Your Guide to Choosing Small Business Insurance
Learn about business insurance and how it can protect your business financially and legally.
Every small business needs some combination of business insurance for financial and legal protection against liability in a crisis.
Popular business insurance policies include general liability, business owners policy (BOP), business interruption, management and product liability, workers' compensation, E&O, auto, and cyber insurance.
To pick the best insurance for your organization, analyze your business assets, liabilities, and risk; determine how basic or comprehensive you want your insurance to be; and compare providers.
This article is for entrepreneurs, startups and small business owners who want to know what business insurance is and what policies they need to protect their business.
· When making financial decisions for your small business or startup, it can be tempting to cut costs by only signing up for the business insurance you're legally required to have. However, just one uninsured accident can cost more than your monthly premium – it can cost you your business. With many types of business insurance available, it can be tough to know just which kinds you need. Small business owners should analyze their needs to make strategic decisions about which plans are right for them.
What is business insurance, and why do you need it?
When accidents happen, you want to be protected. Business insurance protects your business from financial loss during times of crisis or unforeseen events. There is no one-size-fits-all business insurance; instead, there are several types of insurance that can protect your business, and the exact combination of policies you need depends on your unique circumstances.
"[Business insurance] assists in legal payment, claims, employees' issues and business property in case anything goes wrong because of your business activities," Phil Crippen, business advisor at John Adams IT, told Business News Daily. "It can help towards the cost of compensation claims and legal fees, as well as damage to your property or employee-related issues."
The benefits of insurance are often related to financial and legal protection. Insurance can protect you from a variety of losses – for example, if an employee is injured, your office building burns down, a client tries to sue you, or your business partner passes away. The right business insurance can help you recover and continue operating your business.
"As a business owner, you define what the right insurance is going to be," said Seth Morton, MBA, licensed insurance agent and owner of Morton Insurance. "Insurance itself is simply an agreement by an insurance company to pay the insured for business losses. To determine what should be insured, a business owner needs to analyze his risk. Once the scope has been established, the owner can evaluate the cost of insurance versus the risk of loss."
Key takeaway: Business insurance gives you financial and legal protection in a crisis or unforeseen event.
What does business insurance cover?
Business insurance can cover a litany of things, depending on the type. It ranges from basic to comprehensive, so you will want to choose coverage that adequately protects your property, people and business processes.
Morton listed 10 common aspects of a business that insurance can cover and protect:
Lives of the business principals
Lives of key employees
Lives of an employee group
Long- and short-term disability of owners and employees
Liability for injury to owners and employees
Property and casualty coverage for buildings and machinery
Liability for and damage to business transportation assets
Employee health insurance for sickness and injury
Workers' compensation for earnings lost due to injury
Key takeaway: Business insurance can financially and legally protect the main elements of your business, including your property, people and business processes.
How much does business insurance cost?
The type of business insurance you purchase dictates your monthly costs. According to Progressive, the average cost of business insurance is $53 per month for general liability and $85 for workers' compensation. Some business owners purchase a business owner's policy, which combines liability and property coverage in one policy. The average cost for a business owner's policy is $80 per month.
Another factor that impacts how much you pay each month is your business type. For instance, builders pay a lot more for business insurance than accountants. The reason for the increase is related to the hazards associated with the job – there is a greater inherent risk of injury and potential damage if you operate a construction firm versus if you run a small accounting firm.
Business size, or the number of employees your company has, is also a cost consideration. Each employee poses a potential risk for your business, which raises your monthly premium.
Finally, coverage amounts influence cost. The higher the coverage, the more you will pay. One way to offset the cost if you choose a higher coverage is to have a higher deductible (which is the amount of money you pay out of pocket before the insurer will pay for a covered loss). Assuming greater risk can lower your monthly premiums. Many insurance companies offer you a choice of the deductible. The amounts can range from a few hundred dollars ($250) to thousands of dollars ($2,500).
In the event of a claim, business insurance is normally payable directly to the company. As an example, if your business is damaged during a fire, you would file a claim. An adjuster assesses the damage and decides on the cost to repair or replace the damaged property or items. Once you pay your policy's deductible, the insurance company cuts a check to the business based on the parameters of the policy.
Types of business insurance
There are numerous types of business insurance available, and you will likely need a combination of multiple policies to protect your business. It is highly recommended that you speak to an insurance expert to identify the specific policies necessary for your company. However, these are some primary types of insurance that most small businesses will need.
