18 Business Insurance Mistakes to Avoid in California

Most businesses don’t go uninsured. They go wrongly insured. They have a policy, they pay the premium every year, and then a claim, an audit or a contract dispute shows them that the policy doesn’t do what they thought it did.

I’m Shalom Samya, a licensed commercial insurance broker based in Tarzana, and I’ve spent more than 15 years reviewing policies for businesses in Los Angeles, the San Fernando Valley and across California. The same business insurance mistakes come up again and again. None of them are exotic. Almost all of them are cheap to fix before a loss and expensive to discover after one.

Below are 18 of the most common business insurance mistakes I see, grouped by where they hide. For each one I’ll tell you what it actually costs you and what the fix is. At the end there’s a self-audit table you can run through with your current policies in about 20 minutes.

The Quick Version: 18 Mistakes, Consequences and Fixes

If you only read one section, read this table. The detail on each item follows below.

Workers’ Compensation and Payroll Mistakes

Workers’ comp is where I see the most money lost to simple errors. In California, virtually every employer with even one employee must carry it under Labor Code §3700. Operating without it is a crime, and the Labor Commissioner can issue stop orders and penalties.

But having a policy isn’t the end of it. California workers’ comp is priced per $100 of payroll by class code, and the final premium is set by audit after the policy year ends. That structure creates three classic traps.

Mistake 1: Using the wrong class codes

Every employee is assigned a classification code that reflects the work they do. The WCIRB publishes advisory pure premium rates for each code, and carriers file their own rates on top of those. The difference between a clerical code and a field labor code can be dramatic.

What it costs you: If your codes are too low for the real work, the auditor reclassifies the payroll and you get a bill for the difference. If your codes are too high, you’ve been overpaying every year and nobody told you. I see both.

A common example is the “outside sales” or “estimator” who also spends two days a week on job sites. Or the restaurant manager who works the line during rush. The code follows the duties, not the job title.

The fix: Walk through what each person actually does with your broker. Keep written job descriptions and, where it’s legitimate, keep payroll records that separate clerical time from field time. Review the codes every renewal, especially if your operations changed. Our California workers’ comp page explains the basics of how codes and rates work.

Mistake 2: Underestimating payroll to lower the deposit

Your workers’ comp premium at the start of the year is based on an estimate. Some owners lowball that estimate to reduce the upfront payment. Some just don’t plan for growth.

What it costs you: The audit catches up. If you estimated $400,000 of payroll and actually ran $700,000, you owe premium on the extra $300,000, usually in one lump sum shortly after the audit closes. For a growing contractor or restaurant group, that bill can be large enough to wreck a quarter’s cash flow.

There’s a second cost that owners forget. Accurate payroll and loss history feed your experience modification once your premium passes the eligibility threshold. Consistently messy numbers make it harder to manage the mod over time.

The fix: Estimate honestly, including planned hires. If you grow mid-year, tell your broker so the carrier can adjust the estimate and spread the extra premium out. Pay-as-you-go workers’ comp, which bills from actual payroll each period, is another option that shrinks audit surprises.

Mistake 3: Misclassifying workers as 1099 contractors

California uses the ABC test to decide whether someone is an employee or an independent contractor. Many people businesses call “1099s” would be treated as employees under that test.

What it costs you: Two things. First, at audit, the carrier may add payments to uninsured contractors into your payroll and charge premium on them. Second, if one of those workers gets hurt, they may be treated as your employee, and if your coverage wasn’t set up for them you have a serious problem on your hands. That’s on top of any exposure with state agencies over the classification itself.

The fix: Get advice from an employment attorney or CPA on classification. For true subcontractors, collect a current certificate of insurance showing their own workers’ comp before they start work. Keep those certificates organized by policy year, because the auditor will ask for them.

Auto and Contract Mistakes

Mistake 4: No hired and non-owned auto coverage

Your business doesn’t own a vehicle, so you don’t think you need auto coverage. But your employees drive their own cars to the bank, the supply house, a client meeting or a job site. Or you rent a car on a business trip.

