Coming into 2019, Business Insurance Programs for small business owners followed the upward trend in overall insurance industry results. Economic growth, employment rates, and consumer spending helped to fuel improving outcomes. A downturn in recent record natural disasters, (lower globally by one-third to $17 billion compared with the same period in 2017), coupled with rising premium rates, added to the positive outlook.
Amid the Covid-19 pandemic in 2020, the outlook for all types of business insurance is difficult to project. The goal of this report is to review how small businesses use business liability coverages to protect their operations and mitigate risks.
What Does Business Insurance Cover?
All businesses, from the smallest home-based to multi-national conglomerates, have exposures that require them to practice business risk management. Business Insurance Programs in this post relate to small business operations, which typically have 1-99 employees or SMEs (Small-to-Medium Enterprises) with 100-499 employees.
A business program protects the property that a business may either own, lease, or rent. Business coverage for buildings, equipment, inventory, furniture, and fixtures is a staple. Beyond property, a business owner must also insure against the loss of accounts receivable and loss of valuable papers and records.
This graph from the Small Business Association describes common types of business insurance.
Essential Business Insurance Options
At a minimum, the insurance basics that every small business owner needs to include the following business insurance policies, which you will find provided by Worldwide Facilities in the Program Business Marketplace. Make the Program Business marketplace your first step toward getting a business insurance quote.
General Liability
General Liability Insurance (GLI) is also called commercial general liability (CGL) insurance. It protects against lawsuits of property damage or bodily injury. It is written as a standalone policy or sometimes bundled into a Business Owner's Policy (BOP).
Customers can sue the business asserting it as the cause of injury or damage. Defective products, errors in service, disregard for property, exposure to a hazardous environment created by the business are examples. A general liability policy pays damages up to the policy limits. Coverage includes payments for legal defense, attorney's fees, and other expenses such as medical bills for persons injured by or on the premises of the business.
Professional Liability
This coverage is also known as Errors and Omissions. The coverage protects businesses providing services that give advice, offer recommendations, design things, represent the needs of others, or are providers of physical care of others. Clients or patients who use these services may sue the business with claims it failed or did not perform a job in such a way to cause them injury. When found legally liable, the policy will pay any judgment up to the policy limit. The coverage includes legal defense costs, even in cases where there was no wrongdoing by the insured.
BOP
The Business Owner Policy (BOP) is designed to hold down the costs of insurance in business lines for small and mid-size businesses. For convenience and cost savings to business owners, a BOP bundles basic property and liability risks into a single insurance product. Coverages typically found in a BOP include property, business interruption, and liability insurance. As with all coverages, there are eligibility requirements the businesses must meet to qualify.
Workers' Comp
Every state except for Texas requires employers to provide workers’ compensation insurance depending on how many people they employ. Worker's compensation insurance is set to cover medical care for an employee who is injured in the course of employment, regardless of who was at fault for the injury. It also will pay a portion of lost wages to the employee. In the case of an employee who dies because of injuries suffered while working, Worker's Comp extends coverage by providing compensation to the employee's family.
Cyber Insurance
Even the smallest businesses have potential liability issues around problems that Cyber Insurance seeks to cover. Cyber-attacks, network security, and privacy-related risks threaten all businesses. Firms today must safeguard their client's confidential information. Depending on how their employees interact with other companies, your Cyber Insurance prospects are potentially responsible for the security of their client's network and computer systems. Companies that provide staffing have a potentially more significant exposure beyond protecting their own business. They must also protect as much as possible their client's business because of a staffing worker's actions.
There are various insurance policies to help reduce some level of risk to cyber-related exposures. For instance, in the Program Business marketplace, Worldwide Facilities, LLC offers policies that include: Security & Privacy Liability (Cyber), Crime, which can consist of Fraudulent Impersonation (Social Engineering) and Security Breach, as well as, Property & Inland Marine and Professional Liability with IT coverage.
Commercial Auto
This coverage, also called Business Auto insurance, covers autos owned by a business. Typically, it will pay costs, up to the policy limits, to third parties for bodily injury and property damage claims for which an insured business is legally liable. Depending on the risks covered in the policy, it may pay for the repair or replacement to an insured's vehicle due to damage resulting from accidents, theft, flooding, and other events.
What Specialty Business Insurance Policies Should You Consider?
Liquor Liability
Any business has a liquor liability exposure if they make alcohol available for employees, clients, vendors, and others. Gifts of alcoholic beverages to clients, vendors, or employees at holidays or special occasions are a liability. So is sponsoring offsite trips or excursions where guests consume alcoholic drinks.
Employment Practices (EPLI)
Employment Practices Liability insurance protects businesses against claims brought by an applicant or employee for allegations, including but not limited to discrimination, sexual harassment, and wrongful termination.
Health insurance (May be required depending on state & size)
As of January 2020, six states require health insurance. Absent federal laws that expired in 2019, this type of health insurance requirement is known as an "individual mandate." In the aftermath of coronavirus, health insurance is sure to be on the agenda of federal and state lawmakers. We'll continue to report changes and updates for our members on this blog.
Excess/Umbrella Coverage
Since both provide additional limits when policy limits are reached, Excess and Umbrella coverages are often lumped together. But they are not the same. Excess Liability provides other higher limits to an underlying policy, for instance, General Liability or Auto Coverage. Umbrella Liability kicks in to provide additional limits after claim payments on an occurrence have reached the insureds underlying policy's limits.
