- There are many types of business insurance, and some are required by law under certain criteria.
- Business insurance can be an expensive investment, but it could save you thousands of dollars if disaster strikes.
- Before you sign any insurance agreements, it's wise to look over the fine print of your policy.
- This article is for small business owners who want to know what types of insurance policies are available to them and which they are required to have.
Small businesses and startups often work on a tight budget. As a result, it might be tempting to forgo certain types of insurance that aren't required by law. In fact, a survey of 30,000 business owners conducted by Next Insurance found that 44% of responding businesses have never had insurance at all.
Unfortunately, such a risk could end up costing your business way more than the monthly premiums would. Jamie Dokovna, an employment attorney with Becker & Poliakoff, said it isn't the best move to not purchase insurance simply because it isn't legally required. For instance, if a customer slips and falls on your property, injuring themselves in the process, it typically costs up to $20,000 to settle a subsequent lawsuit, according to insurance provider Insureon.
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"It's often a case of being penny wise but pound foolish," Dokovna said. "For some small businesses, they look at the cost [of insurance] and they say, 'Well, it's a little expensive, so I'm willing to take the risk.' But it's not cheaper to forgo insurance when you need it and wish you'd had it."
Instead, Dokovna said, it's best to make strategic decisions about which insurance policies your business needs and which it doesn't. To make this call, you need to know your industry well.
Types of insurance coverage
Some kinds of insurance coverage are required by law once your business reaches a certain size. For example, the Affordable Care Act mandated employer-sponsored healthcare coverage for businesses with 50 or more employees. Failure to retain these types of insurance doesn't expose small businesses only to the risks they're intended to cover, but also to governmental action for violating the law.
There are other types of coverage that aren't required by law but might be wise to have, depending on your line of business.
Liability insurance
General liability insurance helps protect your business if someone claims bodily injury, property damage, or libel or slander due to your company. In the slip-and-fall scenario above, general liability insurance could cover the fees for attorneys and settlements.
That said, certain businesses might deem it a remote risk that someone visits their property at all, let alone injures themselves, so they don't purchase coverage. This is a strategic choice and likely an acceptable risk, compared to, say, a retail store that sees customers daily and chooses to roll the dice anyway.
Workers' compensation
Workers' compensation gives employees benefits if they injure themselves on the job or suffer from illness due to their work. These benefits help the employees pay their medical bills, replace their wages, or pay for ongoing care such as physical therapy. Most states require employers that reach a certain employee threshold (it varies from state to state) to maintain workers' compensation insurance and policies.
Professional liability insurance
Also known as errors and omissions insurance, professional liability insurance helps cover your legal costs related to claims that your business made errors. This insurance is especially helpful if you provide a service to clients, as claims of late, incomplete, or inadequate work can lead to costly lawsuits.
Commercial property insurance
This insurance is for brick-and-mortar businesses, as it helps cover costs resulting from fire damage, theft and natural disasters. However, this insurance doesn't cover damage from flooding or earthquakes, which requires a separate policy.
Business income insurance
Business income insurance helps cover the lost income that results from property damage. It can go toward rent, utilities or payroll.
Employment practices liability
Employment practices liability insurance protects against any lawsuit or complaint an employee may have regarding the employer, such as these:
- Sexual harassment lawsuits
- Wrongful termination
- Timecard discrepancies
- Breach of employment contract
- Failure to employ or promote
- Wrongful discipline
- Discrimination claims
Tips on choosing business insurance
When choosing business insurance, you should consider a few factors before making the final decision. You want to find the best insurance specifically for your company that will minimize risks wherever possible. Without the right coverage, your company or even your personal assets could take a major hit. Keep the following tips in mind when choosing your business insurance.
1. Determine what you need.
There are many types of business insurance, so before you shop around for a plan, it's important to consider your specific needs. A general liability or business owner's policy is good for umbrella coverage, but depending on the type of business you own, other insurance policies might better protect your business.
Jeff Kear, owner of event-management software Planning Pod, said that business owners who work from home should consider separate home-based business insurance.
"Don't assume that your homeowners policy will cover your business assets, because many policies do not cover most home-based business losses," he said. "They may not cover all assets, and probably won't cover any kind of business or professional liability."
Kear also recommends obtaining business interruption insurance to help keep your business afloat in the event of natural disasters, data loss or theft.
2. Know the risks.
With so many insurance providers and types of business insurance on the market, it pays to know the risks unique to your business. For example, if you're starting an e-commerce business, protecting your data is vital to your business's overall wellbeing. On the other hand, if you're a brick-and-mortar business, losing your tangible products or facing damage to your business's physical structure can have a huge impact on your livelihood.
Only you know the extent of the risks your company faces, and it's important to look at each one to determine your business's unique situation. However, you might want to get a risk assessment from an independent agent or company to help you determine final price points and insurance details.
3. Compare quotes.
Choosing an insurance provider is like any other major decision: You should consider all your options before making a final choice. Comparing quotes from multiple providers can help you find the most comprehensive coverage for the best price.
4. Find a good agent or broker.
The insurance agent or broker you work with is responsible for helping you protect your business. As with the plan itself, you should consider your options for agencies – and the best choice isn't necessarily the one closest to you.
"Look for an agent who specializes in business insurance and can be a long-term partner," said Mike Wolfe, co-founder and CEO of marketing agency WAM Enterprises. "It's important to establish a relationship with your agent. Research online, and ask other business owners who they work with. We have several agencies in our town, but [we] decided to do business with an agent who is farther away, because we developed a relationship and trust."
An insurance broker, rather than an agent who works for a specific provider, may be a good choice for business owners who want to find coverage from different providers to suit all their needs, said Kear.
"When you're sitting down and talking with an agent, make sure the agent understands your business and what you do, and how many employees you have," Dokovna added. "Most good agents will know what you need. Some small businesses even use [professional employer organizations], and so those companies sort of act like a super employer; they offer other types of insurance, which are often cheaper and more cost-effective for a small business owner, being able to tap into a larger resource pool than they would have on their own."
5. Regularly review your policy needs.
Most insurance policies need to be renewed annually. Before you sign on for another year of coverage, it's wise to look over the fine print of your policy and account for any changes, either in your business or in the provider's terms of service.
"Coverage and policies change all the time, so review your business with your agent every year," said Paige Dawson, founder and president of marketing firm MPD Ventures. "Your business may have changed during a coverage year, and [your policy] may no longer be adequate. Adding or dropping employees, services, products, physical locations, etc. can have an impact on your policy."
If your business goes through a major change or transition in the middle of coverage, discuss it with your insurance agent as soon as possible, and ask them to walk you through your options. Depending on the change, you may even be able to save money on your policy.
Sean Peek and Nicole Fallon contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.