Canadian small business owners may faithfully purchase insurance, but many hesitate to use it when the time comes. According to TD Insurance vice-president of small business insurance Tang Trang (pictured), this disconnect is driven as much by psychology as by policy details.
“When I saw the data, I was really surprised,” Trang told Insurance Business. “If a large majority of business owners buy insurance, you would expect a high percentage [to] use insurance as well.” Yet TD’s survey revealed that only about half of insured businesses would actually file a claim in an emergency.
One of the key reasons is fear of the consequences of making a claim. Trang explained that some owners worry a claim could drive up their premiums the following year, or worse, jeopardize the policy altogether.
This is especially concerning for contractors or other professionals who must provide proof of insurance to secure work.
Another driver is a lack of awareness. Many businesses purchase insurance but don’t fully understand what they’ve bought. Trang compared it to owning a smartphone: “It’s full of features… but you may use one percent of these features on a day-to-day [basis].”
He pointed to commercial general liability insurance (CGL) as an example. Most small retailers buy it to protect against lawsuits, such as a slip-and-fall incident. But few realize the policy often includes voluntary medical payments – a provision that allows the business to cover medical expenses quickly for an injured customer, he said. Paying a few thousand dollars up front, Trang noted, can mitigate the risk of a larger lawsuit, but there are still insureds who are unaware of that coverage.
Economic pressures are another factor shaping how business owners think about their insurance. Rising costs and inflation are pushing some to scale back coverage in an effort to cut operating expenses.
Trang said many opt for the most affordable policy, which often means less protection. “Business owners may have a tendency to look for savings… and when it applies to insurance, they may actually opt for the most affordable insurance, which unfortunately may mean less coverage,” he explained.
This trade-off can be costly in the long run. Trang pointed out that some owners purchase liability insurance because it’s relatively affordable but skip business interruption coverage, mistakenly believing they don’t need it if profits are low. In reality, he said, fixed expenses such as rent and payroll don’t disappear when operations are disrupted.
“Insurance should be seen as a tool to stabilize costs in the case something unexpected happens,” he said.
In the short term, this might lead to some savings, but in the long run, he said, the costs can pile up if an unexpected event occurs.
“The costs can pile up, and your liability insurance might not cover the entirety [of the damages]. You might have to look at borrowing options, and those are often costlier. The bigger the claim, the more you have to borrow, and interest rates are relatively high nowadays,” he said.
The survey showed the scale of the disconnect. While almost all small business owners (94%) report having business insurance, just over half (52%) said they would actually use it in an emergency. Instead, many indicated they would rely first on credit cards (50%), bank loans (48%), lines of credit (47%), or even friends and family (36%).
Economic pressures may be reinforcing this reliance on credit. The survey found 32% of owners cited rising expenses as their top challenge, up from 29% last year. Misconceptions are also at play, with many still viewing insurance as useful only in the case of major disasters such as fires or floods.
The survey was conducted online with 400 Canadian small business owners and senior decision-makers, focusing on industries including contractors (excluding general contractors), real estate investors, restaurants, management consultants, grocery and convenience retailers, and clothing retailers.
"Insurance isn't a last resort – it's a strategic safeguard. When something goes wrong, your first call to protect the business you've built should be to your advisor," Trang said.