Business owners policy: A BOP is usually a combination of general liability coverage (e.g., bodily injury, property damage, personal or advertising injury, medical payments, products-completed operations, and damages to premises rented) and property insurance. You can also add an employment practices liability insurance (EPLI) policy to your BOP to cover your employees.
Business interruption insurance: Also known as business income insurance, this is one of the most common types of business insurance. It helps you recover lost income and pay operating expenses (e.g., mortgage, rent, payroll, loan payments, taxes) if your business is forced to shut down because of disasters like a fire, flood, theft or collapsed building. It can sometimes be bundled with your BOP.
Management liability insurance: Another comprehensive insurance package you may need is management liability insurance. This often combines insurance coverage like employment practices liability (essential protection for businesses with employees), fiduciary liability, and directors and officers (D&O) liability (essential protection for businesses with a board of directors).
Workers' compensation insurance: If an employee is injured at work, workers' comp can cover their medical costs or lost wages. Workers' comp and disability insurance are often required by law.
Errors and omissions (E&O) insurance: If you offer professional services, you will want to acquire E&O insurance, also known as professional liability insurance. This type of coverage protects you in the event that a customer or client claims your services caused them financial distress. This is especially important for consultants and financial advisors.
Product liability insurance: Small businesses often need product liability insurance to protect themselves against product-related claims. If your product causes damage or injury to a third party, or your business faces a product-related lawsuit, product liability insurance can help cover your protection and security.
Auto insurance: If you or your employees use vehicles for business purposes, you will need some form of vehicle insurance. Whether you need personal or commercial auto insurance depends on the type of vehicles you use, what you use them for, and how much coverage you need.
Cyber insurance: Every small business owner should protect their data and technology with cyber insurance. If your business technology is hacked or data is leaked, cyber insurance (data breach insurance or cyber liability insurance) can help cover the costs of the damage.
These are just a few of the common types of insurance small business owners should consider. You should seek professional assistance to find the coverage that best protects your specific business.
Key takeaway: The types of insurance coverage you need depend on your specific business, as well as the laws regulating your state and industry.
How to determine what types of insurance your business needs
The best insurance for your business depends on your unique needs. To determine what types of insurance you need, you will have to undergo a careful analysis of your business. It is always advisable to speak with an insurance expert to find the right combination of coverage to keep your business legally compliant and financially protected.
Follow these four steps to determine what insurance your business needs.
1. Analyze your legal responsibilities and business assets.
First and foremost, you should do a careful evaluation of your business and assets to determine what you want to insure. What insurance are you legally required to have, and where do your additional liabilities lie?
For example, Morton said a machine shop might want to insure employees for injury, whereas a jeweler might want protection against theft. Owners of a large distribution company would insure inventory as well as employees, as required by law.
"Each state has different requirements, and business owners should consult with professionals in the state where they operate to determine what to insure," said Morton.
2. Analyze your risk.
Analyze your additional risk and liability. This will help you determine which insurance will offer the right type of protection. For example, if your business is situated on the bottom floor of an office building in a region prone to floods, you will likely want comprehensive flood insurance, whereas a business operating in a dangerous industry will likely want insurance to cover the risk of its employees getting injured.
"In general, careful analysis of business operations, including human resources and facilities, helps determine where the risks are and what should be insured," said Morton. "Beyond what could be called insurance for the operation of the business, there is the question of succession planning. What is the plan if an owner dies or is incapacitated, and how is it funded? It is an area often overlooked by business owners and requires professional help to set it up correctly."
3. Determine how comprehensive you want your insurance to be.
Depending on what you are insuring, you may need a basic level of insurance or comprehensive insurance that covers all aspects of the potential loss. You will have to factor in how costly the loss would be and assess the probability of it happening. This will minimize the risk of overpaying for coverage you don't need, or skimping on coverage that is imperative for your protection.
4. Pick a provider.
Insurance providers aren't all the same. Policies, premiums and coverage vary, so do some research to find the best one to protect your business. Choose a few top providers, and compare them by policy coverage, cost, reliability, customer service and how they handle claims. This will help you find the best insurance provider for your business.
Key takeaway: To determine what business insurance you need, you'll need to analyze your operations, assets, risks and liabilities. Then, determine how comprehensive you want your policies to be and compare providers.
Editor's note: The contents of this article do not offer legal, business or insurance advice related to the needs of any specific individual business. Please consult your attorney and/or small business insurer to discuss your situation and coverage.