Business insurance is not evolving as fast as business ideas
Insurance is an old business.
Our roots date back to ancient Greece’s bottomry contracts that protected merchants if a ship were lost at sea.
The Great Fire of London in 1666 marked the beginning of modern property and liability insurance.
The industry has evolved a lot since then, but it’s a slow process.
Why Is There an Insurance Problem for Side Hustles and Startups?
There’s No Loss History on Emerging Markets
Being an “old” business, the commercial insurance industry doesn’t have claims classifications for “new” occupations.
Today we don’t think twice about the profession of graphic design.
But twenty years ago, there wasn’t an insurance classification code for a graphic designer, so underwriters did not know how to classify the risk. They had to extrapolate and find a profession with similar risks, like an accountant.
They’re both sitting in offices working with clients, so exposures might be similar.
The struggle for the insurance industry now is trying to acclimate new business into old-world insurance terms.
Especially the gig economy of self-employed people. Think part-time home/hotel hosting. Sneaker reseller. Beachfront lunch delivery.
Partly fueled by the pandemic, people are making up jobs and professions as they go.
Insurance has no data loss history to work from because these are completely new businesses.
The world has changed to a digital environment but the insurance industry is not equipped to cover it.
Changes Go Through State Insurance Commissions
If the problem is there are no codes to identify these emerging markets, why not just make new codes?
The short answer: time and labor.
There are all kinds of regulations that go with adding a new business code and rate, and it all has to be filed with and approved by the New York state insurance commission, which takes forever to approve new codes.
One example we ran across recently in New York was a fintech company trying to bundle homeowner’s insurance with a mortgage product. No such business code on the books, so they set about lobbying their congresspeople to help navigate the system. Right now, they’re selling in every state but New York.
New Startups / Side Hustles Don’t Operate Like Traditional Businesses Leaving Old Insurance Confused
Some side hustles are essentially resellers who buy products in bulk at discount club stores, then resell them for a profit on Amazon.
For insurance carriers, the problem is what kind of business is that?
If you’re a brick-and-mortar store and you buy supplies and sell products, you find a space to rent for your office, get a lease and have an insurance provider. Underwriters know how to cover that.
But with a side gig, people are running a business from their laptop, or out of their car or garage, so what property do they need to insure? There’s no landlord asking for insurance coverage.
There’s also an inherent product liability risk if you repackage items, especially food items.
If you buy in bulk and then repackage the product to resell individually, the manufacturer’s product liability ends when you break the factory seal.
What if the food is tainted?
That liability is on you, the repackager/reseller.
Where Your New Income Can Leave You Vulnerable
The $ Sign in Your Eyes is Blinding You From Seeing the Risk
You’re an entrepreneur.
You have a great idea for a side gig, you build a website, and you’re excited to begin growing your empire.
You’re likely not thinking about insurance or wondering what your risks are. But the minute you start transacting business, you have exposure and as soon as you sell a product, you have the potential for a lawsuit.
The danger is as an individual, if someone comes after you for a defective product, it’s a life-altering event that can wipe out life savings and homes.
Your side gig might be great for making money and there are no regulations or oversight to hold you back, but there are also no safeguards in this brave new economy.
If Bloggers Are Covering A Business, Who’s Covering Bloggers?
Here’s another new professional example: Blogger/Influencers.
There are fair trade rules about plugging a brand or product and regulations about deceptive marketing for traditional businesses.
But, what if an influencer promotes a restaurant and someone who takes their advice eats there and gets sick?
Are influencers responsible for the products/services they plug to their followers?
AirBnB is a Business
One more new profession: the Air BnB host.
What happens when you have property damage?
If your coverage is a primary owner policy, your carrier is not going to cover damage when you’re acting as a hotel.
In a case we saw recently, Air BnB guests damaged a client’s property and he filed a claim on his homeowner’s policy.
Not only did the carrier not cover the damage because he misrepresented the home’s use, they canceled his policy and returned six year’s worth of premium, vacating any coverage he would have had for prior claims.
It doesn’t pay to withhold relevant information from your insurer.
Advice from an Insurance Advisor and Business Owner
One thing we know for sure: you can be sued for anything at any time.
If you don’t have insurance for your side gig, you could face a lawsuit that kills your business, your dreams, and your personal assets.
If you’re considering launching one – or have already started – have a conversation with a qualified insurance broker.
Your insurance agent lives in the land of “what if” and can guide you appropriately based on revenue, industry, and location.
- a business owner’s policy
- professional liability
- property insurance for business assets
- crime insurance (fraud, theft, forgery)
- workers’ comp
- product liability
- vehicle insurance if you use a car or truck
- business interruption insurance if you have a physical location
- personal and advertising injury (think slander, copyright infringement)
- employment practices liability if you employ others
It might require some creativity to find a way to cover your side gig, but it’s worth it in the long run.
Remember the guy buying sandwiches and reselling them to beach-goers?
There’s no class code for cooler rental with a sandwich. It doesn’t slot perfectly with an existing business, but an insurer might look at it as a catering business, and voila, code issues are solved.
Now that’s thinking outside the [lunch]box.