Small and medium-sized businesses (SMBs) have encountered significant challenges in recent years, including rising interest rates, supply chain disruptions, increasing regulatory pressures and the introduction of new technologies. These hurdles add a considerable amount of complexity and financial strain, making it difficult to navigate the business landscape and maintain profitability.
Despite these challenges, SMBs remain resilient. According to Bank of America’s 2024 Business Owner Report, 87% of mid-sized business owners and 65% of small business owners expect their revenue to increase over the next 12 months. While this optimism is encouraging, businesses must remain cautious due the ongoing economic unpredictability. The same report reveals that 90% of mid-sized and 84% of small businesses are currently impacted by inflation.
In this volatile environment, insurance is a critical tool for SMBs. It not only provides peace of mind but also protects against risks that could jeopardize a business’s reputation and financial security.
Exploring essential insurance solutions available to SMBs
While there are a multitude of insurance solutions available, some are specifically designed for SMBs. It is essential to focus on the critical components of these solutions.
General liability and business owner’s policies?
Two fundamental aspects of SMB insurance are addressing basic liability exposure and protecting the business’s physical assets. Without proper coverage, SMBs risk significant financial losses and operational disruptions. General liability insurance, also known as commercial general liability insurance (CGL), protects the organization, its directors, officers and employees against claims arising from premises and operations exposures. It covers settlements and judgments from such litigation, excluding primarily deliberate acts, pollution, nuclear incidents and professional services.
Insuring the physical contents of an SMB’s operations, along with the structures housing those operations, is critical. Property insurance plays a key role here, covering not only the physical assets but also tenant improvements, mobile equipment (excluding vehicles) and business interruption, including extra expenses from direct physical damage. Basic property insurance typically excludes catastrophic events like floods or earthquakes, though coverage for these can be added for an additional premium.
Many insurers offer a Business Owner’s Policy (BOP), which combines CGL and basic property insurance, providing cost savings and important coverage extensions, such as for mobile and computer equipment. Some BOPs also offer basic elements of data breach coverage as well as for mistakes in handling employee benefit plans. For SMBs, a BOP is almost always a superior option compared to maintaining separate CGL and property insurance policies.
Workers’ compensation insurance
According to a 2024 report from AFL CIO, employers reported nearly 3.5 million work-related injuries and illnesses, a significant increase of 300,000 cases from the previous year. Workers’ compensation insurance typically covers medical expenses, lost wages and rehabilitation costs, and can also provide benefits for permanent disability or death resulting from work-related incidents. Most workers’ compensation policies for SMBs also include an inseparable coverage provision known as employers’ liability insurance, which protects the business from litigation alleging workplace negligence. Although claims in this area are uncommon, this coverage is typically included in nearly all workers’ compensation insurance policies.
Fiduciary liability insurance
In 1976, Congress enacted the Employee Retirement Income Security Act (ERISA), a pivotal piece of legislation that defines employers’ responsibilities regarding employee benefits plans. This legislation mandates fidelity bond coverage in specified amounts for the assets of employee benefit plans. Additionally, it holds individuals with discretionary authority over these plans personally liable for decisions that negatively impact employee beneficiaries. This liability can be addressed with fiduciary liability insurance, typically sold in policy increments of $1 million.
Fiduciary liability insurance is essential, offering protection against personal liability imposed by federal law and safeguarding the SMB. It covers defense expenses, settlements and judgments within an annual aggregate limit, and protects against liabilities arising from legal violations or administrative errors in managing employee benefit plans. A few SMB insurers offer unusually strong insurance which combines the fiduciary liability exposure with the crime exposure, which is especially attractive to SMBs, such as the SMB BOP offered by Colonial Surety Company.
Cyber insurance
As widely publicized data breaches have demonstrated, virtually all businesses need cyber insurance protection. This type of insurance provides essential coverage, including liability protection for SMBs, defense costs and payments related to settlements or judgments stemming from insufficient data security. It also covers business interruptions, associated extra expenses and the costs mandated by law to notify state residents of potential exposure to personally identifiable information. Additionally, coverage is available to pay fines and penalties for violations of specific legislation or to cover regulatory examination defense expenses following a data breach.
Moreover, employee benefit plan data contains significant personally identifiable information, making it advantageous to bundle fiduciary liability and cyber insurance for comprehensive protection.
Employment practices liability insurance
According to a recent report by the U. S. Equal Employment Opportunity Commission (EEOC), 143 discrimination or harassment lawsuits were filed in fiscal 2023, representing a 50% increase from the previous year. This fact alone highlights the need to maintain effective Employment Practices Liability Insurance (EPLI). EPLI protects employers by covering defense costs and paying settlements or judgments related to employee allegations of discrimination, harassment and wrongful termination. Most policies also extend coverage to claims involving failure to promote, negligent evaluations and even the payment of regulatory defense expenses in cases such as inadequate access to premises for persons with disabilities. Additionally, many EPLI policies cover allegations brought by customers or suppliers involving discrimination or harassment and may even provide defense against claims of improperly paying overtime and related violations.
Professional liability insurance
Basic business liability coverage, like CGL, does not cover services provided to others. For businesses offering advisory, consultative or licensed professional services, professional liability insurance- often called Errors & Omissions (E&O) insurance- is essential. This coverage protects against claims of faulty advice, errors or failure to meet client expectations, including defense costs and settlements or judgments. It may also cover situations where a business fails to fulfill contractual obligations, such as missing deadlines or failing to deliver promised services.
Commercial automobile liability insurance
In most states, automobile liability insurance is mandatory for both personally owned and commercial vehicles. Even if the business does not own any vehicles, there is still the potential exposure from employees using personal vehicles for business operations or renting vehicles. This underscores the importance of every SMB having at least a minimal commercial auto insurance coverage to address liability arising from owned, non-owned or hired vehicles.
Employee dishonesty (fidelity) insurance
Businesses need to also consider the actions of their employees. Many SMBs have been severely damaged or even driven to bankruptcy due to employee theft or dishonesty. As mentioned, ERISA legislation mandates employee dishonesty coverage within specified limits for the assets of employee benefit plans. To avoid financial ruin, SMBs should establish proper guardrails and controls for their business operations, particularly in how employees handle customer funds and physical assets. Employee dishonesty (fidelity) insurance is a critical component of an SMBs risk management plan.
Insurance + technology empower SMBs with the agility they need
As the business landscape rapidly transforms, agile SMBs are better equipped to respond to changes that test their risk resilience. Technology solutions play a key role in supporting SMBs in their search for quick and efficient coverage options. By leveraging digital platforms and automated systems, SMBs can streamline the insurance acquisition process, reduce administrative burdens and gain faster access to coverage.
Ultimately, SMBs and their executives who adapt to the current environment, remain aware of both emerging and traditional risks, and maintain comprehensive insurance protection will not only survive but also thrive.
Richard Clarke is the Chief Insurance Officer at Colonial Surety Company.
Small business stock image by G-Stock Studio/Shutterstock