The second a small business opens, there's risk. Business owners have a certain responsibility to their consumers, employees and the world around them that puts them at risk every single day if something goes wrong, and let’s be honest: Things do go wrong. That’s just life, but that’s also why we have business insurance.
A comprehensive business-insurance plan can protect you against the liabilities that lead to financial ruin, but there are so many different types of insurance that it’s often hard to choose what’s necessary. These insurance plans, from an auto insurance policy to liability coverage, are some of the most popular for small-business owners. Most aren’t required by law, but if you ever get into a situation, you’ll be glad you had it.
TL;DR (Too Long; Didn't Read)
A business owner's policy, or BOP, is a comprehensive plan that should cover most of a small business's needs. This is a great place to start.
1. Business Owner’s Policy
A BOP is one comprehensive insurance plan that covers the entirety of a business’s needs. This includes things like liability insurance, crime insurance, business interruption insurance, commercial auto insurance and property insurance. If it sounds too good to be true, that’s because it might be.
Companies usually choose this type of policy because it’s cheaper than getting each plan separately, but it doesn’t always offer the same tailored coverage as getting individual plans. Your business may need a policy that protects against a greater liability, or you might simply need something more specific. It's important to inquire and shop around for your options to see what suits your business needs best.
2. General Liability Insurance
Getting general liability insurance coverage isn’t just a smart way to protect your assets. It may actually be required by law if you’re trying to obtain certain business licenses. At the heart of it, general liability insurance can protect you in the event that you, your employee or your product causes bodily injury, property damage or advertising or personal injury to a third party. This type of insurance coverage also helps cover your legal defense costs in the event that you’re sued.
General liability insurance is typically the first kind of plan a small business purchases (if it is not going the way of the BOP) because it’s so overwhelmingly important. In the most basic sense, a tiny accident could cause a devastating lawsuit regardless of fault. For example, a restaurant could incur tens of thousands of dollars in legal costs if someone slipped on a water spill, even if it was properly labeled with a caution sign. If that’s not enough to sway you, things get even more expensive if you’re found to be at fault.
One of the more famous examples happened in 1992 when McDonald’s had to pay nearly $3 million in damages to a woman who was burned by a cup of coffee at the drive-through. The coffee was found to be a dangerously hot temperature because of a corporate policy. Though that amount of cash doesn’t mean much to a massive corporation, it is the difference between life and death in a small business.
3. Professional Liability Insurance
Let’s be honest: As good as you are at your job, nobody is perfect. Sometimes, you just miss something or mess up. Professional liability insurance (also known as errors and omissions insurance) is there if that unfortunately happens. This type of business-insurance coverage provides defense and damages in the event of a professional mistake or a failure to perform.
Consider the example of an HVAC business. If it improperly installs a hot-water heater and the heater causes a flood, it's probably going to get sued by that customer for water damage. Water damage can cost thousands and even tens of thousands if you're particularly unlucky. Errors and omissions insurance will protect the business against these costs. Of course, all businesses have different products and professional services, so these types of business-insurance policies are custom written for specific industries.
4. Workers’ Compensation Insurance
Workers’ compensation insurance doesn’t just make you a good boss who cares about your employees — it’s also a legal requirement. This type of business insurance needs to be added to your policy as soon as you make your very first W2 hire.
Workers' compensation insurance protects workers who are injured or get sick on the job by providing medical benefits, wage replacement and, in the event of the ultimate tragedy, death benefits. For example, this type of insurance could cover a construction worker who trips on a construction site and injures his ankle. It could also cover a factory worker who hurts his back lifting something heavy or a metal worker who gets burned in an accidental fire.
For this type of insurance, it doesn’t matter if the business was negligent; however, an employee is only covered if he's acting within the scope of his employment. In other words, he can’t make a claim if he catches the flu at home and then can’t come to work (but the kind business owner offers employees paid sick days).
5. Property Insurance
No matter how small the small business, it’s a safe bet that you own at least one asset that would be devastating to lose. A good property insurance plan protects these assets whether you lease or own your place of business. This includes covering machinery, equipment, signage, inventory and furniture if there’s a fire, storm or theft.
Unfortunately, property insurance isn’t all-encompassing, and it typically doesn’t cover major natural disasters like floods and earthquakes (though you may qualify for aid from FEMA if your losses are the result of a national disaster). If you’re working in a flood or earthquake zone, you should get an insurance quote for a more comprehensive plan. Sometimes, if the liability is too great, insurers will not offer additional coverage.
6. Commercial Auto Insurance
Commercial auto insurance is similar to a personal auto policy, but it covers your business’s vehicles and generally offers a higher coverage limit than you can get with a personal plan. This can protect vehicles that carry customers, employees, products or equipment whether you’re driving a van, SUV, car or truck. It even covers food trucks, but you may have to find more specialized insurance if you’re looking to cover semi trucks and tractor trailers. Similarly, people who drive for services like Uber, Lyft or Grubhub typically need to take out a specialized rideshare insurance policy rather than a commercial auto plan.
Like a personal auto insurance policy, commercial auto insurance protects against damage to your vehicle, driver injury, the injury of another party or damage to another party’s property. It also protects you against losing your personal auto coverage in the event of an accident.
There are two types of auto insurance policies: an owned policy and nonowned policy. The former covers vehicles your company owns, like the branded van an electrician drives. The other covers vehicles your employees own. For example, a pizza shop that has a delivery driver using her own vehicle may take out a nonowned commercial auto policy if the driver doesn’t have adequate insurance coverage.
7. Cybersecurity Insurance
In today's world of tech, data breaches are a major issue. Most businesses store sensitive, nonpublic information about employees and clients on their computers or in paper files (yes, people still use paper files, and these can be destroyed or stolen). This includes things you may not even think about, like the bank account details you use to pay your employees via direct deposit and the Social Security numbers you use to issue 1099s.
A cybersecurity policy can cover potential losses if there’s a cyber-related incident like a data breach. It can even cover intellectual property and financial loss because of security breaches whether it is physical or digital files that are taken. This may be something worthwhile for a tech company or an e-commerce company. If consumer credit card information gets hacked just one time, it could crumble your entire business into bankruptcy.
- Consumer Attorneys of California: The McDonald's Hot Coffee Case
- Progressive: A Small Business Owner's Guide to Workers' Comp Insurance
- Geico: Commercial Auto Insurance
- Digital Guardian: What is Data Breach or Cyber Security Insurance?
- Entrepreneur: 7 Types of Insurance You Need to Protect Your Business
- NHTSA. "National Statistics." Accessed Sept. 17, 2020.
- Insurance Information Institute. "Five Insurance Mistakes to Avoid... and Still Save Money." Accessed Sept. 17, 2020.
Mariel Loveland is a small business owner, content strategist and writer from New Jersey. Throughout her career, she's worked with numerous startups creating content to help small business owners bridge the gap between technology and sales. Her work has been featured in publications like Business Insider and Vice.