Small business owners are the acrobats of the business world. Running a small business requires flexibility and precision to perform multiple tricks, all while balancing ambition with caution.

Entrepreneurs constantly make critical decisions with limited budgets. Yet, the one key risk that many entrepreneurs overlook is the need for a safety net to catch themselves should they fall: adequate insurance coverage.

Surprisingly, 75% of small businesses in the U.S. are underinsured, according to the 2023 Hiscox USA Underinsurance Report. For businesses with narrow profit margins, insurance is essential in preventing an error or accident from snowballing into financial setbacks and legal entanglements.

Insurance agents play a critical role in educating business owners about the risks they face and the size of safety net they truly need to absorb the impact of a fall.

Why Small Businesses Are Underinsured

Understanding why small businesses tend to be underinsured helps insurance agents support their clients more effectively. These reasons include:

Cost-cutting missteps. Facing limited budgets, some owners may reduce or not purchase coverage to save money, unaware that this can lead to long-term financial strain.

Set-it-and-forget-it coverage. Many entrepreneurs treat insurance as a one-time purchase, renewed each year without review. What they don't realize is that as a business evolves, so do its coverage needs.

Policy confusion. A substantial number of small business owners misunderstand coverage details, leading to unexpected gaps. For example, 71% of small business owners don't fully understand what a business owners policy (BOP) covers, and 83% are unclear on general liability insurance, according to the Hiscox study.

Overlooked specialized coverage. Entrepreneurs, especially those in consulting or professional services, do not realize that general liability will not cover all their needs. Advisors can point out when additional policies, like professional liability, are necessary.

Small business owners are required to be masters of many talents, simultaneously managing finances, marketing and operations. Insurance often takes a back seat. That's why agents play a vital role as educators and advisors, helping clients navigate the complexity of adequate protection.

In fact, 56% of small business owners view brokers and agents as key resources to guide them through their insurance journey. By following these five best practices, agents and brokers can help small business owners avoid underinsurance:

1) Use plain language. Advisors can explain insurance in terms that small business owners can understand. For example, include how much a lawsuit could cost their business, noting that attorney fees for just two hours could exceed an entire year's insurance premium. Educating clients about the hidden costs of underinsurance and the potential consequences of perceived “savings" can shift their perspective.

2) Personalize advice. Every business requires a tailored approach to address its unique risks. The benefit of seeing an insurance professional is that they take the time to understand all aspects of a client's business to ensure they are appropriately insured and fully understand their coverage. Using real-world examples helps clients see the need for tailored coverage, such as what could happen to a consultant if they give bad advice.

Additionally, offering personalized solutions that balance affordability with comprehensive protection reinforces insurance as an essential investment for a business's long-term stability.

3) Require honesty. An agent can help to foster an open environment where a client feels comfortable being transparent about their business operations. When a client divulges all the information about a business, whether positive or negative, an agent can recommend the best possible coverage for full protection.

4) Provide a biannual check-up. Insurance is not a one-and-done concept. Agents and brokers help small business owners avoid underinsurance by highlighting how insurance must evolve with a growing business. Encourage clients to assess their needs biannually or after significant changes, such as acquiring new equipment, expanding services or increasing revenue. Regular policy check-ups ensure their coverage keeps pace with their operations, protecting them from unforeseen risks.

Independent agents and brokers play a critical role in not only encouraging small business owners to prioritize insurance, but also closing the underinsurance gap and helping to build a more resilient small business community.

Mary Boyd is CEO of Hiscox USA.