Business Insurance Basics: How To Cut Costs Without Raising Risks

Business insurance is an easy expense to cut—since it doesn’t directly contribute to the bottom line like merchandise or raw materials. But cutting insurance can become a costly blunder when a major catastrophe occurs, and the business is not adequately insured.

Good news: Nearly every business in America can cut its insurance costs by 10% – 15%, or sometimes even more—without putting itself into extreme jeopardy.

The secret: Become a super-shrewd insurance buyer, and the sort of customer insurance companies love to insure. Here’s what I tell my clients to help them get the coverage they need for the lowest possible cost.

Stick with insurers that are familiar with the business you’re in.

Most insurance companies are perfectly willing—even eager—to insure just about any business that comes their way. But certain insurance companies have an appetite and aptitude for certain types of business.

Example: You own a corner drugstore.The ABC Insurance Co. has been happily writing a policy for your business even though drugstores are not their area of expertise. On the other hand, XYZ Insurance Co. has extensive experience with corner drugstores. Their marketing and pricing, and the specifics of their policies all are aimed at insuring every corner drugstore in America.By going with an insurer that is familiar with your company’s type of business, it should be possible to obtain coverage for 10% or 15% less. And the coverage should be better than what the business now has.

Guideline: Any insurance agent worth dealing with should have a good idea of which insurance companies specialize in which types of business. If your company’s present agent can’t steer you to the right company, shop for an agent who represents the kind of company that is experienced in your kind of business.Helpful A trade association should know which insurers specialize in your line of business. The association may even have given its approval to one or more companies to write coverage for businesses in your industry.

Choose the best possible policy.

Agents typically will offer either a multiple-peril package or a business owners’ policy. Picking the best form of insurance for the business can save thousands of dollars a year.

Examples:

• Multiple-peril package: This form of insurance tends to charge individually for each area of coverage. You might be charged separately for the building, separately for the contents, separately for liability, separately for glass exposure. The company buys what it needs for its unique situation.

• Business owners’ policy: The commercial equivalent of homeowners’ insurance, you pay one premium for all of the different types of coverage.

Strategy: Normally, it pays to take the business owners’ policy. I’ve seen cases where someone was paying $10,000 a year on a multiple-peril package and reduced that to $6,000 a year by switching to a business owners’ policy.

Before signing, ask the agent, “Is this the best policy we can be on?” Insist that the agent work it out both ways to make sure you’re getting the best coverage for the business’s exact needs—at the right price.

Be a customer that an insurance company would love.

The only way an insurance company makes money is if companies are profitable for it. If your company is profitable for it, the insurer will be willing to pass along a portion of that savings. And the best way to be profitable is to set up your business, so it never has a loss.

Strategy: Make risk management and loss avoidance the cornerstones of the business. Do more rigorous screening of job applicants before hiring them—to prevent careless and inexperienced people from jeopardizing themselves or the company.

Example: You may not think of a delivery person as a critical employee. But if he/she hits a school bus with the company’s van, it will trigger potentially costly liability problems.Make sure any driver you hire has all the proper licenses. Have the company’s insurance agent run a motor vehicle check on the individual to make sure he doesn’t have speeding tickets or accidents on his record.Similarly, when hiring someone to handle cash, check out the person’s background as carefully as possible. Insist on getting references before offering a job.

Important: Once people are hired, provide all the training the business can afford so they know how to do their jobs without getting hurt or putting the company at risk.The mindset shouldn’t be, “We have insurance, and if anything happens, we’re covered.” Instead, it should be, “We don’t want anything to happen because that would cost the insurance company money and everything the insurance company does is predicated on minimizing claims.”Look at your business through an insurance company’s eyes. I don’t advise customers to avoid filing insurance claims just because the insurance company won’t like it. I do advise customers to be very astute before filing an insurance claim.

Reason: People don’t realize that insurance companies don’t worry about the severity of a claim. They’re much more concerned about the frequency of claims.Insurance companies know that the occasional severe incident is going to happen and that they’re going to have to pay out a considerable sum of money. They expect it as part of doing business—even for their best customers.What they don’t like is the guy who hits them with one small claim after another. They know from actuarial data that these clients are not just costing small outlays fairly frequently, but that they will also come in with a significant claim someday.

Cost-cutting strategy: Self-insure the company against routine cost-of-doing-business losses. Remember that what you have is an insurance policy—not a maintenance policy. So, plan to cover losses up to $1,000 out of the company’s own pocket, and negotiate insurance coverage with a deductible of no less than $1,000 per incident.

At the least, that $1,000 deductible will cut the annual premium by 10% or more compared to having a lower deductible. And by absorbing the small claims, the company has taken another step toward becoming the sort of customer insurance companies love. If the company does have a big claim, settling it should go much more smoothly than it would if you filed a small claim every month or two.

Avoid insuring every risk.

Taking on a bigger deductible is one great way to cut the cost of insurance. Another is to analyze your business step by step and consider what absolutely must be covered and where there might be another way of protecting against risks.

Example: If the company is paying too much for burglary insurance, consider getting an alarm system instead. It might cost a little more in the first year, but by the second year, you’re ahead. After that, die saving on burglary insurance is pure savings for the business.

Important: If there is no alternative to reducing coverage, at least protect against the losses that can shut the business down.

Example: If the business has $25,000 in inventory, that is its maximum exposure even if the whole inventory is stolen or destroyed. That would be a major loss, but it probably wouldn’t kill the business.But if the company van hits a bus, liability claims could run into the millions. That could kill the business.