Small business owners have alternatives to traditional insurance. Choosing insurance policies with higher deductibles and reducing risk can also assist small business owners in meeting their protection needs in a more affordable fashion.
While insurance premiums have continued to soar, some insurance companies, fearing that the possibility of lawsuits or losses is too great, actually refuse to make certain types of insurance available to businesses. In many cases you have insurance you can barely afford, and in some cases you can't even get insurance. What's a small business owner to do?
One solution is to explore alternatives to traditional insurance. In this discussion we'll examine self-insurance, controlling risk factors, and risk reduction safety and security plans as methods of reducing your insurance costs.
Tip
It's critical to note that some insurance is required as a matter of law (auto liability for example) and that some types may be so important given your line of work (general liability insurance, malpractice insurance) that you don't belong in business if you can't afford it or can't get it at all.
Self insurance
With self insurance you simply set aside money — some businesses choose to set aside what they would be paying in premiums if they had purchased insurance — and use that money when an unfortunate event occurs. For a small business, the best place to think about self insuring is with property insurance rather than liability insurance because the risks are more manageable.
Example
Suppose you are paying for auto theft, fire, and collision (that is, the kind of insurance that replaces your car if it's in an accident, not someone else's) protection on your vehicle. If you dropped this coverage and put your savings in premiums into a bank, eventually you would save enough money to replace a vehicle from these funds.
Of course, one of the dangers with this approach is that you could have an unfortunate incident before you have enough money in your fund. You also cannot use this approach if you have financed the property in question and are required to maintain insurance by your lender.
Using higher deductibles. Even if you can't totally self insure, you may be able to self insure a little by purchasing policies with higher deductibles.
Example
Suppose that you maintain fire, theft, and collision protection on a vehicle, but agree to be responsible for the first $3,000 of any damage to the vehicle rather than the first $1,00 as is standard in many policies. Your additional risk is not that great, and you may realize substantial savings on your auto premiums.
Risk factors you can control
There is plenty of risk that we cannot control. On the other hand, some risks are under our control to different degrees, and can influence our insurance choices. One example of this is in relation to your choice of business facility.
Insurance is used to protect businesses against personal injury and other liability claims arising from your use of the facility. You'll also need coverage to reimburse the business for any property damage to the building and its contents caused by fire, wind, lightning damage, and the like, as well as damage caused by the acts of people, such as theft, vandalism, and negligent damage to your business property. Here's where the choices you make in connection with your business facility will influence the cost of your business insurance coverage.
When you first go into business, you choose the type of business you will operate. Both as a general category (such as retail, wholesale, or manufacturing businesses) and as a specific type of business (such as a bookseller open nine to five on weekdays only, or a 24-hour convenience store), this decision affects your business insurance rates. Additionally, the crime and fire loss experience of the community and area where you locate may have a large effect on these rates. In some areas, business insurance may not be available at all because of a high crime rate or a very high likelihood of hurricanes, floods etc.
The portion of your business insurance rates that are determined with reference to the choice of business and business location are largely out of your control — the insurance company figures the likelihood of claims and amounts to be paid out for each category that applies to your business (such as kind and location of business) and computes your rates accordingly.
There are business choices, however, that can give you much more direct control over your facility-related insurance rates. The condition, security, and fire protection features of your building are examples of this. A modern, well-lighted building with good access to police and fire departments and good security and fire protection features will make a difference in your premium rates. How safe and claim-free your business has been in the past will also affect your rates.
Risk reduction plans
You may be able to get by with less insurance if you have a solid risk reduction plan that you and your employees follow very carefully. Here are a couple of examples.
- You can get less burglary and theft protection if you have a conscious plan and take steps to assure the security of your workplace.
- You can set up a safety program that will serve to significantly reduce your risks of accidents in the workplace.
