Guide to Small Business Insurance

Misfortunes happen to small business owners all the time. They can force companies and their owners out of business or into debt. To protect your business from these risks, we advise you to purchase business insurance.

What are the types of business insurance?

Although your small business insurance needs depend on the type of business you operate, all business owners should identify their unique risks in the four categories described here.

Damage to business property. Property and casualty insurance (P&C) covers damage to the building where you do business, whether owned or leased, and its contents (furniture, equipment, inventory, and so on). Depending on the policy, P&C insurance may cover damage to customer property under your care. A comprehensive package can also include business income insurance (sometimes called business interruption insurance), which covers financial losses should the business become inoperable.

Keep in mind that a basic P&C policy may not cover theft or the expense of reconstructing valuable papers and records. It probably will not cover environmental liability that exists on your property. You may also need an additional policy for company cars or use of a personal car for business reasons. These types of coverage can be added as endorsements to a P&C policy or as stand-alone policies.

Damage to others. Liability insurance covers damage caused to others by your business activities or by your employees. In general, it covers the cost of your defense if a lawsuit is brought against you. Commercial general liability insurance usually covers injuries to customers or others on your premises, but it can be customized with endorsements or additional policies to fit the size and type of your business. Additional coverage options to consider include:

• Product liability
• Errors and omissions
• Malpractice
• Directors and officers
• Manufacturers and contractors
• Professional liability
• Landlord
• Employment practices, such as harassment, discrimination, and similar business risks

Just as with personal insurance, an umbrella liability policy offers additional coverage in excess of your base policy, up to a specified limit. Umbrella policy premiums can be surprisingly affordable for the value they provide.

Employee benefits. If you have employees, your state likely requires you to obtain workers’ compensation insurance. Workers’ compensation insurance helps cover medical expenses and lost income for employees who are injured on the job or who acquire work-related illnesses. (It is different from disability insurance, which partially replaces an employee’s income as a result of non-work-related injuries or illnesses.) A few states require business owners to provide health insurance for their employees. In addition, many employers allow employees to defer part of their salaries to pay for higher levels of life and disability insurance coverage or additional benefits, such as long-term care insurance.

Loss of key persons. If a key person involved in a small business dies or becomes disabled, it can seriously disrupt business operations and profits. Banks may pull back lines of credit, suppliers may require payments upon delivery, and customers may hesitate to place orders if there is a chance the business won’t survive. A type of life insurance policy—key person insurance—provides cash to replace lost profits or to find a replacement for an employee with a particular skill, talent, or contacts. Key person insurance can also be used to repay business loans.

Business owners should also consider overhead expense disability insurance, which helps cover operating expenses like rent, salaries, insurance, utilities, and maintenance costs if you become disabled. Another important coverage option is buy-sell insurance, a type of life insurance policy that provides cash to buy out a disabled or deceased business owner.

Because some types of life insurance accumulate tax-deferred cash values, they can also provide supplemental retirement dollars in the form of deferred compensation or an executive bonus. These policies can be owned by the business to fund future compensation or owned by the employee but paid for by the business.

Owning a business comes with responsibility and stress. What if you owned the building in which you do business and it burned down or was vandalized? You would be responsible for repairing the damage, either with business or personal assets. What if someone hurt himself with your product or injured herself on your property? You would be liable for the damages. And what if your co-owner became ill or a key employee became disabled? Could your business survive in their absence, or would you have to dip into your own assets to cover expenses?

