As any entrepreneur can attest, starting and running a business is an inherently risky undertaking. To succeed over the long term, small business owners must be able to differentiate between recklessness and acceptable risk. They must learn to avoid the former while managing the latter, and that starts with having the right insurance.
The most obvious risk that all businesses face is the threat of financial loss from a lawsuit. “In today’s litigious society, you can be sued for almost anything,” says Regine Fiddler, CMO and head of Direct at Hiscox. While slip-and-fall incidents trigger many lawsuits, other common complaints include breach of contract, copyright infringement, and discrimination.
A U.S. Small Business Administration (SBA) study estimates that between one-third and one-half of small businesses are involved in a lawsuit every year, and many that are not sued are at least threatened with litigation. “Small business owners often think that no one will bother to sue them, but research shows that small businesses are actually more likely to be sued than large businesses,” Fiddler notes.
Cyber risk is on the rise
Small businesses also face a worsening threat from cyberattacks, and the tremendous growth in e-commerce and online transactions is compounding that risk. “The big attacks make the news, but you don’t hear about the thousands of attacks against small businesses that happen every day,” Fiddler says. In fact, 40 percent of cyberattacks target small businesses with fewer than 500 employees.
Other risks are less obvious, such as those around employee issues. Many employees are members of a protected class, based on race, gender identity, age, or disability, for example. “If they feel they are being discriminated against, there is a clear path for a particular claim,” Fiddler cautions. “And if the pandemic has taught us anything, it’s that workplace risks are constantly evolving. Business owners need to stay on top of their obligations to protect employees.”
Growth almost always involves risk. When a business adds a location, hires a new employee, or launches a new product or service, there is risk involved. But if everything works out, sales and profits increase.
Acceptable vs. reckless
Problems can arise, of course. A new location may not generate the foot traffic expected, or a new employee may lack needed skills. Nonetheless, these are generally acceptable risks. “The business can recover by closing the location or replacing the employee, but the potential upside can be lucrative and may justify taking the risk,” Fiddler says.
Where things tilt from acceptable to reckless is when a risk can be transferred to another party in a cost-effective way, (e.g., through business insurance) but is not. A good example is a business that involves giving advice to other businesses or people.
“If someone sues you for providing bad advice, you can’t go back and undo the recommendation you made,” Fiddler explains. “What you can do is insure your business so that if you are sued, you have a policy that will pay for an attorney to defend you and pay a settlement or judgement if needed.”
Pulled in many directions
That is exactly what Kate Johnson did when she started Heritage Business Services five years ago. Her business provides virtual bookkeeping services and training to other small businesses. “It’s scary to think about having the responsibility for advising clients on their finances and telling them their books are right,” she says. “I got errors and omissions insurance at the outset of my business, and I later added cybersecurity insurance.”
Johnson says that as a business owner, she often feels pulled in many directions at once. “Business is hard enough without having to worry about being uninsured or under-insured. I have to deal with things like customer risk and competition risk and being ready to pivot quickly when needed. I don’t have to worry about the things my business insurance covers. Removing that burden lets me focus on the risks that I have to manage myself.”
Fiddler sees that as the best argument of all for having business insurance. “Small business owners have so many responsibilities and are managing so many risks on their own already,” she says. “They should not have to worry about potential lawsuits. They need to stay focused on doing what’s best to help their businesses grow and be successful.”