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Small Business Insurance Explained—Types and How to Buy
Starting a business involves plenty of challenges and risks. As a business owner, you need ways to minimize and overcome them.
Creating a forecast helps you navigate financial threats. Applying for patents and trademarks protects your intellectual property from being copied. And business insurance acts as a safety net against unexpected liabilities.
In this guide, we’ll break down the basics of business insurance, your options, and how to make clear and informed choices for your business’s security.
*Disclaimer: The information provided in this guide is for informational purposes only and should not be construed as legal advice. Consult a qualified professional or legal counsel regarding business insurance needs or concerns.
What is small business insurance?
Small business insurance protects your business from accidents and risks often out of your control. There is no general business insurance package to invest in, and instead your coverage will be a compilation of insurance types put into an individual policy.
The types of coverage you use will vary depending on your business operations and specific needs. Rather than purchasing separate policies, you can often work with insurance companies to create customizable coverage so you only pay for what you need.
Types of small business insurance
While you may want to consider the options on this list, always consult a broker to ensure you choose the right insurance for your business needs.
1. General liability insurance
A foundational policy that protects businesses against claims resulting from third-party injuries or property damages.
For instance, if a customer trips over a wire in your office and gets injured, this insurance would cover the associated costs.
2. Tools and equipment insurance
Specifically designed to cover the tools and equipment involved in business operations.
- Specialized camera gear
- Culinary equipment
3. Product liability insurance
Insurance that protects against claims arising from injuries or damages caused by your products.
For example, if a customer experiences an allergic reaction to a food product you sell, this insurance would cover the related expenses.
4. Workers’ compensation insurance
An essential policy for businesses with employees—it covers medical expenses and lost wages if an employee gets injured on the job. In many regions, this insurance is not just recommended but legally mandated.
5. Commercial auto insurance
Designed for businesses that operate vehicles. Whether you run a delivery service or operate a fleet of food trucks, this insurance covers damages resulting from vehicular accidents during business operations.
6. Liquor liability insurance
A specialized policy for businesses that manufacture, sell, or serve alcohol. It protects against claims arising from damages or injuries caused by patrons who might have consumed alcohol at your establishment.
7. Damage to premises rented insurance
Ideal for businesses that operate in rented spaces. It covers property damage, ensuring that incidents like fires or structural damages don’t lead to hefty out-of-pocket expenses.
8. Cyber liability and cybercrime insurance
This policy protects businesses from cyber threats. Whether it’s a data breach, ransomware attack, or phishing scam, this insurance covers the associated recovery costs, ensuring business continuity in the digital age.
9. Errors & omissions (E&O) insurance
Also known as professional liability insurance, it’s designed for professionals offering services or advice. It covers claims arising from alleged negligence, undelivered services, or misrepresentation, ensuring that a simple mistake doesn’t lead to a financial setback.
10. Commercial property insurance
A comprehensive policy covers a business’s physical assets, from the building itself to the contents inside, such as machinery, stock, and furniture. It ensures that fires, thefts, or natural disasters don’t ruin business operations.
11. Directors & officers (D&O) insurance
Liability coverage for company leaders against lawsuits arising from managerial actions. It protects both personal assets of directors and the business itself.
12. Umbrella insurance
Extra liability coverage beyond standard policies, activating when primary policy limits are exceeded. It safeguards against significant liability claims.
Why you need business insurance
Here are a few reasons why insurance is a worthwhile investment.
1. Saves you money
In a study by Insureon, they discovered that 32.5% of small businesses experience an incident that insurance would cover every year.
For example, if you work as a massage therapist, you face daily risks simply because you work closely with others. A client could slip and fall in your office, the oils or lotions you use could lead to allergic reactions, or your table could break, leading to costly claims.
Without insurance, you could incur thousands of dollars in defense costs, judgments, and other expenses. However, proper coverage can handle some or all of these costs—providing you with a financial safety net.
Insurance is also a requirement if you want to land funding for your business. If you pursue a business loan or line of credit, the bank may ask to see a certificate of or proof of insurance. Providing that documentation helps you achieve stable credibility.
2. Protects your business
No matter how safe or cautious you are, accidents happen. Insurance acts as a protective barrier, ensuring that when these mishaps occur, your business remains secure.
General liability, professional liability, tools and equipment, and cyber liability insurance are all great starting points for broad protection. If you need something more specific, industry coverage may be available.
3. Often required by law
In many cases, insurance isn’t just a good idea—it’s a legal requirement.
If you have a business loan, lease, or rent a property for your business—you will likely be required to provide proof of insurance.
Outside of these situations, additional laws may be specific to your industry or products/services. For example, if you own a restaurant and sell alcohol, it is required by your state’s dram shop law to have liquor liability insurance.
Be sure to do your homework and understand what additional insurance you need.
4. Provides peace of mind
Running a business comes with plenty of challenges and stress. Insurance alleviates one major concern: financial liability from unexpected events.
With the right insurance, business owners can focus on their operations and customers, knowing they have protection from unforeseen financial setbacks.
5. Increases your professionalism
Having insurance elevates your business’s credibility. It signals to clients and partners how prepared you are for unforeseen challenges.
For example, the Food Liability Insurance Program (FLIP) found that 30% of their insured businesses gained clients due to their insured status. Their customers get a badge to place on their site, letting customers know they are an insured business.
How to buy business insurance
Buying insurance can be overwhelming. You need to identify what type of coverage you need and consider limits, inclusions, and exclusions. Understanding the process will help you avoid buying a policy that does not provide adequate coverage.
Here are four helpful tips to navigate the commercial insurance process:
1. Understand your risk exposure
Begin by understanding your business’s specific risks. Different industries have varied exposures; for instance, a financial consultant might need more professional liability insurance than a landscaping firm.
Research common claims in your sector and use them as a starting point. This is also a chance to implement protective measures, like encryption, which can lower your premiums. Consult your broker for tailored risk management advice.
2. Connect with a licensed agent and shop around
Don’t rush into the first policy you find. Explore various providers, weighing their offerings, costs, and reputations.
Working with a licensed agent can be invaluable here. Their expertise helps you grasp policy nuances, and their industry ties can streamline the buying process, potentially securing discounts.
3. Calculate your policy limits
This is the maximum your insurer will pay after a loss. To set this, envision your business’s worst-case scenario and calculate the recovery cost, factoring in overhead, stock, and equipment.
While it’s tempting to insure only a fraction of your business, remember that premiums are based on the likelihood of partial losses, with a portion reserved for total losses.
4. Review and adjust your policy
Don’t settle. When assessing policies, ensure you’re adequately covered and understand any exclusions. If a significant risk for your business isn’t covered, reconsider the policy.
Remember, quality trumps cost. Existing policyholders should review their coverage annually, ensuring it evolves with the business. Always have your broker clarify any limits or restrictions to make informed decisions.
Dig deeper into specific insurance types, including what options are available and how to eliminate unnecessary expenses.
Important Factors to Consider When Offering Health Insurance to Employees
Before offering health insurance as an employee benefit, here’s what to consider.
Protect your business from the start
Business insurance is not always legally required. But investing in the right coverage can save you from unexpected accidents, lawsuits, or losses that would otherwise sink your business.
Connect with a provider, research, and find the right insurance. Then complete the other requirements to make your business legally compliant.