Small Business Insurance | What Type of Insurance Does Your Small Business Need?
Your small business could fuel a lifetime of financial freedom — if you can get it off the ground. By some estimates, almost half of new businesses fail within the first two years.
Lack of small business insurance is among the leading reasons small businesses fail.
So if you’ve got things rolling with your small business, now’s a good time to check your business insurance situation.
Should you be doing more to protect your investment and your dreams of financial independence?
This guide will cover the types of insurance available for small businesses. Some are required by law, and some are just a good idea to have if you want to protect your business.
What Business Insurance Is Required By Law?
A few kinds of business insurances aren’t optional. Federal and/or state laws require you to buy them for your employees’ protection.
Here are the types of business insurance required by law:
If one of your employees got injured on the job, this coverage would replace part of his or her wages during the employee’s recovery. You’ll buy this coverage through a private insurer or broker, and it costs about 2 to 3 percent of the wages you pay.
If you cut back your staffing, this coverage would provide part of your laid-off employees’ wages while they looked for other work. You don’t need to purchase this coverage; your state and the federal government will charge you through your annual taxes.
Only a few states require you to buy short-term disability coverage for your employees: California, Hawaii, New Jersey, New York, and Rhode Island. In other states, you may choose to provide this coverage as an incentive for your employees. This coverage partially replaces wages if an employee gets sick or disabled from an off-the-job accident.
Other Types of Small Business Insurance
You must buy insurance as required by law to protect your employees. But what about protecting your investment in your business?
The law doesn’t require you to protect yourself, so it’s up to you to decide how much and what kind of business insurance to buy.
These six types of coverage can help protect your small business:
1. Commercial Property Insurance
Commercial property insurance works like homeowners insurance for your place of business.
This coverage protects your buildings, your inventory, and your business equipment from damage caused by fires, storms, floods, theft, or vandalism, and the like.
Most policies won’t cover every possible scenario, so read the fine print before finalizing your coverage.
For example, if you’d like to protect your computer network, you may need to add a policy rider. If you’re concerned about tornadoes, you may need additional coverage.
Like a homeowner’s policy, expect to pay a couple of thousand dollars a year for this coverage for a single business location.
2. Commercial Auto Insurance
Your personal auto insurance policy — or the personal auto policies of your employees — usually won’t protect you when driving for business. If you or an employee had a wreck and injured someone, your business could be held liable.
You’ll need a dedicated commercial auto insurance policy to protect your bottom line.
And you can customize your coverage to match your specific needs. For example, if you depend on a car to make your business run day to day, consider getting extra coverage to replace a wrecked car quickly.
3. General Liability Insurance
If you have customers in and out of your place of business, there’s always a chance someone could get injured. If you sell a product, there’s a chance your product itself could injure someone.
You see where this is going: An injury could lead to a lawsuit that could expose you to court-ordered payments jeopardizing your profits.
General liability insurance can help insulate you from this reality, and the premiums are usually manageable — about $500 to $700 a year.
4. Professional Liability Insurance
Like general liability, professional liability insurance can help insulate your business from litigation. But professional liability protection is more abstract.
People usually associate professional liability insurance with surgeons or attorneys — professionals whose mistakes or misjudgments that could lead to catastrophe for their patients or clients.
But any professional could be sued. If you’re late on a shipment or you can’t deliver a product as promised for some reason, your client could lose money and hold you responsible for the losses.
Or what if you’re managing IT for a company that gets hacked and loses valuable intellectual property? The company may sue you to compensate for its losses.
Professional liability coverage could help protect your profits from evaporating in the heat of a judge’s glare. Expect to pay more — about $1,000 a year or so — for this coverage.
5. Employment Practices Liability Insurance
If an employee successfully sues you for discrimination or wrongful termination, your employment practices liability protection could protect your bottom line from huge losses.
Nobody plans to create a workplace that’s unwelcoming or hostile, and still, these kinds of lawsuits get filed every day.
Small businesses are among the most vulnerable employers because they probably don’t have a legal department or even a dedicated HR staff member.
This kind of protection could save you hundreds of thousands of dollars, but it’s also among the most expensive business insurance policies to buy. Expect to pay $1,000 to $4,000 a year, depending on the size of your workforce.
