According to Murphy’s Law, anything that can go wrong will go wrong. As a business owner, you don’t want things to go awry, but accidents happen. An employee may get hurt, a person visiting your property may trip, or you may end up in the path of a natural disaster.
When you’re considering your business’s financial needs, one of your top concerns should be purchasing the appropriate amount of business insurance. Business insurance can help protect your company’s revenue while ensuring the people who work for you or who patronize your business have the financial assistance they need if the worst happens.
TL;DR (Too Long; Didn't Read)
Business insurance protects your business from financial losses due to lawsuits, natural disasters, accidents and more.
What Is Business Insurance?
Business insurance is an umbrella term for the various types of insurance that businesses need. If you are contemplating starting a business, you may wonder, “Do I need business insurance?” In most cases, you do need some type of business insurance coverage. The type of insurance you need depends on the type of business you have and whether or not you have employees.
Insurance helps protect you from financial exposure. This is especially important if you own a small business, because depending on how you structure your business, you may have some personal financial responsibility if a lawsuit is filed against your business. The most common types of business insurance are business property insurance, liability insurance, commercial vehicle insurance and workers’ compensation insurance.
Is it mandatory to have business insurance? You may also be required to purchase specific types of insurance depending on your industry. At a minimum, if you have employees, you are required by the federal government to have coverage for workers’ compensation, unemployment and disability. Your state may have additional requirements.
Understanding Business Property Insurance
Business property insurance is also referred to as commercial property insurance. This insurance protects you against commercial property loss or damage. This can include accidents, like an employee driving a forklift into some shelving, fire or theft. It includes more than just the structural elements of your property and extends to personal property such as computers, your inventory, your furnishings and your equipment.
Your property insurance may also provide operating funds if there is a catastrophic loss. Check the specifics of your policy to see if natural disasters such as flooding or earthquakes are included. If not, you may need to purchase a separate policy to cover those events.
Understanding Liability Insurance
There are two types of liability insurance: general liability insurance and professional liability insurance. Both types of liability protect you if someone files a lawsuit against your business.
Commercial general liability insurance protects your company from loss due to property damage, advertising injuries or personal injuries. These injuries may be caused by your employees or by your business operations, but they are non-professional acts. Some examples might include a customer tripping over a box and being injured, an employee accidentally damaging a customer’s property or a lawsuit claiming that your ads are misleading.
What is covered by professional liability insurance? Professional liability covers your professional services. This type of insurance is sometimes referred to as errors and omissions insurance. A common type of professional insurance is malpractice insurance. Professional liability insurance provides coverage in the event you are sued for providing inaccurate advice, violating a customer’s good faith or negligence. Professions, where you may want to consider taking out professional liability insurance, include insurance agents, accountants, real estate agents and IT consultants.
Understanding Commercial Vehicle Insurance
If you use your personal vehicle for business or if your business owns vehicles, you will need commercial or business vehicle insurance. Most personal auto insurance policies will not extend coverage to a vehicle that is being used for business purposes. A commercial vehicle insurance policy will pay for property damage or injuries due to accidents that are caused by your vehicle. This coverage is limited by your policy coverage maximums.
Like personal car insurance policies, commercial vehicle policies are required to meet your state’s minimum requirements. This typically includes liability coverage and uninsured motorist coverage. Your policy may also cover other types of damage, such as loss due to theft, fire, flooding or vandalism.
Understanding Workers’ Compensation Insurance
Workers’ compensation insurance covers your employees if they are injured on the job. It provides coverage for their medical expenses, and it helps to replace their lost wages. Paying a workers’ compensation claim doesn’t mean that your business was at fault or negligent; it just means that the injury occurred while your employee was engaged in work-related activities.
Texas is the only state that doesn’t require workers’ compensation insurance. Every other state requires workers’ compensation insurance; in some state if you have more than three employees and other states if you have more than five employees. Large companies may choose to self-insure rather than take out an insurance policy. This means that the company has a large pool of funds that is exclusively dedicated to paying out workers’ compensation claims.
Understanding Business Owners Policies
Business owner policies are an all-in-one insurance policy. Business insurance companies bundle property and liability coverage into one policy that’s sold to small-and-midsized business owners. These policies typically include commercial property insurance, business interruption insurance and general liability insurance. They don’t include other essential insurance policies like workers’ compensation and professional liability insurance.
Considering Other Types of Business Insurance
There are also more specialized business insurance policies. For example, umbrella policies provide liability coverage for unusually high losses. Umbrella policies take over when you’ve reached the limit of another policy, such as general liability or commercial vehicle insurance.
