Every business comes with a certain amount of risk. Although pitfalls and challenges can't be avoided, they can be mitigated with the proper precautions, planning and insurance coverage.
Insurance and legal experts shared their thoughts on today's biggest insurance risks for business owners, and what you can do to protect yourself against them.
Businesses in all industries have seen a huge increase in cybersecurity problems in recent years. Chris Roach, managing director and national IT practice leader of CBIZ Risk & Advisory Services, said data hacks have hit fast-food retailers and e-commerce businesses particularly hard. However, he added that every business that accepts credit cards should be re-evaluating and standardizing its security practices to protect against fraudulent activity.
What to do: If you have a brick-and-mortar store, one of the most important things you can do is ensure that your credit card technology meets EMV standards, to prevent fraud liability from falling onto your shoulders, Roach said. Every business should also review its compliance with Payment Card Industry Data Security Standards (PCI DSS), he said.
"Complying with PCI DSS protects a merchant against digital data security breaches across their entire payment network, not just a single card," Roach said. "Failure to comply can result in penalties and fines if a data breach does occur on your end."
Cyberinsurance is also an important consideration for small businesses. Myles Gibbons, president of select accounts at Travelers, said that more than half of data breaches last year occurred in companies of 250 or fewer employees.
"Cybercoverage has grown increasingly important to all types of businesses and can help to protect them from the costs of data breach notification, remediation, card payment penalties, crisis management and public relations," he said. [See Related Story: Small Business Insurance: What Do You Need?]
Hurricanes, snowstorms, floods, fires and other events that damage your business's physical property can throw a serious wrench in your business's ability to operate normally. While your storefront or office may not have been completely destroyed, chances are, you won't be able to run your business out of there while repairs are happening.
"Only 50 percent of small business owners have a written business-continuity plan, according to the Travelers Business Risk Index," said Scott Humphrey, second vice president of risk control at Travelers. "Between severe weather events and the increasing reliance on a complex network of technology and supply chains, the risks of business interruption are plenty."
What to do: Your first line of defense against the negative effects of property theft or damage is insurance coverage. Gibbons noted that some businesses aren't adequately insured to their true values.
"Ask yourself if you have enough coverage to rebuild a business after a total loss," Gibbons said. "Business owners should make sure their building and its contents — including shelving, displays, inventory and any new equipment — are properly insured. Properties should be insured to their full replacement value — not market value — including any recent improvements."
Michael Freed, a business litigation attorney at Gunster law firm, also urged business owners to consider business interruption insurance to keep their cash flow going, even if operations have been halted temporarily.
"Business interruption insurance provides coverage for lost revenues and profits arising from uncontrollable interruptions in business operations, such as those arising from natural disasters or a building fire," Freed said. "When that type of casualty strikes, business owners need not only to rebuild where there has been physical damage, but to offset for missing revenues while they do so. This is particularly critical for businesses with limited capital reserves."
Beyond that, Humphrey advised developing a disaster recovery plan so your business has a protocol to follow should such an interruption occur.
"To develop a plan, businesses should identify threats or risks most likely to occur based on historical, geographical, organizational and other factors, [and] conduct a business impact analysis [to] identify [what is] critical to the survival of your business," he said. Then, "adopt controls for mitigation and prevention, which can include emergency response, public relations, resource management and employee communications," he added.
Human capital costs
If you have employees, you have a significant amount of business risk. Whether an employee is performing a labor-intensive task, driving a company vehicle or interacting with the public, there is a risk to the company, said Bryan Robertson, equity partner at Sihle Insurance.
"The need for industry-specific training and internal loss controls are apparent now more than ever," he said. "The employee needs to understand how their decisions and actions can tremendously affect the company's well-being, both positively and negatively."
On the flip side, changing market dynamics can mean major cutbacks across the board in certain industries, which can also be an unexpected financial risk, said Tony Consoli, president of the Mid-Atlantic Region at CBIZ Insurance Services.
"Although making changes to the workforce is inevitable ... during tough times, very few business owners know the risks involved with layoffs," Consoli said. "Unemployment insurance costs can be an expensive burden on employers."