6. Key Person Life Insurance
You could debate whether key man life insurance is a business expense. I say it is, especially if you have a business partner who is essential to the success of your small business.
To make this work, your company buys life insurance policies on key personnel such as partners or executives. The business should be named the beneficiary of the policy.
If a key person dies, the policy’s death benefit can help your business keep rolling while you rebuild a new way of doing things without the partner or executive.
Special Small Business Insurance Policies
We’ve talked about must-haves and sensible coverage options for most businesses.
Now let’s dig deeper into some special protections your business may need.
Product Liability Insurance
For: Companies selling tangible, physical products
Yes, general liability insurance can protect your business if one of your products harms someone, and for many businesses, general liability provides enough protection.
But product liability insurance takes your protection to a new level. If your small business makes its money selling physical products, consider this coverage.
Product liability protects your business even from mistakes a contractor may make.
For example, if you contract out your product’s packaging and the packaging injures a customer, the injured customer would sue you since your name is on the package. This coverage could help protect you.
Product liability offers more protection than general liability, and it’s cost-effective: about 0.25 percent of your sales.
Errors and Omissions Insurance
For: A company giving advice — medical, legal, financial, personal
Talented experts have a way of assuming their clients know more than they do. Sometimes they omit the obvious when giving advice.
If this happens and a client experiences a loss, the client may want to hold your business responsible.
Errors and omissions coverage is specially designed for this scenario. For most businesses, professional liability will be enough. Others who specialize in advice may want this extra coverage.
For: Businesses in areas more likely to suffer terrorist attacks
Those of us old enough to remember 9/11 won’t need any explanation here. That horrible act of terror shut down businesses throughout lower Manhattan in the fall of 2001, costing billions of dollars.
Commercial property insurance tends to exclude acts of terror from its list of covered perils, so this supplemental coverage can help, especially if your business operates in New York or Washington, D.C.
Pollution or Environmental Impact Coverage
For: Businesses whose products or manufacturing methods could impact the environment
General liability insurance tends to exclude lawsuits resulting from pollution. If you’re concerned about this, add special coverage against pollution or environmental impact lawsuits.
Even More Special Business Insurance Options
If you’re still reading, you already know the world of business insurance has expanded to include all sorts of special protections.
Here’s a brief list of some of the most specific options your business may need if you:
- Have Underground Storage Tanks: If your fuel tank starts leaking, you may have to shut down shop while crews dig underground, assess the damage, and fix the problem. Underground storage protection could help compensate you for this lost business and extra expense.
- Run a Consulting Firm: Some contractors expect their consultants to have their own coverage, often called Engineers and Consultants (E&O) coverage.
- Transport Hazardous Materials: A lot can go wrong in HAZMAT transportation. If your business deals with this — even if you’re simply taking Asbestos-laced ceiling tiles to the dump — you could be held responsible if someone gets sick.
- Store Data on Your Servers: If you keep customer data on your computer servers, you could lose a lot if someone hacks the data. Ask your broker about this special protection.
How to Buy Business Insurance
Your business needs Workers’ Comp and unemployment coverage as required by law. Your business also needs to address liability and property coverages.
But no business needs every single kind of business insurance now available in the market. Instead, you need your own, personalized small business protection recipe.
Your recipe should reflect your vulnerabilities: If you run a delivery service and have a fleet of vehicles, you’re vulnerable on the highway. If you run a bakery, you’re vulnerable to customers becoming ill from a product you baked. You get the idea.
I recommend working with an insurance broker who can help you identify your business’s weak spots and compensate with the right kind of coverage.
Most insurance products need to be renewed annually, so this gives you a chance to reassess your needs as your business grows and changes.
Business Insurance Should Prevent Unnecessary Losses
A successful small business could be the cornerstone you need for building lifelong financial freedom.
When you work for yourself, and you succeed, the sky is the limit.
But a single accident, storm, fire, injury, or mistake could stall your momentum or even knock your dream out of the sky.
Insurance won’t make your business invulnerable, but the right small business insurance protections can limit your exposure, increasing your chances of surviving the turmoil.
Yes, the premiums will erode your bottom line this year, but that’s the cost of doing business.