Sometimes things don’t go quite as planned and your company ends up a bit more cash strapped than anticipated at year end. The typical gut reaction is topull the rip chord and cut any and all “extraneous” expenses. Insuranceis considered by some to be one of those expenses. Here’s why you shouldn’t be quick to jump to that conclusion.
1. Exposure
This is obvious so we won’t spend much time on it. If you let your insurance lapse, all the risk exposure you had prior to purchasing insurance comes back. Depending on the coverage you have in place, this could mean lawsuits for accidents/injuries in the office, product downtime, data breach incidents, and more.
2. Legality
Again, this one is pretty straightforward: you arerequired by law to carry certain types of insurance. If you have employees on payroll, workers comp, disability, and unemployment insurance are required in most states.
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3. Retroactive Dates
MostDirectors and Officers, Errors and Omissions,Cyber Liability, and Employment Practices liabilitypolicies (to name a few) are what’s called a “claims made” policy. With a claims made policy,coverage will commenceand date back to the inceptionof the policy when it is originally bound.
Thestart date at inception on year 1 is called the “retroactive date.” This means that as the years go on, you effectively have a longer period of coverage as the retroactive date sinks further into the past. Arecoverableclaim in year 4 can arise from a wrongful act that occurred all the way back in year 1 so long as coverage has been continuous and the retroactive date is intact.
If you choose to let your coverage lapse or non-renew, you’re effectively resetting the retroactive date and throwing away your long-tail insurance coverage. Given that startupsare more inclined to make mistakes in their early days, it’s not wise to throw away the year(s) alreadyon the books.
More on claims-made policies here.
4. Reinstatement Fees & Paperwork
It’s not uncommon for an insurance carrier to charge some sort of reinstatement fee when trying to reinstate a policy that has lapsed for quite some time. There will usually be a bit of a grace period for a small lapse, but at a minimum there will some extra paperwork to verify that no claims arose during the lapse period. Startups should befocused on building the business, not extra fees and paperwork.
5. Ruining Future Prospects
When seeking insurance coverage, nearly every underwriter will inquire about your prior insurance history, specifically whether your previous policy or policies lapsed, were cancelled, or non-renewed, and the reasons behind such occurrences.
Disclosing lapses in coverage can significantly impact your ability to secure new insurance, akin to the challenges faced by a borrower with a poor credit history. As a precautionary measure on how to avoid risks, it’s essential to maintain continuous coverage to mitigate the potential of higher premiums, which often reflect the increased risk associated with a potentially delinquent account.
Startups should think hard before letting their business insurance lapse. It’s an expense that, if cut, could lead to a short-sided win and long-term loss for your company. Give us a call at(646)-854-1058 or shoot us an email at info@foundershield.com to make sure that doesn’t happen.
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FAQs
If you let your insurance lapse, all the risk exposure you had prior to purchasing insurance comes back. Depending on the coverage you have in place, this could mean lawsuits for accidents/injuries in the office, product downtime, data breach incidents, and more.
What happens if my business insurance expires? ›
However, a business insurance policy that lapses, expires, or is cancelled by a provider can leave you uninsured and exposed to paying for costly damages or lawsuits on your own. Should it happen to you, it can make getting a new policy difficult and more expensive.
What risks would you want to be sure to insure for your business? ›
Commercial insurance can protect you from some of the most common losses experienced by business owners such as property damage, business interruption, theft, liability, and worker injury.
How important is business insurance in an early startup? ›
Policies can protect you from employees, rivals, thieves and more. As you launch your company, there's a lot to think about, and getting insurance is probably nowhere near the top of your list. But it's worth taking a moment to consider the issue. Going without insurance in a world where risks abound can be dangerous.
What is the risk of insurance lapse? ›
Lapse risk is defined as the rate of surrenders, as well as paid-up and other discontinuances, being higher or lower than the insurer's best estimate assumptions, where such difference results in a diminution of own funds.
What happens if you let an insurance policy lapse? ›
If there isn't enough cash value in the policy to pay the premium, or once the cash value has been used up due to continued non-payment, your policy will slip into the grace period. Your policy will officially lapse once the grace period ends, meaning your coverage will end and no death benefit will be paid.
What is the biggest uninsurable risk for businesses? ›
Some of the most common non-insurable risks include natural disasters, pandemics, and acts of terrorism. While business Insurance can help protect businesses from many types of risks, it is important to be aware of the risks that are not covered.
What are 3 examples of business risks? ›
Examples of uncertainty-based risks include: damage by fire, flood or other natural disasters. unexpected financial loss due to an economic downturn, or bankruptcy of other businesses that owe you money. loss of important suppliers or customers.
What is the biggest risk of an insurance company? ›
6 insurance industry risk factors
- Compliance changes. Regulatory dynamics in the insurance sector are never static. ...
- Cybersecurity threats. ...
- Technology changes. ...
- Climate change & other environmental factors. ...
- Talent shortage. ...
- Financial risks.
Business Owner's Policy: The Best of Both
A business owner's policy (BOP) bundles general liability and commercial property insurance coverages and is generally the most affordable choice. With a single BOP policy, small business owners are protected against theft, lawsuits, fire and more.
If you've asked yourself, “Do I need insurance for my small business?” The answer is yes. A small business insurance policy can help with protecting your assets and company. Without this coverage, small businesses may have to pay to repair or replace damaged or destroyed property on their own.
How important is a business plan when starting a new company? ›
It will help you steer your business as you start and grow. Think of a business plan as a GPS to get your business going. A good business plan guides you through each stage of starting and managing your business. You'll use your business plan like a GPS for how to structure, run, and grow your new business.
Can I restart a lapsed insurance policy? ›
If it has only been a few days since your policy has lapsed, you can likely reinstate the policy without much hassle. If it has been several months or years, you might be able to reinstate your policy, but you will likely have to go through a reinstatement process with a new application.
Can you get money back from lapsed insurance policy? ›
Some insurance policies include a nonforfeiture clause, which means that if you stop paying premiums, you still receive some sort of benefit. You can think of this as a lapsed policy refund. If your coverage lapses, the insurance company will refund part of your premium payments and/or pay you the policy's cash value.
Can you pause a business insurance policy? ›
The majority of commercial insurance providers only permit consumers to halt their policies and resume them at a later date. If you no longer require coverage, you must cancel your policy and obtain a new one when you do.
What happens when your business insurance is cancelled? ›
Canceling insurance means you lose out on coverage for past work. Errors and omissions insurance is usually a claims-made policy. That means it won't cover claims filed after the policy is canceled, even if the claim involves an incident that took place while the policy was in effect.
