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1) “We haven’t really had any big losses and we’ve been here twenty years.”

This is the single most prevalent mistake people make when assessing their risk. Statistical science is not based on taking a sample of one. The predictive power of statistics comes about by sampling a very large population. Your individual history does not reliably predict your future. When you think about it, everything in your life proves this point. You may have been lucky so far and that will be true right up until something happens and then it is suddenly no longer true, and it will be too late to do anything about it.

So, although you have never suffered a major theft, vandalism or arson at your business:

  • If your business fails there is still a 30% chance it will have been due to crime (source: U.S. Chamber of Commerce).
  • There is still a 52% chance that you will suffer some crime in the next three years (Source: The Nat’l Fed. of Independent Businesses). The total cost of crimes (excluding white collar crimes of embezzlement) to small business of about 200 billion per year averages as about $197,000 per year per small business. This is an average of very small losses and very large ones and of businesses that had no losses in a given year and those that had big losses that year.

But your mind races away from this. Everything inside you screams out that this doesn’t apply to you! It contradicts your experience!  This is natural. It is very unsettling to think about these things, so our tricky, emotional minds resort to superstitious thinking or anecdotal evidence. “I haven’t had those losses…I haven’t slipped on the ice…I haven’t been in a major car accident…my business is not at risk for being put out of business…” But the cool, logical, analytic mind of scientific risk assessment knows otherwise. Who wants to think about bad things? Well, people who really value their future security do.

If you truly had little risk because you have been “lucky so far” then your insurance premiums would be zero. The reason your business insurance cost is what it is, is because the underwriters and actuaries have reliably assessed the risk cost of your business as a little under what your premiums are. This leads to the second biggest mistake people make thinking about risk.

2) “If I do have any risk, that’s what I got insurance for.”

If you have been paying $50,000 per year for your insurance and in ten years you have had one or two $5,000 claims, and now you have a $20,000 claim, your insurance company will pay the claim and not make a big deal out of it. After all, they have collected $500,000 and paid out $30,000. (But don’t think it is all profit for the insurers. On some of their insureds they have only collected a $50,000 premium, but had to pay out a five million dollar claim.)

But what happens to you when there is a two million dollar wrongful death claim paid out or a twenty million dollar claim for multiple people injured, or even a $700,000 one paid out because your business was one of the 30% of business failures due to crime, as that U.S. Chamber of Commerce statistic reports? I think you know what happens.

Insurance, when you get into big pay-outs, is really merely an extension of credit by the insurance company to you. They pay out the claim, as determined by a judge and jury, and you pay it back to the insurance company over coming years. Or you go out of business. This may seem a bit heartless, but that is the way it is.

Now, even the above understates the full picture. Your insurance company may not pay the claim. They may point to some negligence on your part by which their position is you failed to meet your requirement under the fine print of your policy. Or maybe there is an exemption, which upon careful rereading, means you are not entitled to compensation. This is a worst case scenario. But even if they pay their obligation under the policy it almost certainly will not cover all your actual costs. Also, your time, hundreds of hours devoted to depositions and trial preparation and trial. Your loss of your customers while your building or operations are disabled from the vandalism or arson or theft may or may not be insured. Your public relations damages if someone was injured on your property or a worker injured. Of course your deductible and anything above your policy limits are not covered.

It should be obvious that the companies in that statistic of 30% of business failures due to crime had insurance, but their insurance did not prevent that consequence. Think about that. For example, there are 31,000 non-residential arsons per year. Seventy percent of businesses with a major fire either never reopen or are out of business within three years (source: U.S. Fire Administration). They all had insurance.

So please understand that if you have a major crime your insurance company may or may not pay it depending on circumstances, almost certainly will not cover all associated costs, hundreds or hours of your time will be involved, and you will end up paying back over time what was paid out. Your premiums could rise so high that you become uninsurable or it is too expensive to stay in business. Insurance will not stop crimes. To protect yourself and your business, which is your greatest investment, you need to take active steps to actually stop crimes, prevent “accidents” (the preferred term is “incidents”) and reduce public liability and risks.