Small Business Insurance Basics

Small businesses fuel the American economy and involve a significant investment in time, money and resources. One of the best ways for owners to protect their investments from unexpected events is through business insurance.

Types of business insurance

Insurance coverage is available to protect businesses from a wide range of risk. In order to mitigate these risks, small business owners should purchase the following types of business insurance.

Liability

Liability insurance (also known as Commercial General Business Liability) protects businesses against financial responsibility for property damages or bodily injuries caused by you, your employees, or your products and/or services. A must-have according to the U.S. Small Business Administration (SBA), it is broken down into three types of business liability:

  • General liability coverage protects you against lawsuits resulting from accidents, injuries, or claims of negligence.
  • Product liability coverage protects manufacturers and/or vendors of products against product defect claims. It also protects against damage or injury caused by your product.
  • Professional liability (also known as Errors & Omissions) coverage protects against errors or negligence, such as malpractice insurance for attorneys and physicians.

Specialized Liability policies

  • Employment Practices Liability Insurance (EPLI) covers wrongful acts arising from the employment process such as employees alleging discrimination based on race, sex, age, or disability, etc.
  • Directors and Officers Liability Insurance (D&O) protects directors and officers against claims made against them while serving in those roles and capacities.
  • Business Identity Theft Insurance provides coverage to businesses that are victims of data theft including customers whose information has potentially been compromised.  

Commercial Property

Property insurance protects businesses against certain unforeseen incidents that jeopardize business assets and real estate. Incidents can include disasters such as fires and storms, or crimes such as vandalism and theft. Property insurance policies cover buildings (the physical location of a business) and personal business property such as equipment and supplies your business owns.

Policies come in two forms: 1) all-risk which covers mostly all incidents and 2) peril-specific which specifies certain incidents. 

Commercial Vehicle

Commercial auto insurance protects small businesses against damage from accidents, theft, flooding, and other events associated with using vehicles for business purposes. If employees are driving for work purposes and/or transporting products or equipment, personal auto policies will not provide coverage.

Similar to a personal auto policy, commercial auto policies provide financial protection against personal injury and other liability as well as coverage for collisions and uninsured motorists.

Worker’s Compensation

Worker’s compensation provides coverage for employees if they get injured on the job. It can also offset employee medical and rehabilitation costs (and some lost wages). It is mandated by law in most states. 

Health Insurance

Unlike businesses with more than 50 full-time equivalent employees, businesses with fewer than 50 full-time equivalent employees are not mandated by law to provide health insurance. In addition, there is no penalty for not providing health insurance.

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However, there is a value in providing health coverage for businesses nonetheless. Some of the benefits to offering health insurance to your employees include a greater perceived value of employee benefits, tax advantages and credits, and more productive employees. 

Additional types of insurance to consider

Terrorism

Since September 11, 2001, terrorism coverage has been offered as a standalone type of insurance to insure losses attributable to terrorist acts commensurate with the increased risk of terrorism Americans face today. Private insurers underwrite policies that are backed by the federal government pursuant to the Terrorism Risk and Insurance Act (TRIA) of 2002.

Under TRIA, commercial property owners and Business Owners Policies (BOPs) are required to offer the opportunity to purchase terrorism coverage. 

Cybercrime

Cybercrime such as the 2017 Ransomware attack is driving a new class of insurance aimed to protect businesses of all sizes, especially small businesses. More than 60% of all hacks are aimed at small-to-mid sized businesses according to the Insurance Information Institute (III). The industry is still considered to be in early stages, meaning policy coverage and premiums vary widely. 

Business Interruption

Business interruption protects against the loss of income resulting from an event – such as a fire or theft – that impedes business operations. Depending on your policy, it also helps cover the costs associated with getting your business back up and running quickly after a disruptive event. This may include coverage for temporary relocation costs, equipment, and even staff. 

Umbrella

Umbrella liability is designed to protect against unusually high losses when the policy limits of underlying policies have been exhausted. This generally applies to general liability or vehicle liability policies for most businesses.  

Bundled Policy

Also called a package policy, a bundled policy combines various types of coverage such as liability and property into one policy. Business owners save time by working with only one carrier and save money through a lower, combined premium. Business Owners Policies (BOPs) are the most common type of bundled policy for businesses, combining protection from major property and liability risks into one package.

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Typically, BOPs include property insurance, business interruption insurance, liability protection, medical payments, loss of income, data breach, equipment breakdown, and employment practices liability. However, BOPs do not cover professional liability, auto insurance, worker’s compensation, health and disability insurance. BOPs also save small business owners time and energy in trying to figure out exactly what coverage to purchase. 

Home-based businesses 

Contrary to popular belief, homeowners’ insurance policies generally do not adequately cover home-based businesses. Industry experts recommend identifying the risks unique to your business to evaluate whether adding riders to your homeowners’ policy or purchasing additional policies will suffice. 

Tips for buying business insurance

Business owners should use these steps when considering the types of insurance necessary and how much coverage is adequate to minimize risks:

  1. Assess your risks. This way, you will be prepared to discuss your options such as premium and deductible amounts (generally the higher the deductible, the less you pay for the policy) with the insurance company that agrees to underwrite your policy.
  2. Shop around. The National Federation of Independent Businesses provides information on insurance options to guide you in assessing risk and choosing appropriate coverage. Brokers who specialize in certain businesses can be valuable in finding the best coverage and rates.
  3. Consider a BOP. Save time and money dealing with one insurance company that combines multiple policies through one, less expensive premium.
  4. Find a reputable, licensed agent. Retaining a licensed, experienced agent can save you time, money, and frustration by matching your business needs with the right policies. An independent agent represents several companies whereas a captive agent represents only one.
  5. Assess your insurance coverage on an annual basis. Over time, your business needs might change. To ensure your business is adequately covered as it expands, contact your agent to discuss changes in your business on an annual basis.

Additional resources for businesses

Because insurance is regulated by each state, most questions and concerns about insurance and/or complaints about brokers or agents can be found at the National Association of Insurance Commissioners.