What it costs you: When an employee causes a serious accident while on company business, the injured party often sues the business too. The employee’s personal policy is primary, and in California the private passenger minimum is only 30/60/15 as of January 1, 2025. A bad accident blows through that quickly, and then the plaintiff looks to you. Without hired and non-owned auto (HNOA) coverage, your business may be defending itself with no insurance behind it.

The fix: Add HNOA coverage. It’s often inexpensive and can be endorsed onto a business owner’s policy, a general liability package or a commercial auto policy. Also check your employees’ driving records and personal limits if they drive regularly for work.

Mistake 5: Signing contracts without reading the insurance clause

Leases, client agreements, vendor contracts and construction subcontracts almost always contain an insurance section. It spells out required coverage types, limits, additional insured status, waiver of subrogation and often “primary and non-contributory” wording. Contracts frequently require $1M per occurrence and sometimes an umbrella on top.

What it costs you: If your policy doesn’t match what the contract requires, you’re in breach. You may lose the job or the lease. Worse, if there’s a loss and the other party expected to be covered under your policy, you may end up paying their damages out of pocket because you promised coverage you never bought. Indemnity clauses can also shift liability onto you that your policy may not fully cover.

The fix: Send the insurance section of any significant contract to your broker before you sign. It usually takes a day to check whether your current policies meet the requirements, whether endorsements are needed, and what they cost. That’s far easier than scrambling after the job starts.

Professional Liability and Claims-Made Mistakes

Mistake 6: Letting claims-made coverage lapse and losing your retro date

Most professional liability (E&O), EPLI, cyber and D&O policies are written on a claims-made basis. That means the policy in force when the claim is made responds, as long as the work or incident happened after the policy’s retroactive date.

The retroactive date is the valuable part. If you’ve carried E&O continuously since 2017 with a 2017 retro date, your current policy covers claims arising from work you did back then.

What it costs you: Let the policy lapse, or switch carriers carelessly, and the new policy may come with a new retro date of today. Everything you did before that date is now uninsured. For an architect, consultant, IT firm or property manager, that’s years of work sitting with no coverage. Claims about professional work often surface long after the work is done.

The fix: Never let a claims-made policy lapse, even for a few days. When changing carriers, make sure the new policy honors your prior retro date. If you’re closing, selling or retiring the business, look at buying an extended reporting period (often called “tail” coverage) so claims made later are still covered. Read more on our professional liability insurance page.

Property and Business Income Mistakes

Mistake 7: Underinsuring property and triggering the coinsurance penalty

Many commercial property policies include a coinsurance clause, commonly 80%, 90% or 100%. It requires you to insure your property for at least that percentage of its value. If you don’t, the carrier reduces your claim payment proportionally, even on a partial loss.

What it costs you: Here’s a simple illustration of how the math works. Say your building would cost $1,000,000 to rebuild and your policy has an 80% coinsurance clause. You’re required to carry at least $800,000. If you only carry $600,000, you’ve met 75% of the requirement.

Now you have a $200,000 fire. Instead of paying $200,000 minus your deductible, the carrier pays roughly 75% of the loss, about $150,000 minus the deductible. You absorb the rest. Many business owners are underinsured without knowing it because construction costs in Los Angeles have risen sharply and their limits haven’t moved in years.

The fix: Insure buildings, tenant improvements, equipment and inventory at current replacement cost, not purchase price or market value. Update values at every renewal. Ask about an agreed value endorsement, which suspends the coinsurance clause when you document your values. If your inventory swings seasonally, ask about peak season coverage.

Mistake 8: No business income coverage

Property coverage pays to repair the building and replace what’s inside. It doesn’t pay your rent, loan payments, payroll or lost profit while you’re closed for repairs.

What it costs you: A kitchen fire that closes a restaurant for four months, or a burst pipe that shuts down a medical office, can do more financial damage through lost income than through the physical damage itself. Businesses that survive the loss but can’t survive the downtime are the ones that close for good.

The fix: Add business income and extra expense coverage. Base the limit on a realistic restoration period, which in Southern California can be long because of permitting and contractor availability. Check the waiting period (often 72 hours) and whether the policy covers losses from damage at a key supplier or customer location, sometimes called dependent property coverage.

