Common Mistakes Small Business Owners Make (2025)
COMMERCIAL INSURANCE
12/11/20244 min read
Small business owners often face a steep learning curve when managing their operations, especially when it comes to risk management and insurance. Here are some common mistakes small business owners make regarding liability risks and how to avoid them:
1. Underestimating the Need for Insurance
Mistake:
Thinking, “Nothing bad will happen to me” or assuming they don’t need coverage because their business is small.
Why It’s a Problem:
Even a single liability claim can result in devastating financial losses, sometimes bankrupting the business.
Example:
A coffee shop owner doesn’t get general liability insurance, assuming spills won’t lead to significant accidents. A customer slips on the wet floor, breaks their hip, and sues for $100,000.
How to Avoid:
Recognize that every business, no matter its size, faces risks. Start with a Commercial General Liability (CGL) policy and expand coverage as needed.
2. Not Understanding Policy Exclusions
Mistake:
Assuming their insurance covers everything.
Why It’s a Problem:
Exclusions can leave you exposed to risks you didn’t realize were uncovered, like professional errors or cyberattacks.
Example:
An IT consultant assumes their CGL policy covers errors in their advice, but it excludes professional liability, leaving them vulnerable to lawsuits from unhappy clients.
How to Avoid:
Review your policy with an insurance agent to understand exclusions. Add necessary coverages like professional liability, cyber liability, or employment practices liability.
3. Ignoring Products and Completed Operations Risks
Mistake:
Believing that liability ends once a product is sold or a job is completed.
Why It’s a Problem:
Claims can arise long after the sale or project is finished, leaving your business exposed if you don’t have Products-Completed Operations Liability.
Example:
A contractor completes a deck, but it collapses six months later, injuring the homeowner. Without coverage, the contractor must pay out of pocket for medical bills and damages.
How to Avoid:
Ensure your CGL policy includes Products-Completed Operations Coverage, especially if you sell products or perform physical work.
4. Setting Inadequate Policy Limits
Mistake:
Choosing low coverage limits to save money.
Why It’s a Problem:
The cost of lawsuits, medical expenses, and property damage can quickly exceed low limits, leaving your business to cover the difference.
Example:
A business with a $100,000 liability limit faces a $250,000 lawsuit. The owner has to pay the remaining $150,000.
How to Avoid:
Work with your agent to choose limits that reflect the risks of your industry, location, and business size. Many businesses opt for at least $1M per occurrence and $2M aggregate.
5. Not Reviewing and Updating Coverage
Mistake:
Treating insurance as “set it and forget it.”
Why It’s a Problem:
As your business grows, your risks may change, leaving you underinsured.
Example:
A bakery expands into catering but doesn’t update its policy to include off-site operations. A catering accident occurs, and they discover the policy doesn’t cover off-premises activities.
How to Avoid:
Review your policy annually or after major business changes like hiring employees, adding services, or expanding operations.
6. Failing to Protect Against Employee Risks
Mistake:
Assuming general liability covers everything related to employees.
Why It’s a Problem:
Claims like workplace discrimination, wrongful termination, or harassment are not covered under CGL policies.
Example:
An employee sues for wrongful termination. Without Employment Practices Liability Insurance (EPLI), the business pays legal fees and settlements out of pocket.
How to Avoid:
Add EPLI if you have employees. It covers claims related to hiring, firing, and workplace conduct.
7. Neglecting Cyber Liability
Mistake:
Believing cyber risks only affect large companies.
Why It’s a Problem:
Small businesses are often easier targets for hackers. A data breach can lead to costly lawsuits, fines, and lost customer trust.
Example:
A small retailer suffers a cyberattack that exposes customer credit card information. Without cyber liability insurance, the business faces steep recovery costs.
How to Avoid:
Invest in cyber liability coverage to handle breaches, ransomware, and data recovery.
8. Forgetting Workers’ Compensation
Mistake:
Skipping workers' compensation coverage to save money, especially for part-time or seasonal workers.
Why It’s a Problem:
Most states require workers' comp for employees, and failing to have it can lead to penalties and lawsuits.
Example:
A part-time employee slips in the stockroom and breaks their wrist. Without workers' comp, the business is liable for medical bills and lost wages.
How to Avoid:
Understand your state’s workers' compensation requirements and ensure you’re compliant.
9. Assuming Home-Based Businesses Are Covered
Mistake:
Relying on a homeowner’s policy to cover business risks.
Why It’s a Problem:
Homeowner policies often exclude business-related claims, leaving you exposed.
Example:
A photographer runs a business from home. A client trips over equipment and sues, but the homeowner’s policy denies the claim.
How to Avoid:
Purchase home-based business insurance or a business owner’s policy (BOP) for proper coverage.
10. Not Keeping Documentation of Incidents
Mistake:
Failing to document accidents or near-misses promptly.
Why It’s a Problem:
Without proper records, disputes become harder to resolve, and insurers may deny claims.
Example:
A customer claims they slipped in your store two weeks ago, but you don’t have an incident report or witnesses to verify the claim.
How to Avoid:
Create an incident reporting process and train employees to document all accidents, even minor ones.
In Summary: How to Avoid These Mistakes
Work with a Knowledgeable Insurance Agent to tailor coverage to your business needs.
Understand Your Risks: Review potential exposures and ensure adequate coverage.
Review Policies Annually to adapt to changes in your business.
Document Incidents Promptly to support potential claims.
By avoiding these mistakes, small business owners can protect their assets, build resilience, and focus on growth without fear of unexpected liabilities.
Learn more about Commercial General Liability
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