Commercial Insurance Mistakes Top 5

Top 5 Mistakes High-Risk Business Owners Make When Buying Commercial Insurance

For business owners in industries that insurers label “high-risk,” securing the right commercial insurance is a strategic challenge. Whether you’re running a bustling nightclub in New York, a specialty manufacturing plant in Houston, or a construction company in Dallas, the insurance landscape can be fraught with potential pitfalls. These mistakes can lead to inadequate commercial insurance coverage, unexpected financial losses, and even threats to your business’s long-term viability.

At GrayStone Insurance Group, we specialize in helping high-risk and hard-to-place businesses across Austin, Dallas, San Antonio, Houston, New York, Denver, and Tampa. Our mission is to guide business owners away from these common errors and towards comprehensive, tailored protection.

Here are the top five mistakes we see high-risk business owners make when purchasing commercial insurance—and how you can avoid them.

Mistake #1: Relying on Standard, Off-the-Shelf Policies

The most common and most dangerous mistake is assuming a generic, “one-size-fits-all” commercial insurance policy will suffice. Standard policies are designed for low-risk, general-purpose businesses. For a high-risk enterprise, this approach is a recipe for disaster, as it often leaves glaring gaps in coverage that are only discovered after a claim is filed.

Why it’s a problem:

• Exclusions for Specific Risks: Standard policies often have specific exclusions for high-risk activities. For example, a general liability policy might not cover assault and battery claims, which are a significant risk for bars and nightclubs. Similarly, a general property policy may exclude flood damage, a critical exposure for businesses in coastal areas like Tampa or flood-prone regions like Houston.
• Inadequate Limits: The coverage limits on a standard policy may be far too low to handle the severity of a high-risk claim. A catastrophic workers’ compensation claim in a manufacturing setting or a multi-million-dollar Dram Shop lawsuit in an Austin bar could quickly exhaust standard policy limits, leaving the business owner personally liable for the remainder.

How to avoid it: Work with a specialized insurance broker who understands your specific industry’s unique risks. A broker who focuses on high-risk sectors can access a broader range of carriers and specialized policies, including those in the Excess and Surplus Lines market, designed to cover the very risks that standard insurers avoid.

Mistake #2: Underinsuring to Save on Premiums

In an effort to keep costs down, many business owners make the mistake of deliberately underinsuring their assets or liabilities. This might involve setting low coverage limits, choosing high deductibles without a sufficient reserve, or failing to update coverage as the business grows.

Why it’s a problem:

• Co-insurance Penalties: In commercial property insurance, a co-insurance clause penalizes you if you underinsure your property. For example, if you are required to insure your building for at least 80% of its value but only insure it for 60%, your insurer will only pay a fraction of any claim, even if it’s within your coverage limit. This can result in significant out-of-pocket expenses.
• Catastrophic Loss Exposure: The entire point of insurance is to protect against a catastrophic event. Undervaluing your property or setting low liability limits to save a few dollars on premiums is a false economy. A single fire, a major liability judgment, or a serious workers’ comp injury could easily lead to an uninsured loss that bankrupts the business.

How to avoid it: Conduct a thorough, accurate valuation of your business’s assets, including buildings, equipment, inventory, and business personal property. Work with a broker to determine realistic liability limits based on your industry and location. Remember, the goal is not to have the cheapest policy, but to have a policy that will truly protect your business when it needs it most.

Mistake #3: Neglecting Risk Mitigation and Safety Practices

Some business owners view insurance as a simple cost of doing business, rather than a component of a larger risk management strategy. They believe that as long as they have a policy, they don’t need to invest time or money into safety protocols and risk reduction.

Why it’s a problem:

• Higher Premiums: Insurers are highly motivated to see you mitigate risk. A business with a poor safety record or a history of frequent claims will always pay more. Conversely, demonstrating a commitment to safety through training, certifications, and robust protocols can lead to more favorable premiums.
• Increased Claim Severity: Without proper risk mitigation, not only are claims more frequent, they are often more severe. For example, a construction company in San Antonio that fails to enforce strict safety measures on a job site is more likely to experience a serious injury, leading to a much larger workers’ compensation claim.
• Loss of Coverage: In some cases, a business’s failure to adhere to safety recommendations or industry standards can result in an insurer non-renewing a policy or even denying a claim if it can be proven that negligence was the direct cause of the loss.

