Most entrepreneurs probably don’t think about it, but from the moment they start their business, they expose themselves to several different risks. That’s the reality even if you operate your business as a sole proprietor with no employees. While there is a lot a business owner can do to reduce their exposure, all it takes is one lawsuit or a catastrophic event to destroy their dream. Fortunately, with most risk exposures, there is a way to transfer the liability to an insurance company to protect the business owner’s personal and business assets.
According to data collected by the Small Business Administration (SBA), up to one-half of small businesses face litigation in any given year. Because most small business owners lack the financial means to cover liability claims on their own, the cost of not having the proper insurance coverage can be much higher than the cost of purchasing the right coverage. Although business insurance can’t protect you from every risk you face, it will provide substantial protection against most legal claims and property damage.
Types of Business Insurance to Consider
Whether you’re just starting a business, or you’ve been operating one for several years, you need business insurance. Two types of insurance coverage, workers compensation, and unemployment insurance, are mandated by law. In addition to that, here are the different types of business insurance every business owner should consider as part of the cost of doing business:
General Liability Insurance
All businesses, regardless of their type, size, or industry, need general liability coverage to safeguard against claims made by employees, customers, or the general public. A general liability policy, also known as a commercial general liability (CGL) policy, is structured to protect against liability claims.
Claims are typically filed when the business or its employees do something (or fail to do something), resulting in property damage or injury to a third party. It doesn’t have to physical bodily harm. A claim could be filed for personal injury arising from slander or libel, or if a customer claims false or misleading advertising.
Liability insurance covers the cost your business incurs as a result of
- Compensatory damages (direct financial losses by an injured party)
- General damages (non-monetary losses such as pain and suffering)
- Punitive damages (additional penalties or charges)
Equally important, liability insurance covers the costs of settling or defending against litigation.
If your business is a part of an industry with specialized risks, you may need to work with an insurer specializing in those risk exposures.
If your business occupies a space, whether owned or leased, you need to have property insurance. Property insurance covers your property and everything in it against damage or loss due to fire, storm, or theft. However, damage caused by a natural disaster, such as a flood, hurricane, or earthquake, won’t be covered by a standard property insurance policy. For that, you’ll need to work with an insurer to get separate coverage.
Business Owners Policy
If your general liability and personal property protection needs are relatively straightforward, you might be able to save some money by bundling them together in a business owner policy (BOP).
Professional liability insurance
If you are in a professional services business, a general liability policy won’t protect you against negligence claims resulting from harm caused by mistakes or failure to perform. For instance, a web developer who fails to deliver a completed website in time for a client’s launch date could be liable for lost sales. Professional liability insurance, also known as errors and omissions (E&O) insurance, will protect against such liabilities.
Product liability insurance
If your business manufactures products that are sold or resold to the general public, you must have product liability insurance. There isn’t enough a business can do to ensure its products are entirely safe. With many small businesses, it takes just one lawsuit due to damage or personal harm caused by one of its products to cripple a business. That’s why product liability insurance is essential, and it needs to be explicitly tailored to the type of products you manufacture.
If you own or lease vehicles for use in your business, they need to be fully insured to protect your business against liability in the event of an accident. The coverage must include liability protection against third-party injury, and it should consist of comprehensive coverage for protecting the vehicle (you’ll need that anyway if you’re financing or leasing the vehicles). Employees who use their own cars for business are covered by their personal insurance, except if they are delivering goods or services for a fee.
Business interruption insurance
If your business operation requires a physical location to generate its revenue, you will need business interruption insurance in the event a catastrophic event forces your business to close temporarily.
If your business relies to any extent on the cloud for conducting commerce or receiving, sending, or storing data, you need cyber insurance to protect it from cyber-attacks. Based on the alarming number of cyber-attacks on small businesses, it not a matter of if your business will fall victim to a cyber-attack; it’s a question of when.
Personal liability insurance
This type of insurance is not for your business; it’s for you. Personal liability insurance, also known as umbrella insurance, adds a layer of protection on top of coverage provided by your general, professional, auto, and homeowners liability coverage. For a few hundred dollars a year, you can buy a million dollars of coverage.
Key person insurance
If your business’s success relies heavily on the talent of a partner or key employee, you will want to protect your business and yourself against the loss of that person due to premature death. The proceeds of a life insurance policy can be used to replace lost revenue or cover the cost of recruiting and hiring a replacement.
If you are operating all or a part of your business out of your home, your homeowner’s policy probably doesn’t cover equipment or inventory associated with your business. Ask your insurer for additional coverage specific to your business equipment.
How to Purchase the Right Business Insurance for Your Business
Very few small businesses need to purchase every type of insurance listed here. It would be essential to work with an insurance broker specializing in business insurance to determine your specific coverage needs. A business insurance specialist can help you determine the level of risk exposure you have in the different aspects of your business.
To ensure you purchase the right insurance coverage, follow these four steps:
Lay the groundwork: With this understanding of the types of coverage, you should consider, talk with other business owners in your industry about what they have done to protect their businesses. Conduct an audit of your business and the risk exposures that can impact it. You can do this yourself or with the help of a business insurance broker or risk specialist.
Hire a business insurance broker: The best way to find a qualified business insurance broker is by asking other business owners for a referral. Once the broker understands your needs, they can go out to the market and get quotes. Insurance brokers don’t represent any particular insurer, which means they can shop around for the most competitive quotes. You can also use an online comparison site like Insureon to obtain and compare quotes.
Compare options: With quotes in hand, work with your broker to review your options, delve into the details, and structure your overall protection plan. Like most forms of insurance, business insurance policies include a deductible that you must pay before the coverage kicks in. You’ll need to consider the amount of deductible you want to pay, keeping in mind that the lower the deductible, the higher your monthly premium.
Don’t just set it and forget it: Enlist your insurance broker to make a review of your insurance coverages a part of your midyear and yearend business review. Your business circumstances and risk exposures are continually changing, so you need to ensure your coverages are up to date.