Before you open a retail shop, insure your business against a variety of risks

Emmet Pierce

When you're preparing to open a retail shop, you may be more concerned about selling products and meeting revenue targets than buying insurance, but having adequate protection against lawsuits, accidents and natural disasters is essential.

Numerous things can go wrong at a retail shop. If you end up closing because you lack the money to replace damaged merchandise or equipment , you may have trouble reopening.

"Typically, the small retail business owner is just interested in moving merchandise," says Cheryl Estep, a State Farm agent in California. "I talk to business owners and they say they can't afford the insurance. You really cannot afford not to have it."

Business can be disrupted by everything from fires and floods to lost Internet connections and broken delivery vehicles. If you own your own retail space, you may be responsible for repairing structural damage, as well as replacing lost merchandise.

The danger posed by lawsuits

Because business lawsuits are quite common, Mark Jaffe, CEO of the Greater New York Chamber of Commerce, urges retail business owners to make sure they have adequate liability coverage.

"We live in a very litigious society," he says. "You don't know what is going to happen. That is what insurance is for."

Derek Ross, president of Kulchin Ross Insurance Services Inc. in California, recommends a minimum of $1 million in liability coverage for retail shops. For property policies, the amount of coverage usually is tied to what it would cost to replace the store and its contents. Many carriers don't write retail property policies for less than $25,000, he says.

"It depends on what type of property they have in their business," Ross says. "If they have a florist shop, $25,000 probably is enough. A small apparel story could easily have $500,000 worth of merchandise. The first question is, 'How much money in inventory do you have?'"

There's no rule of thumb for the percentage of gross retail shop revenue that should be spent on insurance, according to Espey. That's because policies are based on each owner's needs and the risks they face. When setting premiums, insurance underwriters will consider your sales, payroll and the insurance limits you choose.

"Each carrier has their own mechanism," Ross says. "Some set rates based on square footage. The type of risk will be another variable. A flower shop will be less hazardous than a fireworks store."

Covering your bases

Basic coverage for retail shops should include:

  • Property insurance for buildings and inventory.
  • General liability insurance for protection against claims and lawsuits.
  • Loss of income insurance, for businesses that are forced to close.
  • Employee dishonesty insurance to protect businesses from theft.
  • Utility interruption of business insurance, in case business activity is disrupted by power, water or communication failures.
  • Car insurance. This typically pays third parties for costs resulting from injuries or property damage that a business is responsible for.
  • Workers' compensation insurance. Coverage requirements vary by state, according to the Insurance Information Institute. This coverage pays for medical care and replaces a portion of lost wages for workers who are injured on the job. For details, contact your state insurance department.
  • Umbrella liability insurance provides extra protection when your standard liability policy doesn't cover your losses.
  • Cyber liability insurance can provide compensation for the loss of important data -- such as customer credit card information -- because of damage or theft.
  • Employment practices liability insurance protects you from lawsuits over alleged discrimination or harassment.

Don't buy too much insurance

Having adequate insurance is important, but there's no reason to buy more coverage than you truly need. John O'Connor, vice president for product and platform in the small commercial sector at Travelers, says you can save money by using a business owner's policy, also known as BOP. This package, which lets you select from a menu of coverages, typically costs less than if you bought separate policies.

O'Connor urges business owners to take the time to find an experienced agent who understands the insurance needs of retailers.

See how much you could save today on your insurance. Get your free business insurance quotes today!