How to avoid it: Embrace a proactive safety culture. For a bar owner in Austin, this means mandatory TABC certification for all staff and strict policies on refusing service to intoxicated patrons. For a Denver cannabis grower, it means having fire suppression systems and robust security. For all businesses, it means regular safety audits, employee training, and clear, documented procedures for all operations.

Mistake #4: Failing to Update Coverage with Business Changes

High-risk businesses are often dynamic—they expand, they change services, they acquire new equipment, or they enter new markets. A common mistake is to let an insurance policy remain static while the business evolves, leaving new risks uninsured.

Why it’s a problem:

• Uninsured Exposure: A Houston manufacturing company that purchases a new, expensive piece of machinery might assume it’s covered under their existing property policy. However, if they don’t inform their insurer and a claim occurs, the new machine may not be covered at all.
• Changes in Liability: A restaurant in Austin that begins offering catering services, including delivery, has new commercial auto and off-site liability exposures that their original policy may not address.
• Policy Voiding: In some instances, a significant change in operations that goes unreported to an insurer could be grounds for a policy to be voided, leaving the business completely exposed.

How to avoid it: Treat your insurance policy as a living document. You should conduct an annual review of your coverage with your broker, and inform them immediately of any significant changes, such as:

• Purchasing new equipment or property.
• Expanding your services or entering new markets (e.g., adding delivery services).
• Hiring new staff or changing the scope of their work.
• Relocating your business or opening a new location.

Mistake #5: Not Partnering with a Specialized Broker

This mistake is often the root cause of all the others. A high-risk business owner who works with a generalist agent who typically handles standard, low-risk clients is at a significant disadvantage.

Why it’s a problem:

• Limited Market Access: Generalist agents often have access to a limited number of standard carriers. When they are faced with a high-risk business, they may struggle to find competitive quotes or even any coverage at all. A specialized broker has access to the specialized markets and underwriters who are experts in your specific industry.
• Lack of Expertise: A generalist agent may not understand the specific risks of your business. They may not know to ask about liquor liability for a food truck in Austin, builder’s risk for a project in New York, or environmental liability for a manufacturer in San Antonio. This lack of knowledge can result in crucial coverage gaps.
• Ineffective Advocacy: In the event of a claim, a generalist agent may not have the expertise or relationships to effectively advocate for you with an insurer on a complex, high-risk claim.

How to avoid it: Partner with an independent insurance broker like GrayStone Insurance Group, who has a proven track record of working with high-risk businesses in your industry and location. A specialized broker is your advocate, your advisor, and your expert guide through the complexities of your insurance needs.

FAQs About Commercial Insurance for High-Risk Businesses

Q1: What is the “Excess and Surplus Lines” market, and why might I need it? A: The E&S market is a specialized segment of the insurance industry that provides coverage for risks that standard, or “admitted,” insurance carriers are unwilling to underwrite. High-risk businesses often need E&S coverage for hard-to-place risks like specific types of professional liability, unique property exposures, or emerging industry liabilities (e.g., cannabis). Working with a broker who has access to the E&S market is crucial for many high-risk businesses.

Q2: How can I lower my high-risk insurance premiums? A: The best way to lower your premiums is to reduce your risk. This can be achieved by:

• Implementing and documenting a strong safety program.
• Ensuring all employees receive proper training and certifications.
• Maintaining a clean claims history.
• Installing security systems, fire suppression, or other safety equipment.
• Choosing a higher deductible if you have the financial reserves to do so.
• Working with an independent broker who can shop the market for you annually.

Q3: Is it possible to get all my high-risk coverages from one insurer? A: It is possible, but not always the best solution. Depending on your business, you may need a blend of policies from different carriers. For example, your general liability might be with one carrier, while your workers’ comp and cyber liability are with others. A specialized broker can help you build a comprehensive insurance program that may involve multiple carriers to ensure you get the best coverage for each specific risk.

Secure Your Business’s Future with GrayStone Insurance Group

Navigating the complexities of commercial insurance for a high-risk business can be daunting, but it doesn’t have to be. By avoiding these common mistakes and partnering with a specialized independent broker, you can secure the comprehensive and reliable protection your business needs to thrive.

Ready to get the right insurance for your business? Contact GrayStone Insurance Group today for a personalized consultation and a customized insurance solution.