Four Small to Medium Business Insurance Types, Explained
From accidents to theft to lawsuits, there are plenty of scenarios that could result in unexpected costs for a small to medium business (SMB). Insurance is a vital tool for SMBs to protect themselves and their employees from potentially serious financial losses.
However, with so many kinds of SMB insurance products on the market, it’s not always clear which types a certain business may need. In this blog, we will outline four useful insurance products and explain which kinds of companies would most benefit from having them.
1. Cyber Insurance
With 98% of businesses having an online presence, and many businesses storing sensitive customer and company data in internet-accessible databases, cyber insurance has never been more relevant or necessary. As the world becomes even more digital, the volume, sophistication, and frequency of cybercrime are rising, and the need for cyber protection is growing in equal measure.
When a company experiences an attack on its digital property, the cost can be devastating. In 2021, the average cost of a data breach hit $4.24M, and on average, it takes a minimum of two years for SMBs to pay off the cost of a data breach.
What is cyber insurance?
Commercial cyber insurance is a product that helps businesses financially protect themselves from the risk of cybercrime. Similar to any other insurance product, companies can save themselves from exorbitant expenses in the event of a cyber attack by making regular premium payments. A cyber insurance policy typically covers expenses such as:
Breach Response Expenses: This can cover the forensic expenses to discover exactly what happened in a breach situation, as well as the cost of notifying individuals affected, monitoring customer credit, overtime salaries for employees handling the breach, call center expenses, public relations expenses, and more.
Cyber Extortion: In the event of cyber extortion where certain information or capabilities on the business’s website are being held for ransom, this coverage includes the forensics, interest, and negotiation expenses in an extortion event. This can include a certain amount for ransom demands.
Replacement or Restoration of Electronic Data: If electronic data or programs are damaged or lost due to a cyber attack, a cyber insurance policy can cover the cost to replace or recover those directly impacted by the incident.
Business Interruption and Restoration: The loss of revenue due to disruption of the business, impaired customer retention and acquisition, and damaged reputation can cause ongoing financial hardship. This coverage includes the cost of getting a business up and running again after a cyber incident. If a business is interrupted for longer than a certain period of time, this kind of coverage may also pay for revenue lost during that time.
Defense, Fines, and Penalties: There are often various fines and penalties associated with cyber attacks. Insurance can cover the cost of defending a company if the breach results in a regulatory proceeding, and also the cost of potential resulting fines or penalties.
Even more comprehensive policies might reimburse a business if its money is stolen in a fraudulent transaction. One example would be if a company’s email is hacked, and the scammer uses it to initiate a fraudulent bank transfer. Other policies can include coverage for hardware replacement if computers were permanently damaged, higher ransom payments to regain control of systems or data after a ransomware attack, or reimbursement if a scammer tricks the business into sending money.
What companies should have cyber insurance?
Any company with an online presence can and should have some form of cyber insurance. If a company has a website where it conducts business—making transactions, storing information, or communicating with customers—or if it uses a cloud storage system to house critical information, that company would benefit from cyber insurance.
Large corporations tend to be more appealing targets for cybercriminals because criminals can make more money per hack. However, SMBs are also frequently attacked, which can be far more detrimental for those companies. Because SMBs don’t have as much expendable income as larger corporations, the loss can have deeper, longer-lasting financial repercussions.
What cyber insurance products are available?
Traditional insurers tend to create products that only cater to large corporations both in coverage options and pricing, which has historically left the SMB market significantly underserved and overcharged.
However, the landscape for SMB cyber insurance is changing, and more digital, customizable cyber insurance products are becoming available for a wider variety of businesses.
2. Business Owner's Policy (BOP)
Running a small business comes with a lot of risk. For example, if a customer were to slip and fall on the floor of a hair salon, they might bring a personal injury lawsuit against the business. If a coffee shop’s espresso machine breaks down, the cost to replace it might be substantial (not to mention lost revenue while the shop couldn’t serve espresso). For an SMB, these kinds of costs can endanger the entire company. It’s far better for companies to err on the side of caution and protect against these risks, and for that, BOP insurance is essential.
What is BOP insurance?
BOP insurance exists to protect a company’s assets and operations. By paying a monthly premium, businesses can protect themselves from larger expenses if a covered incident occurs, such as:
Bodily injury that occurs on the business’s premises
Property damage
Personal injuries (such as defamation or infringement)
Damages caused by the business’s products
BOP insurance policies often have options for additional endorsements such as cyber, that provides basic protection against cyberattacks, or crime in the event of robbery, theft, counterfeit money orders, forgery, or unauthorized credit card use.
Depending on what industry the business is in, it could also have industry-specific coverage. For example, a restaurant might add endorsements that would cover losses related to food contamination. A retail store might add an endorsement to cover related costs if one of their products is recalled and must be withdrawn.
What companies should have BOP insurance?
Every SMB should have BOP insurance, but what varies is the level of complexity depending on the size of the business. For example, a self-employed freelancer would have different coverage from a medium-sized startup with a hundred employees. The needs of SMBs will be different as well, and the products available to them are unique.
What BOP insurance products are available?
Digital insurtech providers of BOP insurance typically build easier-to-understand products that are made for freelancers and gig economy workers, and can be configured online. These products often aren’t enough for SMBs' needs—they only offer a limited amount of coverage, and often exclude risks that SMBs frequently encounter.