Product Liability
Product liability protects small businesses that are part of a product supply chain, including manufacturers, installers, or sellers of products of any type. Any company in the chain may be required to purchase product liability insurance, depending on the industry. Even when not required, product liability is often recommended. That's due to the high risk when consumers claim or take legal action for bodily injuries or property damage caused by a defective or malfunctioning product. Consumers may also claim a lack of product warnings and explicitly clear usage instructions as causes for injuries and damages.
Business Insurance Costs
Due to the breadth of complexity, including size, location, loss history, business experience of small businesses, you won't find a convenient business insurance calculator. Rates for general liability in 2019 ranged between $300 - $600 per year for most companies. Some with lower risks such as a photography studio might be less while a construction company may pay more than $800 per year.
How Has COVID-19 Affected Business Insurance?
There may be limited exposure for general insurers due to the Covid-19 pandemic Here is a quote from Laura J Hay, Global Head of Insurance, KPMG International:
I expect the impact on claims to be relatively manageable. Most insurers learned the lessons from the SARS outbreak of 2003 and introduced exclusion clauses for communicable diseases and epidemics/pandemics into most non-life products such as business interruption and travel insurance.
Business interruption policies usually pay out only if physical damage occurs to an organization's assets or operations - so coronavirus related claims may not be covered, but there is potential for future disputes on this issue. Travel insurance, meanwhile, may offer cover if a customer is diagnosed with the virus before or during their trip - but not for travel that is canceled because of the pandemic, unless a customer has taken out premium `any cause' cover, which very few have. Of course, interest in `premium' policies could change in a world after COVID-19.
- cancellations may cause greater losses to insurers as some large events (but certainly not all) have policies that may cover them even for epidemics or pandemics. The largest event taking place this year is the Tokyo Olympics where analysts estimate approximately $2bn of coverage.
It is likely that the reinsurance sector will bear some of the brunt here, as insurers claim back the costs of cover from them over a certain threshold. One major global reinsurer, for example, has been quoted as having exposure of over 500 million euros should all events covered for pandemics be canceled.
However, there are two potentially big areas to watch for non-life. Firstly, trade credit insurance, covering businesses against debts that cannot be paid by their customers or suppliers. This is an $11bn global market - and if increasing numbers of companies go out of business due to coronavirus impacts, insurers could face rapidly spiraling claims. There are particular concerns that, alongside some big corporates in acutely affected sectors, SMEs in many markets could be hit hard due to supply chain disruption and a crunch in business levels. The cost of this may very much depend on just how bad the pandemic becomes, the extent to which containment measures affect different kinds of businesses, and how long it lasts.
The second area is workers' compensation claims. We could see spikes in workers claiming they were not adequately protected by their employers against exposure to the virus brought about by their normal working duties. It is impossible to know at this stage how significant such claims could become. But insurers offering this type of cover to employers may need to brace themselves, depending on how things develop.
Finally, the volatility and falling interest rates within the financial markets will likely impact general insurers from an earnings and solvency perspective.
Business Interruption Insurance
Business interruption insurance covers lost income in the event a business is unable to operate for unexpected causes such as a fire or a natural disaster. Coverages include operating expenses, costs to move to a temporary location, payroll, taxes, and loan payments. Unless there are pandemic exclusions as mentioned above, business interruption insurance applies if government actions cause operations to cease temporarily, resulting in a loss for a firm, such as the government-mandated shutdown of all non-essential businesses in the wake of the COVID-19 outbreak.
On May 12, the Program Business blog posted this article, U.S. Treasury Opposes Retroactive BI Legislation. Here is an excerpt from it:
The US Treasury Department has penned a letter to lawmakers voicing its opposition to legislation that would force insurers to retroactively cover business interruption (BI) claims connected to the COVID-19 pandemic.
In the letter, Treasury Principal Deputy Assistant Secretary Frederick Vaughan criticized bills introduced by several states that aim to make insurers pay for disruption to business operations caused by the lockdown.
“While insurers should pay valid claims, we share your concerns that these proposals fundamentally conflict with the contractual nature of insurance obligations and could introduce stability risks to the industry,” Vaughan stated.
Among the states to push for legal action over BI claims are Pennsylvania, New Jersey, New York, Ohio, Massachusetts, South Carolina, and Louisiana.
But there has been widespread opposition to legislation throughout the re/insurance industry, with many senior figures arguing that it could bankrupt companies and drive up premiums in other areas.
Workers' Comp Considerations for Various Industries
Workers' compensation insurance is in the crosshairs due to Covid-19. As the tragedy of the pandemic unfolds, spikes in claims from workers claiming inadequate protection from exposure to coronavirus are predictable. Until the industry has more data and experience, no one can estimate the impact worker's comp claims will become. They are likely to be significant.
How Will the Future of These Policies Unfold?
Even before Covid-19 is brought under control, it has changed the world, including the insurance business forever substantially. Although it’s too soon to say with certainty, it seems a safe bet that rates will rise in response to the effects of Covid-19 on American businesses and the insurers that cover them. Policy underwriting specs are sure to get detailed scrutiny leading to changes in coverages. More exclusions are probable, which is likely to create carve-outs for new types of specialty coverages. The insurance business bases coverages and rates on actuarily profitable forecasts that model predictable outcomes. The worldwide catastrophe of Covid-19 is so far-reaching and damaging that the insurance industry, like all others, will need considerable time to reset its models and normalize its business operations.
Best Business Insurance Programs
Due to the complexities and diversity of coverages that fall under the broad category of Business Insurance, it’s advisable to work with an underwriter with broad experience and markets. Worldwide Facilities is a top choice. Agents using the Program Business marketplace will find it has 56 markets to help them serve their clients. You’ll find the Worldwide Facilities portfolio of coverages includes many of those detailed in this post.