Mistake 9: Assuming earthquake damage is covered

This one is specific to California and it catches a lot of people. Standard commercial property policies generally exclude earthquake. The same goes for flood.

What it costs you: After a significant quake in the San Fernando Valley or anywhere in Southern California, a business without earthquake coverage may have no property coverage for the building, equipment or inventory, and no business income coverage for the shutdown. Fire following an earthquake is often treated differently from the shaking itself, but that’s cold comfort for structural damage.

The fix: Get a quote for separate earthquake coverage, either as its own policy or through a difference-in-conditions (DIC) policy. Earthquake coverage in California typically carries high deductibles, often expressed as a percentage of the insured value, and it isn’t cheap. Some owners decide not to buy it. That’s a legitimate business decision, but it should be a decision, made with the numbers in front of you, not an assumption. Check your lease too, because some landlords and lenders require it.

Mistake 10: Relying on a homeowners or renters policy for a home-based business

Plenty of consultants, designers, bookkeepers and e-commerce sellers in LA run their business from a spare bedroom or garage. Many assume their homeowners policy covers it.

What it costs you: Homeowners policies are built for personal risk. They typically exclude liability arising from business activities and often cover only a small amount of business property. If a client trips on your front steps during a meeting, or your inventory in the garage is stolen, or a customer claims your product hurt them, your homeowners carrier may deny the claim entirely.

The fix: Buy a business policy sized to your operation. For many home-based businesses, a business owner’s policy or a general liability policy with a modest business property limit is affordable. Tell your homeowners carrier about the business too, so there’s no argument about misrepresentation later.

Not sure where your gaps are? I’ll review your current policies at no cost and tell you plainly what’s covered and what isn’t. Call me at (323) 999-6067 or request a free coverage review.

Missing Coverage Lines: Common Business Insurance Gaps

Some of the biggest business insurance gaps aren’t problems with the policies you have. They’re the policies you don’t have. Two lines in particular are skipped far too often in California.

Mistake 11: Skipping EPLI in California

California is one of the most employee-protective states in the country. Under FEHA, most employment protections apply to employers with 5 or more employees, and harassment protections apply to employers with even 1. Employers with 5 or more employees must provide sexual harassment prevention training.

General liability policies usually exclude employment-related claims. Workers’ comp doesn’t cover them either.

What it costs you: A wrongful termination, discrimination, harassment or retaliation claim can cost a significant amount to defend even when you did nothing wrong. Without employment practices liability insurance, those defense costs and any settlement come from your business. For a small company, one claim can be a serious financial event.

The fix: Buy employment practices liability insurance. Ask specifically about wage-and-hour claims, because many EPLI policies exclude them or offer only a limited defense sublimit, and wage-and-hour claims are a large exposure for California employers. Also ask whether the policy includes third-party coverage for harassment claims by customers or vendors.

Mistake 12: No cyber or wire fraud coverage

Business owners tend to think cyber insurance is for tech companies. In practice, the most common losses I hear about involve ordinary businesses: a spoofed email from a “vendor” with new bank details, a bookkeeper tricked into sending a wire, ransomware that locks up the scheduling system.

What it costs you: Funds wired to a criminal are often gone for good. A data breach can trigger legal, forensic and notification costs, and California has its own breach notification requirements. Standard property and liability policies generally don’t cover any of this. Many cyber policies also don’t cover social engineering fraud unless it’s specifically added.

The fix: Buy a cyber liability policy and confirm it includes, or add, social engineering and funds transfer fraud coverage. Pair it with simple controls: call-back verification on any change to payment instructions, multi-factor authentication on email, and dual approval for wires above a set amount. Carriers increasingly ask about these controls on the application, so they help your pricing as well.

Buying and Managing the Program

The next group of commercial insurance mistakes in California have nothing to do with which coverages you buy. They’re about how you buy them and how you manage them during the year.

