Accidents happen, whether or not you prepare for them. One way to protect your small business against the inevitable is by acquiring small business insurance. There are many types of business insurance, from general liability to product liability policies. Some are required by law and others make sense to carry based on your business’s risks, but they all come with premiums attached. To help you understand which types of business insurance you need, we put together this list of some of the most common policies out there for small businesses.
What is business insurance?
Business insurance is a form of risk management used to protect you and your company from financial loss in the event of an accident or crisis. According to Rorie Devine, author of The CTO/CIO Bible (Nielsen UK, 2019), it’s vital for businesses to apply for insurance because it will help cover the costs associated with property damage and liability claims.
Did You Know?
Some of the biggest insurance risks businesses face are data breaches, property damage, human capital costs, building projects and professional service mistakes.
“If you are without business insurance, as an owner, you could run the very real risk of having to pay out of pocket for costly damages and legal claims against your company,” Devine said. “Depending on the cost, this could effectively shut down your business without insurance, meaning that, although you may not need to claim on insurance often, just one use could see the insurance cost paying for itself straightaway.”
While business insurance is important, there are so many types that it can be difficult to know which you truly need. This guide will help you understand the many types of business insurance out there and which apply to your business.
Insurance to protect your business from liability
Some of the most essential business insurance types protect you from liability. The type of liability insurance you need will depend on your business and the services you provide.
Let’s explore some popular types of liability insurance.
General liability insurance
General liability insurance, also known as business or commercial liability insurance, is essential coverage for various claims, including bodily injury, property damage, personal or advertising injury, medical payments, products-completed operations, and damages to premises rented to you.
Virtually every small business owner or contractor should have some form of general liability insurance. When buying small business insurance and comparing policies, keep in mind that your rates will depend on your business’s specific features.
Editor’s note: Looking for the right liability insurance for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.
Business owners policy (BOP)
If you want general liability insurance and property coverage, you can package them together in a business owners insurance policy, also known as a BOP. A BOP provides liability coverage for customer injury, property damage and product-related claims, in addition to commercial building and movable property coverage.
Many BOPs also include business interruption coverage, which pays your lost revenues if you close for a covered claim. This coverage type is ideal for owners of small and midsize businesses, like restaurants, retail stores and wholesalers. Keep in mind that BOP insurance doesn’t cover your employees.
Employment practices liability insurance (EPLI)
Small businesses with employees often benefit from employment practices liability insurance. This insurance type protects you if an employee files a claim against you for wrongful discipline or termination, sexual harassment, discrimination, negligent evaluation, breach of employment contract, mismanagement of employee benefits, or wrongful infliction of emotional distress.
Some insurers offer EPLI as stand-alone coverage, whereas others offer it as an endorsem*nt to their BOP. Your policy’s terms and conditions will depend on the coverage you choose. Your business type, number of employees and various risk factors all play a part in the cost of EPLI.
Professional liability insurance
Professional liability insurance, also known as errors and omissions (E&O) insurance, protects businesses that offer professional services. B2C businesses often use E&O coverage to protect against claims stating their services caused clients financial distress or bodily injury.
Doctors’ malpractice insurance is a common type of professional liability insurance. This insurance type is also essential for professional service providers like consultants and financial advisors. Costs for professional liability insurance will vary depending on the industry and profession. For example, a doctor would likely pay more than a CPA.
Contractors’ professional liability insurance
If your business is in the design-build or construction management industry, you are required to purchase some form of contractors’ professional liability insurance. This coverage protects professionals against construction errors or losses incurred when designing, engineering and constructing a building. It can also protect you from errors made by third-party vendors associated with a project.
Directors and officers (D&O) liability insurance
If your business has a corporate board of directors or advisory committee, you want D&O insurance. This insurance protects your directors’ and officers’ assets if they are personally sued for wrongful acts in company management (e.g., failure to comply with workplace laws, fraud, theft of intellectual property, misrepresentation of company assets and misuse of company funds).
Management liability insurance
Management liability insurance is a combination of coverages used to protect private, public and nonprofit companies for various board-level exposures. It protects against the risks of managing a business and is purchased by organizations with a board of directors. A typical management liability insurance package includes coverage for employment practices liability, fiduciary liability and D&O liability.
Product liability insurance
Product liability insurance provides more protection and security than a standard product warranty or guarantee. This coverage protects your business if a product causes damage or injury to a third party, or if your business faces a product-related lawsuit. For example, if your product had a lithium battery that caught on fire, injuring the consumer, they could sue you. Product liability insurance covers you in this instance.
Insurance to protect business property and equipment
Your company property is essential to your operations, and damage to any uninsured property can be costly to repair. Various property insurance types can protect your buildings, automobiles or other equipment. The type of coverage you need will depend on the property you own or rent.
