13 Types of Insurance for Small Businesses

Jun. 9, 2022

Starting a small business can be a source of joy for many people. You have a great business idea, and you’re on your way to making it profitable. But running a business is also riddled with obstacles and unpredictable events that can set you back. 

One of the most efficient ways to protect your business is to purchase commercial insurance. There are many insurance options, and small business owners can get customized coverage that caters to their needs.

Still, it can be tricky to choose the right policy that protects you and your business against events that are unlikely to happen without spending a fortune. On the other hand, you might leave your business vulnerable if you’re too frugal with your choices. You need to research and choose the coverage that syncs with your goals and budget. 

Reasons You Need Small Business Insurance Coverage

You might think that a commercial insurance policy is unnecessary or an excessive expense, especially when you first start a business. While buying insurance for your business is a nuisance, you’ll likely be incredibly grateful that you have it when you need it. Here are some factors to consider if you’re on the fence about whether your small business needs insurance.

Follows Legal Requirements

Small business insurance is a legal requirement in most U.S. states, meaning you might receive penalties, exclusions from public contracts, fines, and cease and desist orders if you don’t have an active policy. You might spend more time dealing with these issues and neglecting the actual company if you choose to run your business without insurance.

Protects Employees

Every good business owner should care about their employees. Several different business insurance policies cover your workers’ well-being, including protecting their medical care, wages, and funeral benefits. 

Protects Customers

There’s no business if you don’t have customers. Choosing policies that cover potential bodily or personal injury, product liability, or even advertising injury is wise. For example, what happens if a customer slips in your store and breaks their arm? Your business insurance policy could cover the cost of their medical care. 

Gives You More Options

Commercial insurance makes your business more credible and makes signing contracts easier. Nearly all businesses take out loans, hire vendors, rent office space, or sign client agreements. These efforts might be futile without business insurance. 

Increases Employee Recruitment and Retention

If you’re serious about your business and want reliable employees, offering benefits such as life insurance can go a long way. Employers without adequate employee business protections often miss out on excellent opportunities, which might damage their company. 

Protects Against Natural Disasters

When natural disasters occur, they can cause excessive damage to small businesses. It can be difficult, and sometimes impossible, to recover after a flood, hurricane, tornado, or fire. Without proper insurance protection, business owners might have to rebuild from scratch. 

Types of Insurance for Small Business 

Understanding why you need insurance for your small business is a logical first step. You should now go through the available options and see how specific policies can benefit your company. 

1. General Liability Insurance 

Also known as commercial liability insurance, general liability insurance is essential for any small business. Without this insurance, business owners risk bodily injury or property damage claims. For example, maybe a customer injures themselves or the employees damage expensive equipment. Paying for a customer’s medical bills or replacing an expensive piece of equipment might be impossible without general liability insurance. 

This coverage also protects your business from copyright infringement, reputational harm, malicious prosecution, libel, and wrongful evictions. The scope of this insurance alone shows how beneficial it is for your business.

2. Commercial Property Insurance

Unless you’re running a home-based business, commercial property insurance is crucial. It allows you to protect the property you own and rent, such as your office space, inventory, furniture, and personal property. 

This policy covers the company’s physical assets in case of fire, theft, or intentional damage caused by an employee or customer. For example, commercial property insurance comes in handy if someone breaks into your office and takes your computers, printers, and other valuable technology. 

3. Business Income Insurance 

Business income insurance helps you replace income lost when the business cannot operate. This insurance only applies if the loss in income was property damage, not the inability to gain revenue. This is why it’s also called business interruption insurance. Extreme weather and pandemics are also not covered under the policy.

For example, if someone vandalizes your business and you need to close it for a while, business income insurance would cover the loss of income until you can reopen. This policy typically covers rent or mortgage payments, tax payments, employee wages, and estimated revenue for the time the business was closed. 

4. Business Owner’s Policy

Sometimes it’s more efficient to get an insurance bundle instead of paying for each policy separately. The business owner’s policy consolidates the three previously mentioned insurances into one — general liability, commercial property, and business income insurance. 

A business owner’s policy can also contain other policies, especially if your business isn’t reliant on commercial property. You can choose other specialized policies, such as those that protect a company that offers off-premises utility services. 

5. Commercial Auto Insurance 

Many businesses need vehicles to maintain operations. That might be one vehicle for an employee who visits clients or an entire fleet of trucks and vans to deliver your product to stores. Commercial auto insurance protects these vehicles from accidents, damage, and injury liability claims. Without it, damage from a collision can be costly and hinder your daily business activities. 

