As a business owner, it’s likely that you’ve considered purchasing business insurance or already have it. While “business insurance” sounds like a simple term, it represents multiple types of insurance products that cover everything from property damage, lawsuits over misleading advertising, and slip-and-fall scenarios to damage your products cause to someone’s health or property.
What is business insurance?
Business insurance (also known as “commercial insurance”) protects your company from financial losses following a covered risk, whether that’s a lawsuit after a data breach, an employee who got hurt on the job or a fire that turned your inventory into a pile of ashes. It’s not a single type of insurance but a category of insurance products that can help protect your business, such as general liability, commercial property, workers’ compensation or product liability.
Types of small business insurance
Here’s a look at some of the most common types of business insurance:
General liability
General liability insurance protects you when others make a claim against your business because they were injured by or their property was damaged by your services, products or operations. It also protects if someone brings a lawsuit against your business for claims you make in your advertising and libel or slander (called “personal injury”) claims a customer makes.
Additionally, general liability typically provides financial protection if you have to pay legal fees and/or a settlement in a lawsuit.
General liability’s broad coverage makes it a good starting point for almost any company and is a factor in it being the most common type of small business insurance.
“General liability insurance is pretty much the go-to for any business,” Rhett Stubbendeck, CEO of Leverage, an insurance broker that works with medical professionals.
However, certain industries and services may require additional protection that a general liability policy doesn’t offer. For example, professionals providing legal, financial or medical advice often need to carry professional liability insurance, and car repair shops need a garage liability insurance policy, which is a specialized type of general liability coverage. General liability also leaves out key coverages such as accidents involving company cars and employee injuries.
Commercial property
Commercial property insurance covers your business’s building, equipment and inventory if they’re ever damaged by a fire, storm, theft, burst pipes or other covered hazards. This coverage applies whether you own or rent the asset.
But if you want to ensure your belongings are covered for natural disasters like earthquakes and floods, you’ll probably need separate coverage, such as commercial flood insurance.
Business owners policy (BOP)
A business owners policy bundles business property and general liability insurance into a single policy. Policies typically include business income (“business interruption”) insurance, too. You can add other coverages to your BOP, such as product liability, equipment breakdown and cyber liability and crime insurance, to address your unique small business insurance needs. Add-ons vary by insurer.
Your business’s size and industry will also determine BOP eligibility. For larger companies or those with specialized risks, a commercial package policy (CPP) typically offers a wider range of built-in coverages such as general liability, property, business income, business vehicle, business crime, and equipment breakdown.
Commercial auto
Commercial auto insurance protects vehicles used for your business — whether commercial vehicles or personal vehicles used for business purposes — and employees who drive them.
Even if your business has no company cars and you and your employees use personal vehicles for work, commercial auto insurance may be worth it because it provides coverage that personal policies don’t. Personal auto insurance won’t cover a commercial claim because it usually has clauses excluding coverage for accidents and incidents that happen when you’re using your car for business.
Business income
When your business has to close for a covered reason, business income insurance helps replace your lost income and pay business expenses like payroll, rent and utility bills. It can come into play after fire, theft or wind damage prevents you from operating. Business income insurance could even cover you when you’re forced to close your business operations because of government-mandated evacuations or closures.
Generally speaking, you’ll have to wait 24 to 72 hours after the closure to receive business income payments from your insurer. Those payments are based on your company’s income and expenses. Payments continue until you reopen your business. Some insurers may offer extended business income replacement that covers you for an additional 30 days after your business opens.
Professional liability
When you or your employees make a mistake while providing a service or offering advice to a customer, professional liability shields you from the lawsuits that can follow. It’s essential for any business servicing customers, such as real estate agents, graphic designers and insurance brokers. You’ll also see this insurance referred to as errors and omissions (E&O) insurance.
Common areas that professional liability covers include negligence, misleading statements used to close a deal, personal injury (i.e. libel and slander), copyright infringement and inaccurate advice, according to The Hartford. It can even protect you if you miss project deadlines or go over budget.
Workers’ compensation
Workers’ compensation protects your business from lawsuits when workers are injured, get sick or die due to their work. It includes a slew of other benefits for employees, like disability benefits, medical expense coverage, lost income replacement and funeral costs.
South Dakota and Texas are the only states that don’t require workers’ compensation, although Texas still requires it when employees work under government contracts.
For everyone else, check your state’s workers’ comp laws to find out how many employees you can have before needing to purchase this insurance.
Many states require workers’ comp if you have one employee (with certain exceptions), but in others, like Alabama and Mississippi, the threshold is five or more employees for most businesses.
Product liability
If your business makes, sells or distributes products, product liability protects it when someone gets hurt because of a defective product, or the defective product damages a customer’s property. If the claim is covered, your plan can pay for lawyers and court fees, settlements, judgments and more — up to your policy’s limits. Product liability is often a part of a general liability policy.
However, if a defective product is recalled, product liability won’t help cover the associated costs. You would need to carry product recall insurance, which can also typically be added as an endorsement to a general liability.
Do I need business insurance?
All small business owners and first-time investors should have insurance to protect their businesses, employees and finances. It doesn’t take much for litigation costs or judgments to bankrupt you or your company. Additionally, your state may require it if you have at least one employee.
“Lawsuits, property damage, unhappy customers and injuries are all too common and can get incredibly expensive if business owners have to pay for expenses out of pocket,” said Shawn Johnson, assistant director of account management for Insureon. “Insurance for small businesses tends to be relatively inexpensive but can save an incredible amount of money for small businesses and their owners should something unexpected happen.”
How do you know which insurance your business needs?
Start by looking at your state’s small business insurance requirements based on state regulations, the particular project you’re working on, your business type and the number of employees.
Afterward, consider other insurance to cover the risks you wouldn’t be able to pay for out of pocket. General liability is typically the most affordable starter policy you can get. As your business grows, a BOP and additional coverages will likely be necessary.
“Startups are generally considered small businesses … so they will still benefit from things like general liability insurance, workers’ compensation insurance, commercial property insurance and auto insurance,” Johnson said.
How to get the type of business insurance you need
Insurance agents and brokers are one way to get the insurance you want for your business. Agents affiliated with a specific insurance company can tell you which insurer’s offerings fit your needs.
Brokers and independent agents can provide quotes for business insurance from multiple insurers, which can help you get the best deal possible for your company.
You can purchase business insurance online, too, through marketplaces that provide quotes for a variety of business insurance types.
No matter which option you choose, make sure you get multiple quotes so you can compare policy prices versus the benefits and coverage amounts they offer.
Alternatives to business insurance
Stubbendeck has seen some of his clients choose self-insurance or a professional employer organization (PEO) as an alternative, but he advises that business insurance is still the best bet.
Johnson explained that another option is small business bonds, such as surety bonds in case your team misses a project deadline or fidelity bonds if there’s employee theft. You have to pay these bonds back, making them more like a line of credit than a typical insurance policy. Additionally, bonds typically come with fees that depend on a variety of factors including your credit score, claims history and the bond’s coverage period.
Of course, there’s always the option to forgo insurance that isn’t legally required and pay out of pocket for damages or lawsuits if they happen, but this route isn’t advisable.
Frequently asked questions (FAQs)
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This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.
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