9 Key Business Insurance Types That Protect Your Small Business
[Note: I originally wrote this blog post in 2016, and I updated it in 2019 and 2023, but only to remove outdated links and enhance readability. This post reflects the blog structure used in 2016 and my writing style at the time. Both have changed measurably since then. Estimated reading time: 11 minutes.]
If you’re a small business owner, you have a lot to think every day. You're in business to generate revenue that supports you and your family. But, more than that, it's an essential wealth-building pillar.
So, the last thing you need to worry about is the safety of your business from a catastrophe or a lawsuit. That’s why no matter where and how you conduct your business, you'll need insurance protecting your business activities and property.
Whether you work from home, rent an office location and have employees, are a consultant or work in the field as a contractor or sales professional, the right business insurance coverage is critical. Business insurance protection is an important part of your business’ risk-management strategy. And, in the long-run, it protects your wealth.
Why Business Insurance is Necessary Today
The constant threat of lawsuits makes the need for business insurance protection more necessary than ever. Between 36-53% of small businesses owners face litigation each year. One of the most important benefits proper insurance protection provides your small business is legal and financial protection in a covered lawsuit.
In simplest terms, in exchange for paying regular premiums, the insurer agrees to fight a lawsuit for your business. Also, throughout the suit, they cover all associated legal fees and costs up to the policy limit. How that applies to your business depends on the legal language of your insurance contract, however. That's why you must understand exactly what you’re getting with your business coverage.
Another reason business owners need the correct types and levels of business insurance protection is in the case of catastrophes. Natural disasters, fires, vandalism, major thefts, and other calamities jeopardize business operations and continuity daily. Business insurance can mitigate losses in those situations.
Nonetheless, most small businesses owners haven’t obtained and maintained adequate business insurance protection. Frequently, that includes employer small businesses.
But, failing to keep the right insurance coverage could leave you defenseless if you have legal issues or experience a catastrophe that causes considerable damage to your business or worse, prevents you from continuing operations.
All Business Owners Should Investigate These Policy Types
Coverage products and levels of protection your small business should have depends on what business it conducts, its size, age, stage, and revenue and other elements. Also, whether you have employees and substantial business property, including structures, is important to consider. In unique situations, as with high-risk business offerings or businesses using large numbers of seasonal or temporary workers, insurers consider other factors.
Contingent on those basic factors, here are nine key business insurance products your small business may need. As you read this post, don’t think about ways to skimp on these coverages because of the price. It can cost you much more not to have insurance in place.
Commercial Liability Insurance
Often called general liability insurance, this covers your business when someone files a claim alleging something your business did hurt them or their property. A common example is a slip and fall or other injury caused on your premises, whether you conduct business at home or in another place.
This coverage also includes product liability coverage for cases where someone alleges a defective product caused them harm and your business was the source of the product.
Other protections provided are for libel, slander and defamation claims; damage by you or an employee of a third party's property or equipment; and, copyright infringement claims. If you’re counting on the liability coverage that’s part of a homeowner’s or renter’s policy to protect your home-based business, make sure you tell your insurance carrier.
Otherwise, your homeowner's or renter's policy may provide little or no coverage for business done at home and lawsuits or losses related to business won't be covered.
Property Insurance
Losing your business property can damage your business operations significantly or cause their complete cessation. That’s why your business needs property insurance coverage for both your buildings and structures and business personal property.
“Business personal property” includes office furnishings and equipment, including computers; inventory, raw materials, tools and machinery critical to operating your business. Obtaining and maintaining this coverage at proper levels makes it possible for you to replace structures and business personal property after a covered event.
If you get the right policy or add specific endorsements to a policy, it can cover clean up after a catastrophe (including the breakdown and removal of broken equipment and debris) and cover operating expenses while you’re trying to restore your business operations.
Business Owner's Policy or BOP
Created in 1985 just for small businesses, this product can offer the best overall insurance protection available to most small enterprises. BOP combines general liability and property insurance into one package for less than buying them separately.
Often, BOP also provides business interruption or BI insurance. BI insurance covers business income, including profits, after an event covered by your property insurance makes you unable to sustain business operations.
For up to 12 months while you rebuild your business, it can cover employee payroll, taxes, licensing fees, rental of more business equipment and other ongoing business expenses during recovery. That’s especially important if you must run from a temporary site.
In addition to being certain your BOP provides BI, you should decide what riders or endorsements are necessary to protect what your BOP doesn’t automatically cover, like outdoor signs. You may want to get extra expense coverage to extend BI payments. Or, you might consider a separate business umbrella policy to enhance your BOP with up to $1 million in added liability coverage.
Professional Liability Insurance
Consultants, architects, accountants, real estate agents, financial advisors, and others are at constant risk of being sued for the way you provide your professional services. Consequently, you’ll want to investigate errors and omissions or E&O insurance. Designed with experts in mind, this coverage protects you where general liability doesn’t.
Customers might sue you for making a mistake that costs them money, failing to protect their best interests, failing to meet professional standards of service, missing a deadline, giving poor advice or recommendations or just falling short of their business expectations with your services. This policy offers protection when that happens.
For physicians or lawyers, this would be called malpractice insurance. E&O insurance is “malpractice coverage” for other types of professionals who provide advice and certain professional services.
Commercial Auto Insurance
Maybe you’ve begun driving your personal vehicle primarily for business purposes—like using it to run customer errands in the gig economy. Or you have one or more vehicles you and your employees use exclusively in your business.