Business identity insurance provides coverage if your business is a victim of a cybercrime. The policy may have provisions to notify customers and provide them with identity theft recovery services and counseling. A more comprehensive cyber liability policy may also cover instances of data loss from data corruption or malware, A cyber liability policy may also cover operating costs if your business is interrupted due to a cyber event.
Product liability insurance provides you with financial protection if your business’s product causes someone property damage or injury. You may be required to have product liability insurance if you are partnering with a retailer to get your product into stores. You may want to consider including product recall insurance if you are producing products on a large scale and contamination insurance if you are making a product that spoils, such as food or cosmetics.
Business interruption insurance is sometimes included in bundled policies or as part of a property insurance company. It provides you with funds to cover operating costs if you’re no longer able to use your business property due to fire or other damage. The coverage covers your business revenue and operating costs based on what you would have earned if the disaster hadn’t occurred.
Key person insurance is different from most other types of business insurance. It is life insurance on a key person in your business. If your business is a partnership, for example, then your business may take out a policy on your business partner. The business pays the premiums and is the beneficiary of the policy.
If your business partner dies, the business receives the proceeds from the policy. This can be used to help the company recover from the loss of a vital employee. The funds can be used to recruit and train a new employee, pay off debts, pay investors or close down the business.
What Does Business Insurance Cost?
Business insurance costs vary widely. The cost of your insurance is based on the amount of risk involved in your company. A small business with fewer than five employees will pay significantly less than a large company because there is less financial risk to the insurer. In general, the average annual cost of general liability insurance for a small business owner is between $400 and $600 per year or between $36 and $50 per month.
Although there is a wide variety of coverage limits available for general liability insurance, 85 percent of small business owners choose a policy with a $1 million/$2 million limit. This means the policy will pay up to $1 million for a single claim and up to $2 million for the duration of the policy (most policies have one-year terms).
Obtaining Business Insurance
If you’re starting a business or looking for new coverage for a business you already have in place, you’ll need to start by assessing your business risks. This includes taking an inventory of all your business property, including items such as inventory, furnishings and computers. You will also need to know how many people you employ and have a sense of the work that each employee carries out. You should also have a sense of how much you can spend on your insurance coverage.
Once you have this information compiled, you will want to discuss your insurance needs with an insurance professional. Look for a broker who is experienced with business insurance. An insurance broker can let you know what paperwork you will need to provide to each insurance company when you apply. Your broker can also obtain business insurance quotes for your review.
Review each quote carefully. The quotes should all be for similar types of coverage so you can make an accurate comparison. Keep in mind that a higher deductible, which is the amount you pay before the insurance policy begins coverage, will give you lower premium payments. Look at the coverage limits and look for coverage in the event of a natural disaster such as a hurricane or earthquake.
Evaluate your potential insurers. Check the rating of each insurer and look for complaints. Ask the insurer about potential discounts. Some insurance companies will provide discounts on commercial auto insurance if you install devices that provide data on driving habits, for example. Your insurer may also offer discounts for bundling your coverage.
You may also be able to save money by paying annually rather than monthly. Most insurers will provide you with a discount for making annual payments.
Once you choose a policy, you will need to complete an application. The insurance company will review the application and let you know whether or not you are approved. Once you have a policy in place, review your coverage annually or sooner if there is a significant change to your business.
If your insurance costs are higher than you expect, you can take a proactive approach to manage your risks. You can train your employees on safety practices, for example, to help minimize workers’ compensation claims and injuries to customers. You can install a security system or hire a security guard. If there are any structural risks on your premises, you should repair those immediately. When it’s time to renew your policy, let your insurance company know the measures you’ve taken to improve your safety. They may be willing to give you a discount.
- Insurance Information Institute: What Does a Business Owners Policy (BOP) Cover?
- Travelers: Commercial Truck and Auto Insurance
- Insurance Information Institute: Covering Losses with Business Interruption Insurance
- Insurance Information Institute: Product Liability, Recall and Contamination Insurance
- Insurance Information Institute: Cyber Liability Risks
- Insurance Information Institute: Insuring Your Business: Small Business Owners' Guide to Insurance
- Investopedia: Business Insurance
- U.S. Small Business Administration: Get Business Insurance
- Insurance Information Institute: Professional Liability Insurance
- Insurance Information Institute: Commercial General Liability Insurance
- Insurance Information Institute: Shopping for Business Insurance
- Insureon: General Liability Insurance
- Insurance Information Institute: Do I Need Business Interruption Insurance?