6. Workers Compensation Insurance

In some states, this insurance is mandatory for any business with employees. If an employee gets into a work accident, they might be forced to miss wages. Workers compensation insurance would deliver financial coverage during the period that the employee can’t work. 

This policy shows that you care for the employee’s welfare and protects the business from lawsuits. It’s particularly valuable for contractors as homeowners don’t want to stress about liabilities if a worker is injured on the job. 

7. Cyber Liability Insurance

A data breach is the worst possible event for many small business owners. It can slow down, set back, or completely cripple their business. It might also compromise your employees’ and customers’ personal information, and you need to let them know. 

The loss of trust, credibility, and profit from a data breach can be staggering. That’s why it’s advisable to acquire cyber liability insurance for your business. There is more than one version, and some types include financial data. The policy also might require business owners to invest in reliable malware detection software to minimize the chances of cyber-attack.

8. Errors and Omissions Insurance

Instead of selling products or managing equipment, some small businesses offer advice or professional services to their clients. These businesses can benefit from errors and omissions insurance or professional liability insurance. 

Essentially, if a customer claims that you made a mistake in your work, this policy covers the payments and, if necessary, the cost of legal fees and settlements. The coverage includes violation of good faith and fair dealing, inaccurate advice, and negligence. 

Errors and omissions insurance is ideal for graphic designers, accountants, marketing agencies, real estate companies, decorators, and business consultants. 

9. Directors and Officers Liability Insurance 

If your business has a corporate board or advisory committee, you might  consider buying directors and officers liability insurance. This policy covers members from being personally sued for fraud, theft of intellectual property, or failure to abide by workplace laws. It also protects the company if a board member misuses company funds. 

10. Employment Practices Liability Insurance

Employment practices liability insurance is an integral part of protecting your business. This policy covers claims made by employees regarding harassment, gender and age discrimination, wrongful discipline, failure to promote, and wrongful termination. 

Experienced business owners know that employee-related claims can be expensive, time-consuming, and bad for business. Often, business owners are not in the wrong but may get sued anyway. The employment practices liability insurance protects the business from such costly disruptions. 

11. Hazard Insurance 

Hazard insurance is a form of commercial property insurance with a more comprehensive list of hazards. This includes fire, theft, flooding, and natural disasters such as blizzards and hailstorms. Hazard insurance will cover the cost to replace your tools and equipment, furniture, inventory, and sometimes fences and landscaping. 

12. Key Person Insurance 

You might be wondering if your business will be successful enough to outlive you. However, if it has a great future ahead, it’s natural to want to ensure it thrives when you’re no longer around. 

This is where key person insurance comes in. If the key person dies or becomes incapacitated, this policy prevents the business from tanking. 

You can use the policy payout in many ways. The company can hire and train new employees or pay off debts and cover the loss of wages. The goal is to compensate the company for the loss of a key person financially. 

13. Commercial Umbrella Insurance 

Some small business owners buy commercial umbrella insurance to add another layer of protection and expand on the limits of other policies. This policy is sometimes referred to as excess liability insurance as it covers claims that the underlying policy doesn’t. Umbrella insurance is commonly attached to commercial auto insurance or general liability insurance. 

Factors That Determine the Cost of Insurance

It’s crucial to spend time shopping around for the best insurance deals. The cheapest policies are not typically the best option, but it doesn’t mean you have to pay a fortune to feel secure. Several crucial factors will determine the overall cost of business insurance. 

First, your claims history plays a significant role, but it’s not straightforward. Having no claims doesn’t necessarily mean your business is without risk. 

Another relevant factor is your industry. Contractors will pay more for insurance coverage than an owner of a web design company. The price of an insurance policy is determined based on the size of payroll, the number of employees, how much property you have, and your business assets.

Keep in mind that each type of insurance will include custom factors to determine the size of the policy. For example, commercial auto insurance providers will consider where you drive and how often, your demographic, the type of vehicle, and your driving record. 

Finally, business insurance policy bundles tend to be more cost-effective, and many insurance providers recommend them. You might also receive future discounts if you pay for a premium upfront. 

Protecting Your Business With the Right Type of Policies 

Regardless of the size or industry of your small business, it’s essential to start with a comprehensive business plan. You need to work on the product or service, build a website for a local shop, market your business and draw in the customers. When you start the financial planning section, you should include buying business insurance. 

This comprehensive list of business insurance types offers a glimpse into many of the potential problems your company may experience. You can always start with a customized business owner’s policy and employee liability insurance and expand from there. 

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