Commercial Insurance Considerations for Family Businesses

The commercial insurance industry has long been a key resource for mitigating business risk – and family businesses have historically benefited from third-party insurance support.

In fact, for all commercial businesses, some level of third-party risk solutions has been a standard practice. But recently, several high-pressure issues in the insurance marketplace have made a once-predictable business expense extremely volatile and tremendously complex.

Such issues include continued inflationary pressure on replacement costs, higher interest rates on customer credit risk, loss-severity & reduction in reinsurance market capacity driven by climate volatility, elevated levels of cyber and environmental risk, and rapidly evolving employment case law featuring large jury awards.

On the bright side, the market continues to create and offer new risk solutions. With all these factors combined, it’s more important than ever for family business owners and managers to develop market insights and understand how best to craft a cost-effective risk management program.

You can’t rely on the same approach as last year and expect it to be effective. You must be vigilant.

The Importance of Risk Assessment

Business owners typically have looked to third-party insurance partners as a primary resource for managing their business risk.

However, we’ve found that many family businesses choose their insurance partner without completing a robust risk assessment. This means they don’t fully understand their comprehensive level of risk – or which risks are most urgent to address.

All too often, this translates into too much or too little reliance on insurance solutions that aren’t cost-effective and/or comprehensive. Unfortunately, most people find this out when they need their insurance the most – or when their rates spike.

As a rule, we advise that third-party insurance should be reserved for the kind of risk that can’t otherwise be passed on to customers, vendors or those who are economically self-insured. And when it comes to choosing an insurance partner, you should first complete an exhaustive risk assessment process, which considers the following factors:

  • Cybersecurity
  • Environmental liability
  • Key Man life insurance
  • Policy review
  • Credit insurance
  • Group captive
  • Integration of business and personal insurance policies

Now let’s take a closer look at how each of these considerations should inform your insurance choices.

Cybersecurity

More and more of today’s business tools depend on digital and cloud-based solutions – which while often improving productivity can also introduce threats to your business’ cybersecurity.

In fact, cybersecurity is the No. 1 concern for most corporate risk managers – and it can typically be addressed through tightening internal controls and carefully vetting any digital and/or AI solution before it’s adopted.

Only after you’ve put these internal controls in place should you seek a third-party insurance solution in this space.

Environmental liability

Increased regulatory pressure at all levels makes environmental liability top-of-mind for many family business owners.

Adding environmental liability coverage to an existing commercial insurance program may be a low cost/high payoff solution for some commercial and industrial businesses.

A history of this type of coverage also may be useful during a change of ownership.

Key Man Life Insurance

Key Man” life insurance can help protect the value of your family business when there is an unexpected death of any key employee.

This type of coverage also may help facilitate a merger or acquisition opportunity or new credit opportunity.

Having this kind of policy in place is a good sign for potential lenders that your company isn’t vulnerable to a life event.

Policy Review

It may not be your favorite part of the job, but it’s essential to make sure you stay up-to-date on changes within the insurance industry – and let those changes inform the decisions you make about your HR policies and procedures.

You have to be disciplined and thorough to make sure new changes don’t surprise you, and that you’re also clearly communicating expectations to your team.

Credit Insurance

Using credit insurance can have a few benefits for your business.

First, it may allow a quicker domestic customer credit approval process – which means you can gain a new client or customer without the risk of losing them while you conduct a typical sales default credit risk.

This benefit also could be related to a supplier whom you’re relying on to take advantage of a newly originated long-term sale or purchase contract.

Group Captive

You could consider joining a group captive for casualty coverage, along with a separate employee benefits solution.

This approach allows you to enjoy a much larger scale, which translates to pricing discounts for casualty insurance.

Integration of Commercial and Personal Insurance Programs

Integrating commercial and personal insurance programs may help in a couple of ways.

First, you may benefit from the company purchasing from the owner/employee seller, which helps your business achieve a lower cost and better availability of insurance options.

In addition, owners of farming or ranching commercial businesses may use their commercial policies for both workers’ compensation and excess liability policies.

Managing Third-Party Relationships

When it comes to the insurance market, your key relationships will be with your broker and your underwriter.

So how do you know when it’s time to change to a new partner?

We’ve noticed a few key signs. For example, if your broker is slow to respond to requests, or unavailable when you have an urgent matter to address, you should consider that a red flag – no matter how long they’ve been your partner.

In addition, if the renewal process is unclear or overly complex, or your broker’s efforts are yielding very few options for you, it may be time to research new partners.

You should expect at least three to five viable options for your consideration.

If you feel as though your broker doesn’t fully understand the nuances of your business, you could likely benefit from a new partner.

You shouldn’t have to keep educating your broker about what you do and the risk you’re exposed to.

When it comes time to choose a new partner, lean into your own professional contacts, especially those in your industry.

Find out everything you can about potential broker reputations, the industries they’re well-versed in and how they benefit their clients.

  • What underwriters do they work with?
  • What is their claims process like?
  • If relationships are important to you, will you be able to regularly connect with a real human, or is their process driven by bots?

Take your third-party insurance partnerships seriously

Overall, in today’s climate, it’s important to remember what is at risk if you take a “Same as Last Year” approach to your commercial insurance program – in essence, it’s the value of your equity in your family business.

That’s why we advise that clients take third-party insurance partnerships very seriously.

We also believe that most clients can benefit from an outside perspective – and we’re here to help.

If you’d like a partner as you navigate the commercial insurance landscape, our trusted advisors stand ready to assist you. Reach out for a consultation call today.

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