Commercial property insurance
Commercial property insurance protects your physical assets (building, equipment, inventory, tools, furniture and personal property) and covers financial losses due to property damage from fire, theft or loss.
Property insurance coverage ranges from basic to comprehensive (and pricing scales reflect that), although small and midsize businesses with physical assets typically need some form of this coverage. Unless you own your commercial property outright (meaning there is no lien or mortgage against it), your lender will require you to have this coverage.
Homeowners insurance
If you have a home-based business or store business property in your house, check the business coverage under your homeowners insurance. Homeowners insurance often provides only limited coverage (e.g., $2,500) for business property or equipment stored in your home, and some policies don’t cover business property at all.
Those with a home-based business should seek more comprehensive business coverage through a homeowners policy endorsem*nt or an in-home business policy. As with commercial property insurance, a lender will require a homeowners policy until the mortgage is paid.
Business renters insurance
Business renters insurance is essential for businesses operating in one or more rented spaces. It will cover incidents within the space, including fire, floods, accidents, and building or property damage due to natural disasters. This type of insurance covers many things other policies do, but for rented spaces specifically.
Personal auto insurance
If you are self-employed and drive your personal vehicle for business purposes, you may be covered under your personal automobile insurance. If you own your car, truck or van, and use it only occasionally for work, you may be able to skate by with standard personal auto insurance designated for business use. However, if you operate a company-owned vehicle, your vehicle is specifically designated for work or you need more coverage, you may need a commercial automobile insurance policy.
Commercial auto insurance
Commercial auto insurance is similar to personal automobile insurance: It protects your cars, trucks or vans in the event of damage, injury or liability claims. However, commercial auto insurance provides additional coverage, including property and liability trailer exposure, loading and unloading exposure, hired-vehicle coverage, non-owned vehicle coverage, and higher coverage limits.
You will likely need this form of auto insurance if you have vehicles used for business purposes, dump trucks, tow trucks, snowplows, semi or commercial trailers, vehicles exceeding 10,000 pounds, or vehicles with installed business equipment (e.g., toolboxes or ladders).
If your business operates a fleet of vehicles, follow these best practices for fleet health and safety compliance to minimize risk.
Business overhead expense (BOE) insurance
Business overhead expense insurance, commonly known as business expense insurance, goes hand in hand with your disability insurance. BOE insurance covers the cost of running your business (based on actual expenses, including utility bills and employee salaries) if you become disabled and can no longer operate your business. However, BOE insurance does not pay your salary (as an employer) while you’re out of work.
This type of insurance is a standard purchase for small law firms, medical practices, and architecture and accounting firms.
Insurance to protect executives and employees
Your team is one of your company’s most important assets. It’s vital to have insurance coverage that protects you and your employees. The type of insurance you need will depend on you and your team (and legal requirements). Learn about the popular types of insurance available to protect you and your team.
Workers’ compensation
Workers’ compensation insurance, also known as workers’ comp or workman’s comp, covers medical costs and a portion of lost wages for an employee who has suffered a work-related illness or injury. If an employee accepts the benefits of workers’ comp, they relinquish their ability to sue your company for the illness or injury. This insurance is often required by law.
Disability income insurance
Disability insurance is similar to workers’ comp in that it temporarily covers an employee’s lost wages if they are unable to work because of a disability. However, disability insurance will cover injuries or illnesses that occurred on or off the job, whereas workers’ comp covers only work-related issues. This type of insurance is sometimes required by law.
Key person insurance
Key person insurance, also known as key man insurance or key woman insurance, helps replace lost revenue due to the death of a key executive of your business. Your business pays the premium while the key person is alive and then collects a death benefit after their passing. These benefits can be essential to continuing the operation of your business or finding someone to fill their role.
Did You Know?
When founders die, businesses often have a challenging time continuing operations. It’s essential for entrepreneurs to create a business continuity plan so the company can still thrive if the worst happens.
Life insurance
You and any other members of your business can acquire a life insurance policy. This is similar to key person insurance, providing a beneficiary with financial assistance in the event of your death. Having life insurance in place can give you peace of mind that your death will not burden your family or business partners financially.
Insurance to protect your business from disasters
If your business falls victim to an unexpected disaster, you’ll want to be insured. One calamity can cost an uninsured business more than the company is worth, resulting in irreparable financial loss and legal suits. To protect your business, you will need some combination of disaster insurance.
Business interruption insurance
Business interruption insurance, also known as business income insurance, is one of the most common types of coverage most small businesses need. If a disaster strikes (such as a fire, flood, theft, building collapse or civil authority incident) and your business is required to shut down for a period of time, business interruption insurance will help cover lost income or operating expenses like mortgage or rent, loan payments, taxes, and payroll. Business interruption insurance can be bundled into your BOP.
Tip
To rebuild your business after a natural disaster, communicate transparently with customers, and be flexible and compassionate with employees and vendors.