Mistake 13: Buying on price alone

Two general liability quotes can both say “$1,000,000 per occurrence / $2,000,000 aggregate” and still be very different policies. The difference is in the form, the endorsements and the exclusions.

What it costs you: A cheaper policy can carry exclusions that remove coverage for the exact work you do. Examples I watch for include classification limitation endorsements that restrict coverage to a narrow description of operations, residential or tract housing exclusions for contractors, action-over exclusions, assault and battery exclusions for bars and restaurants, and defense costs that erode the limit. You don’t find out until a claim is denied.

The fix: Compare quotes side by side on coverage, not just premium. Ask your broker to list the material exclusions and endorsements on each option. Look at the carrier’s financial strength and claims reputation too. In my experience, the right answer is usually the best coverage you can reasonably afford, not the lowest number on the page. Working with a broker who shops multiple carriers helps you see real alternatives.

Mistake 14: Not reporting changes mid-term

Your policy describes your business as it was on the day it was written. Businesses change constantly. You buy a truck, open a second location, add a new service, start selling online, hire your first employee in another state.

What it costs you: Some policies extend automatic coverage for newly acquired vehicles or locations for a limited time, but those grace periods are limited and vary by policy. A new operation that falls outside your classification may not be covered at all. A new employee in Nevada or Arizona may not be covered under a California-only workers’ comp policy.

The fix: Make it a habit to call your broker before the change happens, not at renewal. New vehicles, drivers, locations, services, states, large contracts, and significant revenue or payroll changes are all worth a quick call. For a checklist of trigger events, see when a business should review its insurance coverage.

Mistake 15: Reporting claims late

Owners often sit on an incident. A customer slipped but said they were fine. A client complained about a project but didn’t mention a lawyer. An employee mentioned a sore back. They don’t want to “bother” the carrier or worry about premiums.

What it costs you: Policies require prompt notice. Late notice can lead to a coverage dispute or a denial, and it can mean you lose the carrier’s help in the early stage when a claim is cheapest to handle. On claims-made policies, missing the reporting window can mean no coverage at all, because those reporting deadlines are typically enforced strictly. California law gives policyholders some protection against late-notice denials in certain situations, but you don’t want to be the test case.

The fix: Report incidents that could reasonably turn into a claim, as soon as you know about them. Your broker can help you decide what needs formal notice and how to phrase it. Keep a simple incident log with dates, names, photos and witness details. Reporting an incident is not the same as admitting fault.

Mistake 16: Not reviewing certificates from subcontractors and vendors

Collecting certificates of insurance from subcontractors is standard practice. Actually reading them isn’t.

What it costs you: A certificate is informational. It doesn’t by itself give you coverage. If your subcontractor’s policy has expired, has low limits, excludes the type of work they’re doing for you, or doesn’t name you as additional insured by endorsement, then when their work causes injury or damage, the claim lands on your policy. That drives up your losses and your future premiums. On the workers’ comp side, an uninsured sub’s payroll can end up in your audit, as noted above.

The fix: Before a sub starts work, confirm:

• Policy dates cover the full duration of the job
• Limits meet or exceed what your contract with them requires
• You are named as additional insured by endorsement, and you have a copy of the endorsement
• Waiver of subrogation and primary and non-contributory wording are included where required
• Workers’ comp is in force if they have employees
• Their operations description matches the work they’re doing for you

Track expiration dates and request renewed certificates. For contractors, this is one of the most important habits you can build.

Mistake 17: Buying an umbrella that doesn’t follow form

An umbrella or excess policy adds limits above your general liability, auto and employer’s liability. Contracts, landlords and clients often require it, and it’s one of the better values in commercial insurance.

What it costs you: Not every umbrella is written the same way. A “follow form” excess policy generally follows the terms of the underlying policy. A standalone umbrella has its own terms and may contain exclusions the underlying policies don’t. If your umbrella excludes something your GL covers, you may find your extra limit isn’t there when a large claim exceeds the primary limit. Umbrellas also often require specific underlying limits; if your auto policy doesn’t meet them, you can end up with a gap between the two.

