A small business owner purchases commercial insurance so that he or she can file a claim if something goes wrong at the venture.
It makes sense. Forty percent of small business owners will file a commercial insurance claim within the next 10 years.
So when something does go wrong, whether it's fire or storm or some other sort of covered event, there's no question about whether to seek help from a provider, right? Isn't that why the business owner has been paying premiums? Actually, the answer's not so clear cut, for a variety of reasons, and the right one can vary among business owners.
The solution has much to do with the business owner's claims history, his or her deductible—the amount he or she agrees to pay toward a claim—and the amount of harm the business suffers during the event.
What you should consider before you file a business insurance claim:
Reasons to File a Claim
Following are the factors to consider that favor filing a claim:
- As mentioned previously, that's why business owners purchase commercial insurance—property and liability—in the first place. If they're not going to use it, why buy it?
- Business owners need to make their businesses whole again after a covered event.
- If the event causes business operations to cease temporarily or relocate for repairs, a claim can keep the business afloat.
- Some claims, particularly liability claims, should be filed as soon as possible.
- Many commercial policies have an aggregate deductible, meaning the provider doesn't pay anything toward a claim until that deductible is met during a policy year. Declining to file a claim for one event just means the business owner is further putting off collecting on any claim during the policy term.
Reasons to Avoid a Claim
Here are reasons not to file a claim:
- The amount needed to address the situation might not exceed the business owner's deductible—or it might not exceed it by enough to make it worthwhile. It's a good idea to set deductibles as high as the policyholder can manage. All other things being equal, the lower the deductible, the larger the premium and vice versa.
- Filing a claim won't always cause commercial insurance premiums to increase but it could. That's true even if the policyholder later determines that the claim isn't worth pursuing. Over time, premium increases could wipe out any reimbursement you receive from a provider.
- A policyholder's claims history will follow him or her for up to seven years even if he or she switches providers.
- Some claims, particularly those that involve water damage, can cause providers to drop policyholders. The reason: water damage can involve mold, which is expensive to repair and can recur.
- Filing a business insurance claim can be an arduous process, and there can be expenses involved in documenting the damage, the cause of it and its effects on the company's finances.
- If a maintenance issue is involved in the loss, don't file the claim. It likely will be rejected.
The Most Common Claims and Payouts
Part of the decision on whether to file a commercial insurance claim rests with the type of claim. That has a huge effect on the potential loss. When a business owner suffers large losses, the decision leans much more heavily toward filing the claim.
According the study by The Hartford, the five most common commercial and property liability claims are the following:
- Burglary and theft: 20 percent of all commercial claims, however, the average payout for these claims is only about $8,000
- Water and freezing damage: 15 percent, average payout: $17,000
- Wind and hail: 15 percent, average payout: $26,000
- Fire: 10 percent, average payout: $35,000
- Customer slip and fall: 10 percent, average payout: $20,000
The message from these statistics is clear: most burglary and theft claims might not be worth the potential consequences of filing a claim. Property damage claims probably depend on the amount of damage and the deductible.
On the other hand, claims for customer slip-and-fall cases should be filed immediately. Most liability claims have no deductible, and the potential for huge awards is great; it's best to have the insurance provider in on them immediately.
It's important to respond quickly to the two least frequent claims types: reputational harm and commercial vehicle accidents. The average payouts are $50,000 and $45,000, respectively.
Related Article: 9 Ways to Save Money on Business Insurance
When the Decision is to File a Claim
Once the business owner has weighed all the factors and decided to file a claim, the best thing he or she can do is review the policy again to make sure the venture is insured against that particular threat. Then the policyholder should contact the provider as soon as possible.
The Insurance Information Institute recommends holding off on permanent repairs until an insurance company gives the OK. However, the policyholder should make temporary repairs to keep the damage from worsening.
For example, if there's a hole in the roof, put up a tarp to prevent more problems. If there's damage to any equipment, save the damaged parts.
Policyholders who plan to file business interruption claims must be able to demonstrate the income generated before and after the loss, including the cost of relocation to a temporary location.
The Answer to the Question
None of this is intended to discourage small business owners from filing claims against their commercial policies. However, knowing when to pick one's spots for a claim can result in long-term gains that could be more beneficial than a small payout now.
As is true for any decision involving a company, business owners should always weigh the benefits of taking action against the potential downside.