I field a lot of questions about small business insurance from potential customers, and I'm always surprised by how many of them pivot on the idea of size. For example, people want to know if they need insurance if they only have three employees or if they're just working part time out of a home office.
The answer is usually "yes." That's because, from a legal perspective, a business is exposed to significant liability the minute it engages in a transaction. Businesses that don't take steps to minimize those risks could face serious financial consequences.
Here are four of the most common size-related myths I hear, plus the truth behind them.
Myth #1: "I formed an LLC. That means I don't need insurance."
There's a common misperception that forming an LLC means you don't need to buy insurance.
The confusion comes from a misunderstanding about how business liability works. When you're a sole proprietor, you are personally responsible for any liabilities your business incurs–and you get to keep all the profits. When you incorporate, you create a separate legal entity to take on those liabilities and profits.
But forming an LLC doesn't protect you from lawsuits. A dissatisfied customer can sue your LLC, and the money to pay those legal bills has to come from somewhere. In some cases, such as when the plaintiff's lawyer alleges that your LLC was improperly capitalized (e.g., you kept 95 percent of revenue as your salary), your personal finances could be at stake.
The good news: Liability insurance covers legal bills when your business is sued, whether it's an LLC or a sole proprietorship.
Myth #2: "No cyber criminal is coming after me. I'm too small."
Data breaches that target major retailers make for great headlines. You know what doesn't make a great headline? "Small business goes bankrupt after employee opens malicious email."
Unfortunately, the latter is probably more common than the former. According to Experian's Data Breach Industry Forecast, breaches caused by human error (e.g., misplaced smartphones) caused 59 percent of security incidents last year. Combine that with the finding that 60 percent of small businesses go out of business six months after a breach, and the message is clear: You're a target. Cyber Liability Insurance can cover expenses when you're hit.
Myth #3: "I don't work with that client anymore so I can drop the insurance they made me buy."
Imagine this scenario. Your client won't sign a contract until you buy more liability insurance. You need the work, so you make the purchase. But when the job is complete, you have more insurance than you want. Time to unload the surplus, right?
Think twice before you do. A robust policy makes you look financially stable, which can help you land more clients. Besides, starting and stopping coverage makes insurance companies wary. If you have too many gaps, it may be more difficult for you to get coverage when you need it.
Myth #4: "Umbrella Insurance? I can't afford that."
A lot of small-business owners I talk to have the impression that Umbrella Insurance is...
- Only for big companies.
- Really expensive.
Here's the real deal. That client who wants you to get extra insurance before signing the contract? Their demand can often be met with Umbrella Liability. The customer who's threatening to sue after breaking their leg in your store? Umbrella Liability supplements your General Liability limits so you're not paying out of pocket.
Umbrella Insurance is usually an affordable policy, too. According to the Insurance Information Institute, you can often buy a $1 million Umbrella policy for $150 to $300 per year.
The bottom line? Even for small businesses, liability exposures can be big. Managing risk with insurance makes financial sense at any size.