On the other hand, legacy insurance providers of BOP typically build complex products that are too expensive and too complicated to understand without the help and recommendations of a traditional insurance agent. In many cases, the coverages and limits they offer are overkill for SMBs.
Options are more limited for single-location small businesses, but as the insurtech industry expands, more digital-first BOP insurance products are entering the market that cater specifically to the SMB market.
3. Management Liability Insurance
Allegations of employment discrimination, wage disputes, and sexual harassment are only a few of the issues that can spark a lawsuit, and all are expensive to defend against.
In 2022 alone, workplace settlements cost companies nearly $2 billion combined. From big corporations to start-ups, a workplace lawsuit can be a major financial liability. Even if a company has done nothing wrong, the cost of legal defense can endanger the entire business, and cost thousands, if not millions, of dollars.
What is Management Liability?
Management liability insurance is a collection of coverages designed to mitigate the cost of lawsuits against the company—specifically related to upper management. That means that if the company is sued, the insurance may cover legal fees, settlements, and other related costs. The three most common coverages included in management liability insurance all cover a different type of lawsuit:
Directors and Officers (D&O) insurance: This is a type of liability insurance for a business’s senior management in case they are sued for something related to their duties managing the company. This coverage frequently applies to both personal lawsuits against the directors and officers and lawsuits against the company related to their actions.
Employment Practices Liability (EPL) insurance: This protects the company from the cost of being sued for things related to hiring or personnel practices. This can include lawsuits alleging things like wrongful termination, discrimination, harassment, and other employment-related issues.
Fiduciary Insurance: This protects the company from the cost of lawsuits related to mismanagement of the company benefits plan. This can include anything from bad 401(k) investments to wrongful denial of benefits.
Some management liability packages may also include non-lawsuit-related coverages, such as a type of crime insurance that covers kidnapping for ransom and other specific crimes against a company’s senior management.
What companies should have management liability insurance?
Any business with a management or leadership team should have management liability insurance. Companies with a C-suite, board of directors, or strategic investor partners could benefit from the protection that management liability offers. What SMB management liability insurance products are available?
The small to medium businesses that are most likely to need management liability insurance are startups. However, this market often has a difficult time finding a suitable policy.
Because most available management liability insurance products were created for larger companies, these products evaluate the level of risk associated with the business based on things like how long the company has been in business, how many employees they have, and their revenue numbers. Since startups often have little or no revenue and relatively limited business history, these kinds of underwriting factors often lead to startups being flagged as very high risk. When a company is flagged as high-risk, they will either be denied coverage altogether or, if they do get approved, the policy they are offered may be extremely expensive. Many startups simply can’t afford it.
A secondary challenge is how coverages are sold. It can be difficult for startups to understand what coverages they need because most distributors sell D&O, EPL, and Fiduciary coverages as separate products without a clear explanation of how they work together. This can be a barrier for these businesses getting the protection they actually need.
However, there are management liability insurance products on the market that cater specifically to startups. These products package the three coverages as a unit so they are easier to understand, and they use alternative datasets to better evaluate startup risks. That being said, it’s important for startups—and companies that cater to startups—to do their research and find a product that fits their business.
4. Parental Leave Insurance
Parental leave is the third most requested benefit for US workers, but according to the Bureau of Labor Statistics, only 23% of privately employed U.S. workers had access to paid parental leave benefits in 2021.
In the absence of a national parental leave solution, it’s up to the private sector to find ways to support new parents in the workforce. Some companies offer self-funded paid leave to employees, but for many SMBs, this can be prohibitively expensive.
What is Parental Leave Insurance?
Parental leave insurance is a business insurance innovation designed to make parental leave affordable specifically for SMBs. The company chooses a package that covers the kind of leave they want to offer their employees, including factors such as what percentage of their employee’s salary to pay during leave, and how long employees can take leave.
Once the policy is customized and purchased, the SMB simply pays the insurance provider a recurring premium based on their selected benefits and employee demographics. When a covered employee takes parental leave, the company files a claim through their insurance provider’s claims process. Then the company will be reimbursed for the cost of paying the employee during the covered leave period, up to the contracted amount.
What companies should have parental leave insurance?
Every SMB can and should offer parental leave insurance. It is an important benefit for employee acquisition, retention, and overall satisfaction. It’s a solution that mitigates the large, unexpected leave costs that often prevent SMBs from being able to offer this benefit. With a parental leave insurance product, the employer can avoid unexpected costs by paying a regular premium, and they can rest easy knowing their insurance policy will protect them.
What parental leave insurance products are available?
Boost’s parental leave insurance is a first-of-its-kind product and is currently the only parental leave product on the market. It is specifically designed for SMBs and fills an important gap in the market.
Seeing as there is no national parental leave program or solution, the other options for parental leave include short-term disability, a combination of state-funded parental leave and PTO, and the Family and Medical Leave Act, which legally gives 12 weeks of protected, unpaid parental leave wherein the parent cannot lose their job during that time. However, most people cannot afford to go 12 weeks without pay. In short, parental leave insurance is a great option for SMBs who are looking to provide an equitable solution to their employees.
All businesses need protection against unexpected financial loss, and SMBs are no exception. When something does go wrong, the right insurance products can be a crucial support for SMBs getting back to business as usual.
If you cater to small to medium businesses and want to learn more about how you can grow your revenue by offering insurance—including but not limited to cyber, BOP, management liability, and parental leave— contact us, or dive into building your insurance program with Boost Launchpad.
