Small Business Insurance, What Are The Chances You Will Use It?

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As a commercial insurance agent, I'm reminded often that most business owners don't believe there's a good chance that they ever use the insurance they buy. Because of that feeling, it's often not so much of a risk transfer strategy for businesses buying insurance, it's viewed as a necessary evil that someone else is forcing them to buy. Requirements to buy business insurance may come from a licensing authority, a general contractor, bank, customer, or elsewhere, but what's often lost in the process is exactly what are the odds of using a policy.

It's well known that people often grossly miscalculate the odds of an event happening. The best example I can think of is someone speeding along to the airport, weaving in and out of traffic like a crazy person, but with little fear that they could die quickly in a car crash. That same person boards the plane and while displaying a sense of confidence on the outside, is desperately trying to think of anything other than the flight they are about to embark on for fear they will crash and die.

The odds of a commercial plane crash are about one in every 1.2 million flights, but most people live through most crashes. In fact, it's estimated that if your plane crashes, you will have over a 90% chance of surviving. So the odds of dying in a plane crash are about one in 11 million.  Knowing the odds are so small that it shouldn't impact your decisions isn't helpful for many people because the fear of crashing and dying isn't rational, it's emotional, and that's the rub. We make many decisions based on emotion and not logic, but often we can't help it, even when we know better.

Take The Point of No Return in the Wisconsin Dells as a great example of allowing emotion to rule one's decision making process. My sons, at the time 12 and 10 have both gone down the 10 story high water slide multiple times. Yet, their mother and father, while with them, have not. Logically, I know that the odds of an adverse advent happening are likely less than one in an airplane, and certainly less risky than the car ride to the Dells, and yet, even though I considered it, I haven't gone down it (maybe this year as the season is just getting started at the time of writing).

Speaking of car accidents, the odds vary depending on the source, but it's safe to say that the odds of being in an automobile crash are at least one in 10,000 and maybe one in 5,000. For the average person, that translates into about four accidents in one's lifetime. The odds of dying as a result of a car crash is about one in 77.

Going back full circle, the odds of using a small business commercial insurance policy and filing a claim is about 40% over a period of 10 years, according to The Hartford Insurance Company, and obviously (in my opinion) increasing as each year passes. Small businesses can expect to file the following types of claims at the below rate:

Burglary or theft. 20% of small business claims involved burglary or theft, and that includes insider theft by employees and others. In some businesses, I've been advised by many business owners that insider theft from employees is a greater problem than strangers. It's really sad when you think about it, but that's the world we find ourselves in.

Frozen pipes cause about 15% of claims. Water and freezing temperatures just don't mix well. That's especially true in the Midwest where I have my practice. Michigan, Minnesota, and Wisconsin comprise a great deal of the frozen pipes insurance claims in the United States.

Equally damaging in terms of occurrence of claims is wind or hail damage. Wind and hail damage causes about 15% of business property insurance claims and can be especially expensive for business owners that own their own buildings. One of the advantages of leasing instead of owning is the avoidance of such losses, but in my opinion, if you're going to be at a location longer than seven years, it usually makes sense to own instead of lease when given the choice.

Next is fire damage and customer slips and falls at about 10% of commercial insurance claims. It's important to note that many business owners think of fire damage as their number one risk, but as we can see, there's only a one in 10 chance if you have an insurance claim that it will be a fire, and that's if you include customers falling. So the number one fear is actually less than 10% after removing the slips and falls.

Customer injury not related to slips and falls, customer property damage, product liability, customer or visitor struck by an object, reputational harm, and finally vehicle accidents all account for under 5% each. If you're thinking that your industry encounters more or less of any given type of claim, you're absolutely correct in most cases. The above figures encompass all claims from all industries, but the fact remains that each industry has its own variance to the above.

The key takeaway is that your odds of filing a claim are probably much higher than you expected and knowing that your covered appropriately is the key to long-term success in business. Of course, you can rely on luck, and hope that you're never going to have a loss, however, I know business owners that depend on luck and I know business owners that have been in business for years, but I don't know any business owners that have been in business for a long time and depended on luck for their success. Long-term success comes from hard work, and knowing how much risk to transfer and never allowing a single event take them out of the game.

That doesn't mean there's a 40% chance in 10 years you will have an event that will take your business out if you don't have commercial insurance, but if you're expecting to be in business 20 years or more from now, it's silly to think you won't have at least one event that may result in a significant hardship. Actually, silly isn't the correct term, poor planning and management probably better describes the leadership that allows a random event destroy everything that has taken years to build up.

Bottom line, don't allow emotion to dictate your financial decisions when it comes to your business and the type of coverage your business has.

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