What to do: Workers' compensation insurance is mandatory for any business with employees, but there are other insurance coverages you can get to mitigate your risk as an employer. Robertson advised looking into management liability and employment practices liability insurance.
"This coverage protects the owners and managers from suits related to discrimination to potential, current and past employees, as well as third-party claims," he said.
In terms of layoffs, thoroughly planning for employee departures is the best thing you can do to avoid financial and legal recourse. Consoli recommended offering benefits — such as severance packages, payment for unused time off and continuing health insurance coverage — to laid-off employees. You should also focus on pending workers' compensation claims that might be affected by layoffs and on conducting midyear reviews of your resources to scale back when necessary, he said.
Professional service mistakes
Service providers like accountants, consultants and web developers all face the constant risk of customers seeking legal recourse if their "product" doesn't meet expectations. Kevin Kerridge, executive vice president of the direct and partnership division at Hiscox, a small business insurer, said that a common challenge for many small business owners is overcoming the mind-set that their work is so good that no client would need to sue them.
"A business doesn't have to make a mistake to face an allegation," Kerridge said. "One lawsuit, even if unwarranted, can cripple a small business in terms of time and money."
What to do: Kerridge recommended that owners of any service-based businesses look into professional liability insurance.
"This coverage protects a business in the event that they receive a lawsuit alleging that they have made a mistake [and covers] defense costs and resultant damages up to an agreed limit, typically $1 million," Kerridge said. "We see a range of claims on this, from tax preparers making a mistake on a client's tax return to technology service providers delivering a substandard work product."
International manufacturing and export/transit issues
Many companies utilize overseas factories to manufacture their product, or export products internationally, said Lou Camhe, vice president of CBIZ Insurance Services. A lot can go wrong in the journey from factory to warehouse to showroom to retail store, especially if it happens outside your home country, Camhe said.
What to do: Camhe advised looking into contingent business interruption (CBI) insurance to soften the financial impact of a problem with a vendor in your supply chain — a fire at your manufacturer's factory, for instance.
Camhe also suggested foreign package policies to extend your insurance coverage to any international exposures you may have.
According to the U.S. Census Bureau, U.S. construction costs reached $1 trillion in 2015 — the highest they've been in nearly a decade. This industry boom indicates that building projects are increasing, and many of those projects are commissioned by businesses and educational organizations that want to expand, Consoli said. However, he noted that construction comes with a fair amount of risk that business owners should consider before moving forward with a contract.
What to do: Consoli said proper planning is essential for construction projects and that you should clarify the language in the contract to ensure you're not overpaying for the builder's reimbursements. As for insurance, Consoli advised going over your policies to understand what it does and doesn't cover in terms of damages or injuries that occur during the project.
"Carefully review the insurance coverage and costs related to the project," he said. "What if a worker is injured on the job? Who pays for water damage during a storm? What happens if materials for a build are weeks late and this prolongs the entire project? Make sure all of your ducks are in a row before the expansion. Doing so will guarantee proper coverage while also mitigating financial risk to potential insurance overbillings."
What's your biggest risk?
Every industry and every individual business within an industry face different levels of risk, both in terms of the probability of something happening and the severity of the consequences, Kerridge said. However, ignoring those risks is simply not an option, he said.
"There is no substitute for running a business professionally and not cutting corners, but however careful you are, bad things happen," Kerridge said. "It's worth buying as much insurance as your budget allows, as a backstop."
"Partner with an appropriate carrier that is invested in your company's long-term success and provides the necessary loss mitigation tools," Robertson added. "Each carrier has its own industry specialization, and it is important [to work] with a broker who will provide a complete risk management program, rather than merely a cost-based approach."To assess your level of risk, Freed advised selecting and building relationships with a "dream team" of advisers: an attorney, accountant, insurance broker and banker.Each has something valuable to contribute to minimizing risks efficiently and effectively, he said.
"An advisory dream team, empowered to be proactive on your behalf, can help anticipate and avoid pitfalls that befall many business owners," Freed told Business News Daily. "The old adage is entirely true when it comes to risk mitigation: 'An ounce of prevention is worth a pound of cure.'"