The crisis management motto for small businesses should echo that of the Boy Scouts of America: “Be Prepared.” A crisis can be anything that threatens the existence of the business, says Robert Hartwig, co-director of the Center for Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina and a clinical associate professor. Prior to joining the Darla Moore School of Business, Robert was president and economist for the Insurance Information Institute in New York.
Small businesses may experience a crisis because they are often not prepared or as well prepared as larger companies. “It is easier for a crisis to occur in a small business because small businesses by definition have fewer redundancies,” Robert says. “If the CEO of a large corporation dies, the company probably has a pipeline of individuals already identified. If Walmart loses one or two buildings to a tornado, they still have 2,200 other buildings, so they are not going to go out of business. Many small businesses just assume that it can’t happen to them or won’t happen to them.” And that is the biggest mistake.
Crisis management experts tend to group business crises by type:
- Financial crisis
- Personal crisis
- Organizational crisis
- Technological crisis
- Natural crisis
But as Robert notes, a crisis could be related to property, liability, educational issues, or the health of the owner.
Natural disasters are an omnipresent risk for South Carolina businesses, from the historic flood four years ago to the annual threat of hurricanes. A natural disaster brings with it two types of crises. The most obvious is the need to rebuild or repair, which is often covered by insurance. But the most common reason that small businesses fail to recover from a natural disaster is that they don’t have enough business interruption coverage for the interim. The business’s revenue stream is gone, but they still have expenses. “Just because you are not operating doesn’t mean you don’t owe the mortgage. A lot of business owners forget about that,” Robert says.
Even if a business is not severely damaged, it can still experience a crisis. If a business suffers only minor damage from a natural disaster and is back up and running in a day or two, customers may not come back immediately, especially if the disaster is widespread. Maybe the road to the business gets washed out. “You need business interruption coverage to tide you over. This is the most common cause of small business failure after a disaster. Not the lack of property insurance, but the lack of business interruption insurance. Those are property related risks,” Robert explains.
Liability issues can also present significant crisis management issues. “This is a litigious country, and South Carolina is a litigious state,” he says. “The question is not if you will be sued; it is when you will be sued and for how much.”
While small businesses need sufficient liability coverage for the ordinary situations, such as if someone slips and falls or if a heavy box falls on a customer’s head, a particularly challenging area now is commercial auto claims. The frequency and severity of those claims has been rising. At one time whiplash was the primary claim, but now more often it is traumatic brain injury. Businesses need to be sure that they carry sufficient high limits on all their liability coverages.
Businesses may want to carry a commercial umbrella policy, a liability policy that sits on top of all of a business’s other liability policies. If a business exhausts the liability on its commercial auto policy, the umbrella would kick in. “It has its own separate limits, but it would not kick in until you have exhausted the limits of your other policy, so it’s backstop. And it is usually not that expensive, and it provides you an added layer of protection,” Robert says.
Businesses may also consider employment practices liability insurance. In the “Me Too” movement era, even a small business could get sued for sexual harassment, racial discrimination, or age discrimination. The employment practice liability policy can cover businesses in what has become an expanded area of litigation.
But beyond the traditional property and casualty risks, small businesses need to think about and plan for the crisis that can arise from the health issues of key employees. The most common form of organizational structure for businesses in the United States is the sole proprietor, and increasingly more people are freelancing and working for themselves. Many of these individuals are their business, and they are legally and economically inseparable. What happens if the sole proprietor, the business owner who is generating the bulk of the income in the family, becomes incapacitated or dies? “Having disability insurance on the proprietor as the owner would be a smart thing to do,” Robert says. “That would typically replace a portion of the income that was lost. And then there should also be life insurance in place.”
An individual typically would have some life insurance, but the owner of a business should carry even more life insurance because if the proprietor or a partner were to die, costs will be associated with trying to sell that business or find a new partner. These life insurance policies can be taken out not only by the individual or a family member but also by the business. “It is called Key Person Life Insurance and is considered a legitimate business expense,” explains Robert. “It is a reasonable expense to have the business pay the premium, and that would provide for whatever potential cost might occur in the event of the untimely death of the proprietor, the partner, or whomever.”
In a limited liability partnership, having a policy that would initiate in the event of the death of any one of the partners would be wise. “If there are two or three partners, the death of any one of those partners could lead to the death of the business,” Robert says. “You have to think about anything that could have a negative impact on your ability to continue as a concern.”
Some of the current issues revolve around cyber attacks. “Cyber risk is a Top 5 issue, no question about it,” says Robert. The threat of ransomware has become epidemic in the small business world, including nonprofits. Information or computer access is often ransomed for just a few thousand dollars, and in many cases the only alternative is to pay the ransom.
“They might say, ‘Who would attack me? I’m a small business,’” Robert says, indicating that is exactly what makes them vulnerable. “They are going to attack you because you are a small business and they expect you to be unsophisticated in terms of firewalls and other protections. They know you won’t be able to pay $1 million or $300,000, but they’ll ransom you for $3,000 because they know if you can’t get up and running today you will experience a huge loss. So that’s a crisis if you wake up and all your computer systems are down or locked. Many small businesses sell over the web. If they can’t do that, it’s a crisis. Having cyber insurance is the solution.”
A small business might also find itself with a reputational crisis. If someone gets sick at a restaurant, that can be a liability issue, but what if someone leaves the restaurant without telling the manager and then posts on social media? The impact of social media on a business’s reputation can be huge. “My usual advice in those situations is: ‘How would you have handled that complaint if you had heard it from the patron at the restaurant?’ A good business would try to make it right. On Facebook, you can message the person and still try to make it right,” he says. “Small business owners are not necessarily that sophisticated with social media. Their initial instinct is to get angry, and understandably so, but that won’t solve the problem.”
The key to surviving a business crisis comes down to being prepared and that means having a plan. Crisis management insurance is designed to help a business limit the negative impact of events on its reputation, and typically that coverage is bundled with other options.
Robert says, “Understand your vulnerabilities and run through those with your insurance agent to make sure that you have the resources to tide you through those vulnerabilities. I think many businesses just don’t understand how vulnerable they are.”