Should I Cancel Business Insurance During Shutdown?

If you’re one of the many businesses deemed “non-essential” and are feeling the impact of being temporarily shutdown by a shelter-in-place order, you’re seeking ways to manage your business through this tragedy. You may be asking, “should I cancel business insurance during the shutdown?”

This makes sense, cost cutting is the best first step.

You’re not alone, many owners and managers looking critically at their budgets are beginning to consider cancelling all of one of their insurance policies. Why not? If your closed what’s your exposure?

If you cancel business insurance, it may cost more in the long run.

Canceling your insurance coverage while your business is temporarily closed may seem like a smart financial decision, and for some it may be necessary, but the short-term savings may cost you more in the long-term.

Before we start, it’s important to note that your business insurance doesn’t likely provide coverage for a pandemic unless you purchased the communicable disease endorsement or rider. But it does provide you protection for other potential losses. To learn more, you can read our COVID-19 FAQ’s page.

As you consider your options, here are a few things you should consider before you cancel your business insurance.

You may not get a full refund of premium.

Here is the thing that will frustrate you most, you may not get a full refund of premiums already paid, or alternatively, you may still owe the insurance company money when you cancel your business insurance coverage.

Depending on the insurer or the type of policy you’ve purchased, providers may include a “minimum earned premium” clauses in their policies. If your policy has one, you’ll still have to pay a percentage of the total premium if you cancel coverage.

You may pay more the similar coverage when your purchase new insurance.

Business insurance providers don’t normally allow a brief lapse in coverage with a reinstatement in a few weeks. If you cancel your policy, you will have to purchase a new policy when you’re ready to re-open.

Here is the catch, under normal circumstances, insurance carriers view lapses in coverage negatively, so when you do seek new coverage you may find the premium to be higher than your previous policy.

While I wouldn’t plan for it, there is also a possibility that insurance carriers will carve-out lapses resulting from stay-at-home orders. However, until insurance carriers make that determination, there is no certainty your lapse won’t increase your premium. It’s best to operate under the premise that a lapse if viewed as an increased risk and could cost more money in premiums new coverage.

You could lose permits or licenses

Your specific business segment may require you to carry insurance (eg. construction), and a cancellation may put future payments or jobs at risk.

In nearly all jurisdiction, worker’s compensation is mandatory, and to maintain your office or location lease, you may be required to have general liability insurance.

If you cancel certain insurance policies, you risk putting some licenses and permits in jeopardy, or you may be in breach of a contract. Getting them back can be expensive and time-consuming, and there’s no guarantee you’ll succeed.

For instance, cities and counties typically issue a limited number of liquor licenses. A restaurant owner who cancels insurance could end up losing that valuable license to the competition.

When closure orders are lifted, you want to be licensed and ready to re-open immediately.

Without insurance you could be on the hook for damaged or lost property

For some businesses, theft and/or vandalism is a constant worry. If your storefront is closed and unattended, this risk will only increase.

Burglars and vandals aren’t inclined to abide by shelter-in-place orders.

Vacant or not, open or not, damage can still occur, and you’ll want to have your insurance protection.

If you have a storefront, warehouse or office, you likely have commercial property insurance and general liability insurance. In fact, you landlord or mortgage company may require this protection. If you cancel your commercial property insurance, you’ll have to cover the costs to repair or replace damaged or stolen property out-of-pocket.

You may have to pay for the cost of a auto accident

To survive, many small businesses are offering or expanding delivery services. If this is your business, the probability that you or an employee will have an accident has increased.

You can’t rely on personal auto insurance to cover business related auto accidents. They aren’t designed for commercial use and may have specific exclusions for your specific business use. That’s why you shouldn’t cancel your commercial or hired and non-owned auto insurance policies.

If you cancel your commercial auto insurance and/or the hired and nonowned endorsement, you might have to pay out-of-pocket for medical costs or damage resulting from an auto accident.

Scarier yet, you won’t liability protection if you or your employee are determined liable for injuries or property damage to others.

Could lack of proper insurance cause a default on a loan or lease?

Your business, like so many, is dependent on financing. This could be your mortgage or equipment loan or lease. Your lenders likely have contracted that you provide evidence of insurance.

If you temporarily drop your insurance coverage, you may find yourself in default, even if you’re current with payments.

Check the fine print of your lease and loans for the business insurance requirements before you cancel any policies.

What can you consider besides canceling insurance?

The one thing that is certain, things will get back to normal, and you’ll need all your tools and financial assurances to continue operations.

Cancelling your insurance protection, just may be the wrong cost savings for short term, but you do have other insurance related options.

The first thing you should do is to contact your insurance agent to review adjusting coverages, deductibles and a review of the endorsement and value add items that may not be necessary given current circumstances.

It may even be time to consider a change of carrier. If you’re considering a change, act quickly. Rates are likely to increase, so now is the time to find the best quote and lock in your rate.