Risky Business

Getting business insurance used to be a matter of filling out an application and sending in a check for the first month's premium. But today, insurance of many kinds is harder to find, less affordable and offers less protection than at any time in years. As a result, entrepreneurs are shopping around, changing companies more often, negotiating harder, and in some cases, changing their operations or even reducing or eliminating their insurance coverage. Fifteen percent of small businesses don't purchase business insurance to protect their enterprises, according to the Insurance Information Institute (III). More than 17 percent have responded to recent price increases and other issues by reducing coverage, while nearly 30 percent have increased deductibles, says the III. Eighteen percent of small businesses changed their operations to reduce the risk of incurring a claim. While insurers' moves to end covering such things as mold claims is an issue, cost is the major small-business insurance complaint. It's not just affecting health coverage, either. Premiums for all types of insurance have risen broadly and steadily for years, and nearly half of all small businesses saw 10 to 20 percent increases during the first three months of 2002, according to The Council of Insurance Agents & Brokers. Affordable insurance is harder to find today because of higher damage claims, lower investment returns and industry consolidation, according to Eric Andersen, New York City national managing director for the financial services group at AON Risk Services, a retail insurance brokerage. Directors and officers (D&O) liability insurance has been hit especially hard, forcing some firms to go overseas to get coverage to protect their leaders from lawsuits. Business owners are engaging in protracted negotiations with insurance companies, including detailing actions they're taking to reduce the risk of being sued if an acquisition goes awry. "The underwriting process has gotten much more diligent," Andersen says. He encourages insurance-seekers to return the scrutiny by taking a careful look at the insurance companies themselves, particularly their credit ratings. If a carrier becomes insolvent, any claims you make go into receivership and may be paid years later at pennies on the dollar. Ask your broker for information on insurers' ratings for credit risk, and stick to those with stellar ratings. So far, only a small percentage of business insurance users report problems with getting claims paid. But if trends continue, the number may rise, and the response could be drastic among those who pay their premiums, then see their claims refused. Conrad Powell, owner of Columbia Antique Mall, a five-person company in Columbia, South Carolina, has had two theft- or vandalism-related claims totaling $50,000 rejected by his insurer within the past two years. Powell responded by canceling all his business insurance except liability. The cost of more than $1,000 a month for theft, fire and other coverage wasn't worth it if the companies wouldn't pay what he considered valid claims, he says. "If my place burns down, I'll be singing the blues," he acknowledges. "But I had to make a business decision, and, for $12,000 a year, I'll take my chances." No business insurance is completely indispensable, just as no insurance perfectly protects an entrepreneur from all risks. Insurance needs vary widely by business type, location and other characteristics. Errors and omissions coverage may be important for consulting firms, while product liability is more critical to manufacturers. Perhaps most broadly valuable is insurance that allows entrepreneurs to get good advice from a capable board of directors. "For many directors, the need to purchase and maintain D&O liability insurance is an indispensable form of personal asset protection they seek while serving on a board," says Andersen. "Unfortunately, even in this difficult insurance market, D&O insurance is a key coverage that companies must continue to purchase." Mark Henricks writes on business and technology for leading publications and is the author of Not Just a Living.