Benefits of Owning Business Insurance

1. To protect against risks and perils to property. Just like your home,* your business is susceptible to damage. The loss or damage of business assets could result in an interruption of the business process or even a complete shutdown. To protect your business, you can buy various types of business insurance, such as building and equipment insurance, valuable papers insurance, crime insurance, and business interruption insurance. The right combination of property and casualty insurance can mean the difference between a temporary shutdown to make repairs and permanent closure.
2. To protect human assets. Within most small businesses, there are key employees without whom the business would weaken or fail. If something were to happen to you, could your company survive? Could your business pay its overhead if key personnel could not work? You can protect against the loss of human assets by purchasing company-owned life and disability insurance to cover key personnel and co-owners. If you (the covered owner) or a covered employee were to die or become disabled, the policy would provide payments to cover the loss of income generated by that individual. Funds provided by the policy could help the business continue operations and remain competitive while a replacement is found. (Keep in mind that these policies are different from workers’ compensation insurance. Workers’ compensation pays employees for work-prohibiting injuries, while business insurance compensates the business for the loss of a key employee.)
3. To protect against liability claims. Providing services comes with risk. Through contact with the public and through personal injuries suffered on your business premises, your company could face liability claims and lawsuits. Liability insurance can provide funds to settle claims, sparing your business (or your own bank account) the expense. Liability coverage may also include legal representation in the event of a lawsuit. But, remember, if you provide professional services (e.g., doctor, lawyer, accountant), a general liability policy doesn’t cover losses arising from your professional acts incurred by third parties. In these cases, you may need professional liability insurance, such as malpractice insurance or errors and omissions insurance.
4. To protect against data breach and cyber risk. Cyber insurance is an important consideration for business owners. It can help provide notification support for clients, as well as cover the cost of credit monitoring for victims.
5. To attract and retain employees. Business insurance is a crucial component of most employee benefit packages. In addition to salary, employees seek benefits that will help them improve their quality of life outside the workplace. By offering group insurance coverage (i.e., life insurance, health, disability, and long-term care insurance) as part of your company benefits package, you may be able to attract and retain employees who might otherwise be hired by competitors.

Sometimes You Are Legally Required to Carry Business Insurance

While these reasons demonstrate the benefits of owning insurance, your business may be required to own insurance by law or by the terms of your contracts. Depending on the size of your business, the industry in which it operates, and the state where you do business, you may be required to carry workers’ compensation insurance. Some states require businesses to purchase disability insurance for employees, and some states require professional liability insurance as a condition of licensing. In addition, various contracts you enter into might require that you own insurance. For example, if you rent or lease your business facility, the contract with your landlord may require that your business carry its own property insurance. If you or your business borrowed money to finance buildings, equipment, or operations, the loan agreement may also include an insurance requirement.

Insurance coverage is available for every conceivable risk your business might face. Below, you’ll find an overview of the four main categories of business insurance, as well as tips for evaluating a policy.

Do you need insurance if you run a business from home?

Many start-ups are based in the entrepreneur’s home. If you’re operating out of your home, don’t assume that your homeowners’ and automobile policies will cover your business risks. For a reasonable premium, your insurance carrier can add an endorsement to your homeowners’ policy or issue you a home office policy that offers a broad range of coverage for additional business risks. If you use your personal vehicle for business, ask your insurance agent if you need a commercial policy.

What are some things to consider when insuring your business?

Selecting a policy requires more than comparing premiums. Be sure to take the steps below before purchasing a policy.

• With your insurance agent’s help, select the type and amount of coverage. A good commercial insurance agent can evaluate your business and identify risks you may not have thought of, such as cyberspace liability or environmental pollution.
• Decide how much risk you will self-insure. Self-insurance could take the form of higher deductibles, a side fund for small but infrequent claims, or risk avoidance techniques. For example, your business might underwrite the cost of 13 weeks of disability benefits for employees but purchase insurance for longer disabilities.
• Review a specimen or sample policy. Even so-called comprehensive policies have coverage gaps. Review the scope of the coverage and any exclusions, taking care to distinguish between “claims made” and “occurrence” coverage. With a claims-made provision, only claims reported while the policy is in force are covered. While these types of policies are less expensive, it’s common for a liability claim to arise several years after a business error happens. Occurrence policies cover claims for events that happen while the coverage is in place, even if the claim comes later. This can be particularly useful after you retire from your business and no longer maintain liability insurance.

To learn more about business insurance, visit Insure U for Small Businesses at www.insureuonline.org/smallbusiness. Sponsored by the National Association of Insurance Commissioners, the site provides important tips for evaluating and purchasing insurance for your business.

How We Can Help

As the owner of a small business, you take on many risks and requirements. We will work with you to defray and transfer the risks associated with your business. As your trusted financial professional, we will help you put together the appropriate mix of insurance products to ensure that you and your business are sufficiently protected. 

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.