What is business insurance? It’s exactly what it sounds like. You’ve probably been buying car insurance, life insurance, and health insurance for the better part of your adult life because it safeguards you in situations that are often out of your control.
Business insurance protects your small business in a very similar way, offering you financial coverage in the case of lawsuits, injuries, accidents, honest mistakes, and other occurrences that are often unexpected and uncontrollable.
And just as there are many different types of personal insurance policies, there is a huge array of business insurance policies—some very general and others quite specific in scope.
Why Does Your Business Need Insurance?
Even if your business is a sole proprietorship or you only employ a handful of employees, you still need some business insurance. It might not be an incredibly complex insurance program that you need to put together. However, there are policies that every business should buy for the simple reason that there are business risks that every business faces, no matter the size, industry, structure, or location of the organization.
It’s also very important to note that business insurance doesn’t nullify these risks or wipe them from existence. It does, however, mitigate these risks and offer your business a certain level of protection that can often be indispensable.
To avoid ambiguity, here are the 3 most direct reasons why businesses need insurance:
- Your Business Could Get Sued: According to the Small Business Association (SBA), the cost of litigation for small businesses ranges between $3,000 and $150,000, and in between 36 and 53% of small businesses face litigation every year.
- Some Insurance Policies Are Mandated: Certain types of business insurance are required by law. Namely, if you have any employees at all, just about every state requires you to purchase a workers’ compensation policy. Unemployment insurance and disability insurance are often required policies as well.
- Many Business Partnerships Require Insurance: If you want to take out a business loan from a bank, you’ll need insurance. If you’re looking to raise venture capital for your startup, there are types of insurance policies that you will need to procure (most notably, a directors & officers insurance policy). For their own protection, vendors, merchandisers, distributors, and other types of business partners will often require you to have certain policies before signing a contract and agreeing to do business with you.
Obviously, not every business needs every type of business insurance, and the type of insurance, the amount of insurance you need, and the cost of your insurance will all depend on a large variety of factors, including your industry, the size of your business, your location, number of employees, revenue, and much more.
Let’s talk about some of the most basic and general business insurance policies that just about every small business should purchase in order to mitigate basic business risks in its efforts to secure financial stability and sustainable growth.
General Liability Insurance
There are no legal requirements that mandate the purchase of general liability insurance, but it’s nonetheless a policy that every small business should acquire. If a third party (a customer, client, or business partner) suffers an injury or damages on your business property or as a result of your product or services, general liability insurance would protect your business and cover your legal expenses.
If you run a small business where accidents are common, like a restaurant or a construction business, you should seriously consider buying a general liability policy.
Commercial Property Insurance
This insurance policy protects your business property. Not only does it protect your office or physical place of work, it covers things such as equipment, inventory, and signage as well. So it’s obviously a must-have for a brick-and-mortar business, but even if you’re an online shop with a storage facility that houses your inventory, it definitely wouldn’t be a bad idea to protect that property with commercial property insurance.
Commercial property insurance is a bit complex since there are usually exclusions and other decisions you need to make when putting your policy together. For example, there are actual cash value policies and replacement cost policies. Actual cash value means that you will be getting the current market value of the damaged or stolen property, while replacement cost means that the actual, brand-new cost of the property will be covered.
A basic commercial property insurance policy will cover incidents such as vandalism, theft, fires, and some more minor weather-related damages. Natural disasters such as earthquakes and wildfires are usually not covered, but specific coverage can be added to your policy if your business is located in a high-risk area.
Business Interruption Insurance
Another complementary policy to look into is business interruption insurance. So if, for example, your business is badly damaged in a fire, your commercial property insurance will cover the costs of repairing your property and getting your business up and running again. Business interruption insurance will cover your lost income during this recovery period.
Pro tip: Insurance carriers are aware that most businesses will want to purchase general liability, commercial property, and business interruption insurance, which is why these 3 policies are often bundled as a Business Owner’s Policy (BOP). Buying a BOP instead of these 3 policies separately saves you time and money.
Workers’ Compensation Insurance
Just about every state requires employers to carry workers’ compensation insurance. Businesses that don’t purchase workers’ comp can be fined and even face criminal penalties. A workers’ compensation policy will cover all work-related employee injuries. So if your employee is injured performing his or her job, this insurance policy will cover their medical expenses, rehab costs, and lost wages.
If your employee does not agree to be compensated via this insurance policy and wants to file a claim against your business instead, your workers’ compensation policy will cover those legal expenses as well in most cases.
Cyber Liability Insurance
Some people assume that cyber liability is something that only software companies and tech startups need, but that couldn’t be further from the truth. Today, just about every business relies on the internet in some way or another. And whether you’re a restaurant or an auto parts store, there’s a good chance that you deal with and store sensitive customer information.
A cyber liability policy protects your company in the event of a data breach or cyber attack. If your system is hacked and your customer information (Social Security numbers, credit card information, bank account information, etc.) is compromised, a cyber liability policy will pay the costs of notifying your customers, civil damages if you are sued, and even computer forensics that you will need to pay for to uncover the cause of the breach and prevent these types of incidents from occurring again.
Other Policies to Consider
Buying business insurance is all about weighing your business risks and determining which policies would be a worthy investment. While the aforementioned policies could be considered essential for a majority of businesses, there might be other insurance policies that could be deemed as essential for your business based on your specific risk profile.
Here are a few more very common business insurance policies that most business could use:
Commercial Auto Insurance: If your business has vehicles, then you need this coverage. Even if you have a work-from-home business and you’re using your personal vehicle for work purposes, you should buy a commercial auto insurance policy because your personal auto insurance will not cover work-related damages.
Professional Liability (Errors & Omissions) Insurance: Also known as “malpractice insurance,” this policy is most commonly associated with lawyers, accountants, doctors, and others that provide professional services in which errors and mishaps could easily lead to lawsuits.
Employment Practices Liability Insurance: Not only are employee lawsuits on the rise, but they are also often resolved very slowly and can be super-expensive, which is why more and more employers consider EPL insurance essential coverage. It protects businesses from employee claims of harassment, discrimination, failure to promote, wrongful demotion, and more.
Key Person Insurance: This insurance is basically a business-related life insurance policy. If you or any other key member of your team dies or becomes disabled and can no longer lead the business, this policy kicks in to provide financial coverage as your business takes steps to replace the key person it has lost. Key person insurance is commonly used as a guarantee for business loans as well.