Many business owners have not considered the impact changes in the business environment will have on their insurance requirements.
A total of 5.4 million new business applications were filed in 2021, surpassing the 4.4 million applications filed in 2020, according to data from the Census Bureau. In 2019, the year before the coronavirus pandemic, 3.5 million new business applications were filed. The past two years have created a boom in startups with a surge in entrepreneurship attributed to workers who lost their jobs because of the coronavirus pandemic or who simply reevaluated their lives during the pandemic and started the business they always wanted to.
“With the Great Resignation, we have seen some professionals leave larger firms to form their own businesses, as well as more professionals accelerating their retirement and providing part-time services," says Sarah Medina, president, professional liability, The Hanover. “While these professionals have strong relationships with their clients and are experts in their spaces, the need for professional liability insurance does not abate."
Small businesses have adapted how they do business, interacting with clients more digitally and adjusting their offerings to meet the changes over the past two years. Meanwhile, businesses that did not have online stores prior to the coronavirus pandemic have had to rethink their business model.
Yet, many business owners—new and old—have not considered the impact such changes will have on their insurance requirements, leaving them open to potential coverage gaps that could result in significant costs from a lawsuit.
“Professional liability policies rely specifically upon the accuracy of the professional services listed, so if any new services are being undertaken, owners should contact their agent and look to have them added," says Paul Melone, senior director, professional liability, Markel. “Offering new professional services that are not specifically enumerated on the policy may leave them without coverage that they need."
Typically, small businesses do not review their insurance policies regularly, with 42% indicating they have not reviewed their policies within the past 12 months, according to The Hanover's 2022 Small Business Risk Report. Therefore, small businesses may be unaware of the specialized insurance protection they require, which is a concern given that 78% of small businesses engage in one or more activities that present a professional liability risk exposure, according to The Hanover's report.
Changes made by small business owners to meet demand and to help them survive, particularly over the past two years, has “opened up a lot of new potential ways to interact with customers, which in some ways is good, but it caused a little more stress in terms of response requirements or response expectations," says Manny Cho, executive vice president, executive lines, RPS. “What a lot of companies needed to create is a different set of operational standards and controls—so it didn't fundamentally change the professional liability scope of what they are doing. What it did is it changed how they're delivering their services."
With many new, tech-enabled business start-ups or home-based businesses, there is increased cyber exposure. “Now, you're more likely to be capturing and dealing with a lot more digital data for the companies or people that you work with," Cho says. “It could be a lot of protected information, it could be a lot of private information or intellectual properties. How you're storing and protecting that information is critical."
Many professional liability insurance policies contain some form of basic cyber liability coverage, and insurance carriers often offer additional cyber coverage to make the policy more attractive.
However, with 52% of new small business owners launching their new companies with less than $10,000 in funding and nearly half of that group with less than $5,000 on hand on opening day, according to a Salesforce survey, purchasing professional liability insurance may be difficult for many small business owners.
The reason: “While it's affordable, many small business owners feel they may not be at risk given the complexity of the coverage. But compromising on errors & omissions coverage can have long-term impacts," Medina says. “Unhappy customers can withhold payments, costing professionals operating income, while liability lawsuits can expose them to significant costs, jeopardizing profitability and reputation."
Olivia Overman is IA content editor.