The fix: Have your broker compare the umbrella’s exclusions against each underlying policy. Confirm that every required underlying policy is listed on the schedule and meets the minimum limits. Check that the umbrella covers auto if you rely on it for your vehicles.

Mistake 18: Cancelling the old policy before the new one binds

You found a better deal. You call the old carrier and cancel. The new policy is “in process” and should be done in a day or two.

What it costs you: Any gap, even one day, is a day with no coverage. A claim in that window is simply uninsured. For claims-made policies, a gap can also cost you your retroactive date (see Mistake 6). For workers’ comp in California, a lapse means you’re operating in violation of Labor Code §3700. For contractors, it can also create a problem with your CSLB license, since contractors with employees must have workers’ comp on file.

The fix: Don’t cancel anything until you have written confirmation that the new policy is bound, with an effective date that matches the cancellation date. Coordinate both steps through your broker so the dates line up exactly.

How These Mistakes Stack Up

The mistakes above rarely show up alone. An underinsured business that skipped business income coverage often also has outdated class codes and a contract it never checked. When I review a program, I usually find several small issues that compound each other.

The pattern behind most of them is the same. Insurance gets bought once, then renewed on autopilot while the business changes underneath it. The fix is also the same: a real review, at least once a year, by someone who understands both the policies and your operations.

If you want to start from the ground up, our guide on what insurance your business needs lays out the core coverages by business type.

Business Insurance Self-Audit

Use this table with your current policies in hand. Any “No” or “Not sure” answer is worth a conversation with your broker.

Why a Broker Review Catches What You Won’t

Most owners read the declarations page and the premium. The problems above live in the endorsements, the exclusions, the audit worksheet and the contract you signed two years ago. That’s not a criticism. Reading insurance forms isn’t your job.

It is mine. I’m a California licensed Property & Casualty producer (CA DOI license #OK30674), a partner at Zolo Insurance Services, and I work with businesses in California and more than 27 other states in English, Hebrew and Spanish. I work with multiple carriers and shop the market, which means I can compare policy forms and not just prices.

My view is simple. Clients don’t need someone to hand them a policy. They need someone who understands their business, pushes for the right rate, and is available when something goes wrong. Many of my client relationships have lasted more than eight years for exactly that reason.

Frequently Asked Questions

What is the most common business insurance mistake?

In my experience, it’s letting the insurance program stand still while the business changes. New employees, vehicles, services and contracts get added, but the policies stay the same until a claim or audit exposes the gap.

What is a coinsurance penalty?

It’s a reduction in your property claim payment when you carry less insurance than your policy’s coinsurance clause requires, often 80% to 100% of the property’s value. The carrier pays only the proportion of the loss that matches how much of the required amount you actually carried.

Does my general liability policy cover employee lawsuits?

Generally no. Claims for wrongful termination, harassment, discrimination and retaliation are usually excluded from general liability. You need employment practices liability insurance (EPLI) for those.

Why did I get a large bill after my workers’ comp audit?

Usually because actual payroll was higher than estimated, employees were reclassified into higher-rated class codes, or payments to uninsured subcontractors were added to your payroll. Reviewing your estimate and codes mid-year helps avoid it.

Is earthquake damage covered by commercial property insurance in California?

Standard commercial property policies generally exclude earthquake. Coverage is available separately, usually with a percentage-based deductible. Whether to buy it is a business decision you should make with actual quotes in hand.

What happens if I let my professional liability policy lapse?

You may lose your retroactive date. A new policy could then exclude claims arising from work you did before the new start date, leaving years of past work uninsured.

Is a certificate of insurance from a subcontractor enough to protect me?

Not by itself. A certificate is informational. You want to see the actual additional insured endorsement, confirm the dates and limits, and verify workers’ comp if the sub has employees.

How often should I review my business insurance?

At least once a year before renewal, and any time something significant changes, such as new vehicles, locations, services, states, large contracts or major hiring.

If you’d like a second set of eyes on your current coverage, I’ll review your policies for free and give you a straight answer on where the gaps are. Call me at (323) 999-6067 or reach out through the contact page. My office is at 18757 Burbank Blvd, Suite 105, in Tarzana.