Comprehensive crime insurance
Crime insurance can protect your business from financial loss due to criminal activity, including computer and funds transfer fraud, employee dishonesty, forgery and alteration, loss of money and securities, and theft of your clients’ property. If you have employees or work with sensitive information, you will want some form of crime insurance. Before purchasing a policy, make sure the provider covers your industry.
Credit insurance
Small businesses with loans or credit cards can purchase credit insurance, also known as payment protection insurance. Credit insurance ensures that payments will still be made in the event of a financial shock (such as a death, disability or unemployment). Unlike disability insurance, credit insurance does not pay the employer; it simply pays your lenders what you owe.
Cyber insurance
In the digital era, protecting your company’s technology is imperative. Small businesses should seek cyber insurance to protect against losses from cyberattacks like ransomware, viruses and data breaches. Cyber insurance can include data breach insurance (which is good for helping small businesses recover) and cyber liability insurance (geared toward larger businesses that need more coverage).
Key Takeaway
To recover from a data breach, consider retaining a forensic expert, who can find and analyze equipment and data to assess what happened and prevent repeat breaches.
Product recall insurance
If your business sends out a defective product and needs to recall it from the market, product recall insurance can financially help you do that. This insurance is typically necessary for manufacturers to cover recall costs related to customer notification, shipping and disposal.
Inland marine insurance
Small businesses with movable business property can purchase inland marine insurance to protect their equipment, products or materials while they’re in transit via truck or train. Although “marine” implies water, this insurance covers transportation over land only, as well as property being temporarily warehoused by a third party.
Commercial umbrella insurance
For an extra layer of protection, business owners can seek out umbrella insurance. Commercial umbrella insurance (similar to personal umbrella insurance, but with higher policy limits) covers the cost of additional liability that exceeds the limits of an underlying policy, such as your general liability or commercial auto insurance. Though often referred to interchangeably with excess liability insurance, commercial umbrella insurance can sometimes cover claims that the underlying policy wouldn’t otherwise cover.
Disaster insurance
If your business is at risk for floods, tornadoes, earthquakes or other types of natural disasters, you should get disaster insurance. These policies are specific to the types of disaster your area is prone to. For example, California businesses should consider earthquake insurance due to the high probability of an earthquake. While these policies can be expensive, they are essential to protecting your business from disasters that are likely to occur in your area.
Key Takeaway
Protect your business against losses from physical and technological disasters with policies like business interruption insurance and cyber insurance.
How to choose business insurance
Choosing the small business insurance policies your business needs can be a daunting task. Here’s how to navigate this world and optimize your selection:
- Tally your assets. You need to know exactly what your insurance needs to cover.
- Think about your risks. Every business is subject to a unique set of risks. A company that rents jet skis has very different risks from a dog groomer, but either could be sued if something goes wrong – and both companies have plenty to lose from theft or natural disaster.
- Consider your responsibilities. Professional services are subject to different risk types. You are liable for being an expert when you provide these services. That means honest mistakes or bad advice could get you into legal and financial trouble. It is essential to know your responsibilities and have adequate liability coverage for them.
- Compare coverage to cost. Money is always a significant consideration. It’s tempting to buy just the minimum coverage to save money on premiums, but inadequate coverage is a dangerous risk for small businesses. It’s worth your time to look at comprehensive plans, extra coverage and add-on features to see everything that might make sense for your circ*mstances. Ironically, double coverage rarely costs double the premium, so it’s worth considering.
Choosing a combination of insurance types
There isn’t one insurance type that meets the needs of every business. You will need a combination of business insurance plans based on your location, company and industry. Alex Roje, partner at Lathrop GPM, said each small business owner should assess their specific needs and liabilities to develop the combination that best protects their business.
“Consider what sorts of liabilities or issues keep you up at night, and then sit down with a reputable, experienced insurance broker and discuss a plan to cover those, and to get [their] assessment of additional coverages you may need,” she said.
Once you’ve determined the type of coverage you need, choose an insurance plan comprehensive (or basic) enough to match your associated risk and liability. Roje said pricing shouldn’t be the sole driver of the insurance products you buy.
“Cheaper is not always the right choice,” Roje said. “You may be buying the Pinto version of coverage when you really need the Ferrari, or at least the Toyota.”
Tip
Compare insurance carriers’ coverage and costs with an online business insurance quote tool.
Don’t skimp on business insurance
Business insurance may represent an expense on the balance sheet, but it’s well worth the cost. Although you may never need it (if you’re lucky), having it could save you some serious money in the long run. In many cases, certain types of business insurance is even required by law, so be sure you at least have the legally required minimum for your business. Remember, when it comes to insurance, it’s better to have it and not need it than to need it and not have it.
Tejas Vemparala and Kimberlee Leonard contributed to this article. Some source interviews were conducted for a previous version of this article.
