When owners of small retail businesses receive insurance quotes, they might experience a mixture of shock and resignation. It’s perfectly understandable. Insurance isn’t cheap, and premiums only continue to climb.
However, that sticker shock may be just the beginning for retailers who are ill-prepared and underinformed. The premium is just the tip of the iceberg; below the surface lurk many costs that most retailers don’t see coming until they’re in the middle of a claim, when it’s too late to make cost-saving adjustments.
The Premium Is Only Part of the Story
Business owners who familiarize themselves with the costs of retail insurance beyond the premium are better equipped to make the right choice for their retail business.
We’ve compiled a handful of important policy considerations to help you think through your options with clarity and confidence.
Deductibles
These are probably the most obvious “hidden” costs, although it’s surprising how many business owners forget about deductibles until they need to make a claim. Your deductible is essentially your co-pay for using your insurance. Commercial insurance deductibles can run anywhere from $500 to $10,000 or more.
Many policies now feature percentage-based deductibles for certain perils. Such percentage-based deductibles are becoming more common in coastal areas prone to hurricanes or regions with high wildfire risk. For example, instead of a flat $2,500, you could be responsible for around 2% of your building’s insured value. On a modest $300,000 building, that’s $6,000 coming out of your pocket before insurance kicks in.
Business Interruption Waiting Periods
Here’s another hidden business cost that catches many retailers off guard. General business interruption coverage sounds great on paper: it replaces your lost income if your store must close temporarily due to a covered loss. However, it is important to note that most policies have a waiting period of 48 to 72 hours before coverage begins.
If a pipe bursts and floods your store on Friday afternoon and you have to close Saturday and Sunday for cleanup, you’ll need to cover the lost revenue from those two days out of pocket. Even if you’re closed for a full week, your first 2 to 3 days of lost revenue could be subject to an exclusionary waiting period.
Unfortunately, those first few days are often the most expensive because you’re still paying your staff without generating revenue.
Coinsurance Penalties
If there’s one insurance concept that can really hit retailers hard, it’s coinsurance. That’s not because it’s particularly complicated, but because the financial implications can be devastating if you get it wrong.
In simple terms, coinsurance requires you to insure your retail property up to a certain percentage of its full replacement value, usually 80%, 90%, or 100%. Failure to meet coinsurance requirements results in costly penalties.
Let’s say you have a building worth $500,000, but to save money, you only insured it for $300,000. If your policy has an 80% coinsurance clause, you should have insured it for at least $400,000. If you have a $100,000 loss, the insurance company won’t pay the full amount. Instead, they’ll apply a penalty based on how underinsured you are.
In this example, you’d only get $75,000 for your $100,000 loss. That’s a $25,000 mistake and amounts to far more than whatever premium you “saved” by underinsuring.
Exclusions
Smart business owners don’t skim the exclusions section. They read it twice, then call their agent with questions. This is because what’s not covered in your policy can bankrupt you faster than what is covered.
Flood insurance is a classic example. Standard commercial property policies exclude flood damage, yet countless retailers assume they are covered. One heavy rainstorm with local flooding could leave you looking at tens of thousands in uninsured losses.
The same goes for earthquake coverage in many areas, equipment breakdown for specialized retail equipment, or cyber liability for your point-of-sale systems. These coverages typically require separate policies or endorsements, along with corresponding additional premiums.
The True Cost of Claims: Your Future Premiums
Here’s another important consideration: making a claim impacts what you will pay in the future. Insurance companies weigh a business’s claims history when calculating premiums at renewal time. While just one claim can be enough to spur a rate increase, those who make multiple claims could see their rates skyrocket.
Of course, this doesn’t mean you shouldn’t file legitimate claims; that’s why you have insurance in the first place. But it does mean that you might want to think carefully about filing any claims that are only slightly higher than your deductible, as the long-term increase in your premium might cost more than what you would recover in the claim.
Reach Out to JMG Insurance Agency
At John M. Glover Insurance Agency, we believe in full transparency. Our agents will walk you through all the costs involved in your insurance and explain your coverage options so you can secure a plan that covers your risks without compromising your budget or catching you off guard. Contact us today to schedule a consultation.
