As I was thinking about topics for this column, I was in two minds whether to write about the need for insurance for small businesses or not. It is not a very popular topic. The next morning, I read about the fire incident at the Bhagirath Palace at Chandni Chowk, Delhi. More than 120 shops were estimated to be gutted with a cumulative loss of over ₹500 crore. I could no longer sit on the fence. A large majority of these shops would have been uninsured. This would mean their life’s savings would get wiped out in a matter of days.
Key Takeaways
-
Protecting the “Survival Chain”: A fire doesn’t just burn stock; it leaves you with outstanding creditors and bank loans with personal collateral at risk. Insurance provides the liquidity needed to pay off debt and restart operations without losing personal assets like your home.
-
Negligible Cost vs. High Severity: The premium for a standard shop is often less than your annual electricity bill or a month’s bank interest. In 2026, paying 0.1% of your asset value annually is a minor “safety tax” to prevent 100% capital wipeout.
-
The 15% Safety Buffer: In the past, if you underestimated your asset value, insurers would cut your claim proportionately. Under the current Bharat Udyam guidelines, there is a 15% waiver for under-insurance, ensuring you get a fairer payout even if your inventory counts were slightly off.
-
Fire Loss of Profit (FLOP): This is a critical recommendation. While standard insurance fixes the building, FLOP pays for your lost gross profit and fixed expenses (like staff salaries) while the business is being rebuilt, preventing you from dipping into your personal savings.
-
Public Liability – Your Legal Shield: If a fire starts in your shop and spreads to a neighbor, you could be sued for negligence. Public Liability insurance covers your legal fees and any court-awarded compensation to third parties for as little as ₹3,000 for a ₹10 lakh cover.
The impact of a fire incident on a small business is multi-fold.
- First, they lose most of their capital, which is in the form of stocks, machinery, fittings, and other immovable assets.
- Second, most businesses would have creditors to pay for the stock or assets with them, which still remains outstanding. Unless these creditors are paid, the entrepreneurs have limited ability to revive their supply chain.
- Third, many take working capital loans from banks and NBFCs. Typically, these loans are against collateral of company assets and in many cases personal assets of the entrepreneur. These institutions would come after the borrower to attach their collateral and recover the loan.
- Fourth, the income-generating capacity of the individual gets substantially impacted, as the assets used to generate income are impaired. So, entrepreneurs have to cover regular expenses from whatever savings they have. Finally, businesses have to usually borrow money to reinstate their damaged assets. Such loans are taken at distress interest rates, thus leaving a dent in the business income for several years.
While we discussed fire incidents, similar catastrophic losses could happen due to natural disasters or accidents, such as aircraft crashes. Some of these accidents seem improbable. But, so was the pandemic. The important point here is that while the probability of such incidents is low, the severity of damage can ruin one’s life.
Thankfully, insurers price the low probability of these incidents into the insurance premium. The cost of covering all the above risks for a regular shop is less than 0.1% of the value of the assets. So, over 100 years, you don’t even pay 10% of the value of the asset as premium. Such premiums also need to be paid only annually. The recurring cost relative to the sum assured at risk is negligible. Another way to rationalize the cost would be to compare it with the annual bank interest cost or the electricity bill of the premises. The insurance cost is likely to be less than both.
The small business fire insurance is now covered by two dedicated products i.e., Bharat Sookshma Udyam Suraksha, which covers businesses with total assets of up to ₹5 crore, and Bharat Laghu Udyam Suraksha, which covers businesses with total assets valued between ₹5 and ₹50 crore. Some of the built-in coverages of these plans are very policyholder-friendly. One of these covers is the ‘waiver of under-insurance’ clause of up to 15%. Often, businesses miss out adding some assets in the policy. This used to cause deductions at the time of claim settlement. Thankfully, with this clause, there would be no deduction for up to 15% of under-insurance. Through products like the above, the regulator is pushing for reforms to make insurance more accessible.
Apart from the built-in coverage, there are two covers that I recommend considering. First is Fire Loss of Profit (Flop). Under this, business gets indemnified for the loss of gross profit and fixed expenses for the duration of reinstatement. This ensures that the entrepreneur does not need to eat into their savings to meet their day-to-day expenses. A Flop insurance costs less than 0.1% of the annual gross profit value and fixed expenses. Second, is that of a public liability insurance. This is meant to cover damages to others due to your business. For instance, a fire that starts from your place and spreads to other premises; owners of other businesses could sue you for negligence. In such cases, the policy pays for lawyer fees and any compensation awarded by the court. It costs around ₹3,000 for a ₹10 lakh public liability insurance.
Summary: Small Business Insurance (Sookshma & Laghu Udyam)
Several years ago, we had set up a small team to serve business marketplaces such as Bhagirath Palace. We got resounding support from the local shopkeepers’ associations. The office bearers of these associations appreciated the need for insurance. However, individual shopkeepers required a little nudging. It was an avoidable expense for them. Unfortunately, we had to shut the pilot and focus on online inbound leads. Ironically, those who need insurance the most value it the least. With the Bhagirath Palace incident, I feel it is our responsibility to take insurance to the underserved and have restarted the pilot. Hopefully, the small businesses would have moved along as well.
Frequently Asked Questions (FAQs)
Q1: Does this insurance cover “Stocks” that are frequently changing in my shop?
A) Yes. You can insure stocks on a “Floater” or “Declaration” basis. This ensures that even as your inventory levels fluctuate during peak SEO sales seasons or festivals, your average stock value remains protected under the policy.
Q2: What is “Reinstatement Value” and how does it help me?
A) Reinstatement value means the insurer pays the cost to replace the damaged asset with a new one of the same kind, without deducting for “wear and tear” (depreciation). This is vital because it allows you to buy new machinery or fittings at 2026 market prices.
Q3: Is an “Aircraft Crash” really covered in a shop insurance policy?
A) Yes. While the probability is extremely low, Bharat Sookshma and Laghu Udyam policies are comprehensive. They cover accidental damage from external factors, including fire, lightning, explosions, strikes, riots, and even impact damage from vehicles or aircraft.
Q4: Can I buy this insurance if my shop is in a congested area like Chandni Chowk?
A) Yes. While insurers might charge a slightly higher premium for “High-Risk” congested zones due to the proximity of shops, it is precisely in these areas where the risk of fire spreading is highest and insurance is most needed.
Q5: Why do I need “Public Liability” if I already have fire insurance?
A) Standard fire insurance only pays for your losses. If your fire damages your neighbor’s property or injures a customer, they can sue you personally. Public Liability covers those third-party claims, protecting you from litigation that could bankrupt your business.
About The Author
Mayank Sharma
MBA Finance
He is a professional who brings extensive knowledge and expertise to the field of group health insurance. He has dedicated 7years to helping individuals and businesses navigate the complexities of insurance. Having worked closely with numerous clients and insurance providers, he deeply understands the nuances of group health insurance policies. With a reputation for providing insightful and informative content, he leverages his industry experience to educate readers about the importance of group health insurance and its benefits. Through their articles, Mayank Sharma aims to empower individuals and businesses to make informed decisions about their healthcare coverage, ultimately promoting healthier and more secure communities.