather patterns causing droughts and floods, and stronger (and longer-lasting hurricanes and tropical cyclones).
The U.S. experienced nearly 30 weather and climate disasters, costing at least $1 billion in 2023. Between 2019 and 2023, natural disasters caused $600 billion in damage — “more than double the 44-year inflation-adjusted annual average cost.”
While business insurance has risen considerably, with liability costs jumping nearly 20%, property and casualty insurance increasing between 10% and 25%, and disaster insurance increasing up to 25% in some markets, in 2024, can businesses not afford to have the right insurance policy for protection?
From financial protection, help with business continuity and legal protection to peace of mind, the short answer is, “No.”
Are you a commercial real estate investor — or looking for a specific property to meet your company’s needs? Or a business or property owner who’d like guidance on the right insurance policy? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