If so, you’ll need this important coverage. Commercial auto insurance is not unlike personal auto insurance in what it covers. The difference is personal auto insurance isn’t likely to cover you in an event related to business use of your personal auto.
For vehicles owned by your business, it would pay any costs related to bodily injury or property damage caused while operating your business vehicle up to the policy limits. You may want to get enhanced coverage for repairs or replacement of your business vehicle caused by theft, fire, vandalism, flood and other events.
Worker’s Compensation Insurance
If you have employees, in all states except Texas you must keep this coverage or face severe penalties or uncovered employee lawsuits. If you’re an incorporated contractor with no employees and the sole officer in your company, an exemption might be available. Generally, however, states require worker’s comp for companies with two or more employees.
Workers comp pays medical costs and replaces some an employee’s wages when they’re injured on the job, even they’re conducting off-site duties related to your business. That is regardless of who is at fault for the injury. If an employee dies as a result of a work-related accident or injury, this insurance compensates their family.
Employment Practices Liability Insurance
Lawsuits against employers by prospective, current and former employees are increasingly common, even for employer small business owners. These suits can allege discrimination, harassment, and wrongful termination among other charges against managers, officers, directors or other employees of your small enterprise.
Moreover, regulations under the Family Medical Leave Act and Americans with Disabilities Act define specific practices for employers to follow. If you violate those regulations, even unintentionally, your small business could face litigation. These suits are expensive to fight, can hobble business operations and settlements can run into the millions, even if your firm is found not liable.
That’s why employment practices liability insurance or EPLI is important. It protects your business against those claims and provides resources to fight the lawsuits effectively. It takes effect after a person or group alleging unfair employment practices, violation of their civil rights, or the inability to complete their work in a fair and acceptable employment environment files a claim.
Directors and Officers Insurance
These executives are highly trained and experienced professionals who serve on private and nonprofit boards of directors or have officer roles in a company. They are hard to recruit in part because others can sue them for actions or decisions related to their role.
Plaintiffs in these lawsuits may attempt to hold them personally liable for those actions. Those claims include disgruntled employees alleging wrongful termination, discrimination, invasion of privacy, breach of conflict and related emotional distress.
Third-parties, like regulatory agencies or customers, can bring claims against your officers or directors for alleged violations of fiduciary trust or mishandling of your organization’s funds. Of course, competitors might bring claims of unfair competition, intellectual property theft or defamation and libel against your organization and its top leadership.
Directors and Officers or D&O coverage protects your directors and officers against personal financial and reputation losses in such suits, except in the case of criminal acts. While EPLI does, D&O doesn’t cover managers in roles below director or company officer. And, it’s not just for large companies, either.
With this type of litigation being more common and costly than most believe, this coverage likely is critical for your company, especially to recruit and keep top officers and directors.
Cyber Liability Insurance
You see the data breach stories in the news regularly and related losses for firms if sometimes millions. However, they are not unique to large businesses and big law firms. They happen with small enterprises regularly, too.
If you have IT infrastructure that’s critical to business operations or your business collects and keeps sensitive customer financial or other data, you need this coverage. Your small business can't afford to work without its key technology for even a short time or to fight a lawsuit if there's a customer data breach, especially when criminals share the information.
Cyber liability insurance can protect your business with two major types of coverage, first-party coverage, and third-party defense liability coverage. First-party coverage offers financial compensation so your small business can address immediate business and client needs if your in-house computer systems fail.
Third-party defense liability coverage protects your business if a partner or customer sues related to an alleged data breach caused by your small business’s negligence or actions. Business owners also can ask for policies offering consulting services and other tools.
Those extras can help your business assess the size of the security breach and get back up quickly afterward while restoring your business standing. You can use those services to thwart future breaches, too. You may want to consider one or both depending on your business’s needs as well as any add-on services.
How to Identify Your Key Business Insurance Products
Business owners can start by doing research online. There are a number of resources, including the Insurance Information Institute and state and local agencies offering significant resources and information about small business insurance.
Then, get ready to talk with an agent or broker. Organize documents and know what your business does and how it conducts each aspect of its daily operations. Make sure you talk to key employees, partners, and supply chain vendors to decide what their loss during a catastrophe might mean to your business.
Naturally, self-employed people will have different concerns and insurance needs from employer small business. The latter must have specific insurance in force to prevent legal liability and government fines. The larger you are (or riskier your business operations) the more kinds of insurance you’ll need and there will be extra requirements to get coverage.
Home-based business owners may not need what employer small businesses or some consultants do. But you likely need more than your homeowner’s policy covers.
All small business owners, regardless of size or type, should work with an agent who specializes in businesses of your size and type in your industry. By working with the right local agent, it's possible to get all necessary business insurance coverage, even products not identified above.
The right business insurance products can keep your small business safe from disasters, including legal ones. You’ll also have the peace of mind that comes with being covered in those situations.
[Disclaimer: This post is written for informational purposes only. It is not meant to substitute for any legal, financial, accounting or other business or personal advice that should be provided by qualified professionals in those areas. Before taking any action based on the information contained here that could have legal, financial, or any other important consequences, consult with qualified professionals who can provide guidance that considers your unique circumstances. Since you maintain full responsibility and liability for applying this information to your business, contact licensed insurance providers, attorneys, accountants, other professionals, and your business partners/investors before deciding to apply information contained here to your enterprise.]
(c) 2016-2023. Dahna M. Chandler for The Stellar Communicator, Inc., a division of Thrive Media Collaborative, Inc. All rights reserved. This blog post may not be reproduced in whole or in part without express written permission of the author. Reading time estimated by Read-O-Meter.
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