What Is a Micro-Business and How Can You Insure It with a Micro-BOP?

What Is a Micro-Business?

There are varying definitions as to what a micro-business is. The Insurance Services Office, Inc. (ISO), has promulgated a definition that they use for eligibility purposes. It means a business that employs fewer than 5 people and generates less than $500,000 in annual revenue. This definition contrasts with the US Small Business Administration's definition of a "small business." Under this definition, small businesses can employ up to 1,500 employees and earn several millions of dollars in annual revenue.

The comparatively small value of micro-businesses makes them easy to overlook from an insurance industry perspective. However, micro-businesses are the dominant business type. They represent the largest number of establishments in the United States. ¹

Why Have Micro-Businesses Grown in the Past Few Years?

Advances in technology and the growing use of remote work have made it possible for entrepreneurs to kickstart a business idea without the large-scale commitments once required by small startups. For example, creating a website today only takes a few clicks. Most business functions can be outsourced if needed, including accounting, information technology, customer service, and shipping. This outsourcing allows the owner an opportunity to run a successful business from their own home or even a temporary shared space. These developments have made micro-businesses an enticing opportunity for those with an entrepreneurial spirit.

What Are Some Common Micro-Business Loss Exposures?

Micro-business loss exposures are often different compared to traditional small businesses. This is in large part because the day-to-day operations vary greatly between these two classifications of businesses. Typically, micro-businesses do not have a traditional customer-facing storefront. Instead, they often operate out of the home or a shared space such as a pop-up vendor or mobile shop. Therefore, the biggest property loss exposure of a micro-business is typically loss or damage to its equipment and personal property used in the business.

On the liability front, micro-businesses are generally susceptible to the same loss exposures as any other business type. This includes legal liability for bodily injury, property damage, or personal and advertising injury to others.

Depending on the situation, a micro-business may also need workers compensation insurance to cover the costs to compensate an injured employee on the job. Additionally, the business may need to provide health or disability insurance for medical costs if the owner or an employee becomes ill, injured, or disabled and is unable to work.

If an auto is involved in the micro-business—such as delivering goods or providing mobile services to customers—a separate business auto policy may be necessary.

What Is a Micro-BOP and How Does It Vary from a BOP?

So what is a BOP, and how do micro-BOPs, in particular, relate to the types of businesses we've been talking about here?

First of all, a BOP is a package policy that combines both liability and property coverage for small businesses. The benefit of combining these coverages into one policy is that the application process is simpler and premiums are discounted.

A micro-BOP, therefore, is a BOP with coverage tailored to the loss exposures specific to a micro-business. For example, the limited property loss exposures faced by a micro-business means the micro-BOP provides limited property coverage. Liability coverage between a BOP and micro-BOP is similar because the liability loss exposures are more comparable between the two business types.

The types of businesses eligible for a micro-BOP are those that employ fewer than 5 employees and do not exceed $500,000 in annual revenue. The business operations must occur in a home, at a shared space, or a temporary location. A business that surpasses the employee count and revenue threshold or has a physical storefront should look to a BOP for coverage.

Why Should You Insure a Micro-Business with a Micro-BOP?

The unfortunate reality is that most micro-businessowners do not have adequate insurance for their needs. ² Those uninsured businessowners may believe that existing homeowners and personal auto policies could extend coverage to their micro-businesses. However, most personal lines policies exclude business use. In that case, a micro-BOP can be an essential tool for protection.

Because of the exclusions and other challenges mentioned, insurance agents and brokers can help small businessowners protect their livelihoods and assets. Conducting a thorough assessment of your current client's risks and loss exposures could uncover the need for additional coverage.

For example, while servicing an existing insured's homeowners policy, you may find that the customer has a side business where she sells jewelry online. Or, while taking care of a customer with a personal auto policy, you may uncover that he runs a mobile auto detailing business.

Coverage in either of these scenarios can be obtained with affordable premiums with the micro-BOP, thus protecting the livelihoods and assets of these micro-businesses. What is the lesson for agents and brokers? Take the opportunity to conduct a thorough risk and loss exposure assessment of your insureds. You may discover cross-selling opportunities that may have been otherwise missed.

How Can You Insure a Micro-Business with a Micro-BOP?

The micro-BOP addresses key property and liability coverage concerns for micro-business owners without the need to procure separate commercial property and commercial liability insurance policies.

Consider a handmade ceramics business operated from the owner's home. The owner suffered a fire loss that destroyed the business's specialized equipment. In an ideal scenario, the owner was covered because their agent discovered the need for a micro-BOP after conducting a risk assessment. An unfortunate version of this is the agent did not conduct the risk assessment and the customer assumed their homeowners policy extended coverage to the business, leading to a major coverage gap.

It is important to note that micro-businesses face loss exposures outside of property and liability. For these exposures, a robust insurance program involving necessary coverages like workers compensation and commercial auto should be in place.

Coverage under a BOP and micro-BOP may be tailored to the specific needs of a small business, using many of the exposure-specific endorsements offered by ISO. For example, professional liability coverage that would otherwise require a stand-alone policy can be endorsed on the micro-BOP with the right endorsement attached.

For a brief overview of BOP and micro-BOP policies, make sure to also check out our free guide on BOPs.