Cancelling Business Insurance Might Cost More Than It Pays: Here’s Why
The COVID-19 pandemic has caused enormous economic hardship across many segments of the U.S. economy. Businesses that involve close personal interactions like bars, restaurants and hair salons have had to cut back on capacity and even shut their doors completely based on state and local regulations. Even businesses that haven’t been directly impacted may have seen revenues decrease as consumers find they have less disposable income or simply decide to save more money out of their paychecks “just in case.”
Businesses Looking for Ways to Save Money
Businesses, therefore, have had to look for ways to reduce costs. While COVID-19 may be new, there’s nothing new about businesses looking for ways to save money. Cost-saving efforts may include things like reducing leased space, cutting staff or working with suppliers to lower prices. Some businesses might also be tempted to eliminate what they see as burdensome overhead costs that don’t provide obvious benefits on a day-to-day basis – like their business insurance.
Insurance costs vary significantly based on the size and inherent risk of a business, ranging anywhere from a couple thousand dollars to millions of dollars per year. That money can be a tempting target of a cost-cutting strategy. Some companies can go for years without ever having to file an insurance claim.
Reduced operations due to COVID-19 and the economic downturn might make the risk of liability seem even lower. Some businesses may even need to temporarily shut down and see no need to maintain insurance coverage while they aren’t operating.
But cancelling a business insurance policy can and often does end up costing companies more money in the long run. In this post, we discuss some of the reasons we feel this is a big mistake.
One of the most obvious costs associated with cancelling an insurance policy is that something happens, exposing the company to liability for which there is no longer insurance. The cost to address that liability would need to be covered out-of-pocket. While business owners might assume the risk of a major liability event occurring, they do happen, and people and businesses take out insurance policies precisely because they’re unexpected.
Costs of Cancelling and Re-Insuring
Most insurance policies have a set term attached to them. Cancelling mid-term doesn’t typically come with a refund. The business is simply out the money they’ve already put down for their premium. Additionally, just as with auto insurance, business insurance providers see gaps in coverage as a sign of potential risk. They’re likely charge higher premiums when a company decides it wants to add coverage again.
Many Agreements Require Insurance Coverage
Many business-to-business agreements with customers, suppliers and other business partners include a number of contract provisions designed to manage risk for everyone involved. These frequently include requirements that companies carry a certain amount of insurance coverage. The same can even be true of many business loan agreements. Cancelling insurance might make it harder to secure new business-to-business agreements and loans in the future. Cancellations might also jeopardize agreements that are already in place! Failing to maintain the insurance required in a contract with another company could serve as a breach of that agreement, resulting in defaults and costly contractual messes.
Many Permits and Licenses Require Insurance Coverage
Similarly, many permits and licenses with federal, state and local regulatory bodies also require insurance coverage. Eliminating that coverage could jeopardize those licenses and permits. The time and money involved in re-acquiring those rights, as well as the business lost from losing them in the first place, can greatly outweigh any temporary insurance cost savings.
Other Options Exist for Reducing Costs
As a final consideration, businesses should be aware that that insurance isn’t an all-or-nothing game. There are various tiers of coverage and various packages of covered events businesses can adjust depending on their needs. If a business decides that it does absolutely need to reduce its insurance premium costs, it should start by evaluating whether reducing coverage can help save money without eliminating coverage altogether. This might include negotiating a lower maximum coverage amount, eliminating coverage for certain events that are no longer needed due to changes in business volume or practice. It’s natural for business owners to look for ways to reduce costs, especially during the kind of widespread uncertainty caused by an international pandemic and economic downturn. But while insurance premiums might seem like a tempting target for cost reduction, particularly when the coverage is rarely, if ever, called upon, there are many reasons it can be a big mistake to eliminate business insurance policies. From a financial standpoint, many companies may find it costs them more than they save in the long run.