Know what’s essential? Having insurance for your small business. But choosing AND understanding why you need a certain type of insurance can often times be a daunting process (that gets placed at the bottom of our ever-growing to-do lists). Some of the most common questions I get asked are:
What is business insurance?
How does it differ in protection from other insurance plans?
And why do I really need insurance for my business?
In this blog, I’m answering all of those questions (and more) because having insurance is KEY to keeping you and your business safe and protected from unexpected liability.
What is Business Insurance?
“Business insurance” is a broad term which is used to cover a range of insurance policies designed to protect businesses from any financial loss that might occur, such as breakage or loss of your equipment, injury to another person, data loss, etc. Every business is different and needs different types of insurance policy coverage for potential incidents and losses. That’s why insurance policies will usually tailor their language and what they cover to match the type of business that they are insuring. It’s also not uncommon to have multiple insurance policies covering a single business.
Some examples of different business insurance policies are:
- General Liability Insurance for claims from third parties (THIS IS ABSOLUTELY NECESSARY for any small business!);
- Property/Equipment Insurance, which covers any damage to equipment or malfunctions;
- Workers’ Compensation & Unemployment Insurance, which covers your employees if they get sick or injured while working and any unemployment claims;
- Cybercrime Insurance, which provides protection for risks that you may incur due to Internet usage and online business proceedings;
- Business Interruption Insurance, which covers your business if you are not able to conduct your business because of a loss;
- Errors and Omissions Insurance, which covers professionals against claims of inadequate work or negligent actions (usually required for anyone who provides a service such as financial services, insurance agents, doctors, lawyers, and wedding planners);
- Commercial Auto Insurance, which covers damage and injury from an automobile accident while driving for work-related purposes;
- Record Retention Insurance, which covers the loss of any important business or financial records; and
- Disability Insurance, which covers the loss of income due to a disability that creates a barrier to complete core work functions.
How Does Business Insurance Actually Work?
Business insurance essentially operates as a contract between the insurance company you chose to work with and your business. The company will agree to provide your business protection and monetary reimbursement from things covered in your policy (like loss or damage, lawsuits, etc.) in exchange for payment, or “premiums.” Should something go wrong with your business, you file a claim against your policy, the claim is processed, you pay your deductible, and then the insurance provider either (1) settles the claim with a payment from your insurance company to you or a third party, or (2) in some more severe cases, the insurance company will handle a lawsuit on your behalf and provide you with legal counsel.
How Much Does Business Insurance Cost?
How much business insurance will cost you depends on a multitude of factors, including your individual business and the protections that you may need. A typical monthly payment for business insurance is around $100-200, but a smaller, home-run business can be insured for less, and a larger company with more employees/facilities/risks can cost much more. A good thing to remember that business insurance is tax-deductible, as long as the insurance is coverage for operating a business!
What Insurance is Right for Me?
The type of insurance that will be right for your business will depend on a variety of factors, and often insurance policies are not one size fits all. General liability insurance, which covers against injury, accidents, and claims of negligence, is an ABSOLUTE NECESSITY for any business owner. A good starting point for policy limits is around $1 million aggregate/$100,000 per occurrence.
Then, depending on your type of small business, here are a few other types of business insurance policies that TLP highly recommends you consider:
- Product/Equipment Insurance (this can be added on to General Liability Insurance);
- Commercial Auto Insurance;
- Business Interruption Insurance and/or Disability Insurance.
Considerations for Independent Contractors and Employees
Another key factor you will want to consider is ensuring any independent contractors you hire have their OWN insurance. What a lot of small business owners don’t know is that there is an exclusion in most insurance policies for coverage of any independent contractors working for you. This can really become a problem if a legal dispute comes up--your insurance provider will DENY coverage to you based on this exclusion in the policy--so make sure you are communicating clearly with contractors during the hiring process that you expect them to maintain certain insurance coverage upon hiring. You will then want the contractor to send you an updated insurance policy so you have it for your records. This will protect not only you, but your contractors as well!
Furthermore, whenever you deduce to hire employees, it is crucial to note that there are certain types of business insurance that you are required to have by law. Those required forms of insurance are:
- Unemployment Insurance. This insurance applies to any business that has employees and may be obligated to pay unemployment insurance taxes. This is something you will purchase through your state’s UI fund.
- Workers’ Compensation Insurance. Workers’ compensation laws are state-specific, so make sure you are doing your research to see what your state requires of you. Most CPAs will inform you of where to get Workers Comp coverage in your state.
- Disability Insurance. Multiple states require that a business have insurance coverage for eligible employees should they suffer a non-work related injury or illness. California, Hawaii, New York, and New Jersey are some of these states.
Does Business Insurance Cover Lawsuits?
Business insurance does cover lawsuits, but only as long as you have the appropriate business liability insurance and enough coverage to pay for your legal costs. The main thing to remember is that General Liability Insurance is super important for small business owners to have because the insurance provider would pay for your legal fees in a lawsuit because they have what’s called a “duty to defend” you. This can be tens of thousands, if not hundreds of thousands, of dollars in legal fees, which is why simply paying a deductible under your insurance policy will save you tons of money during a legal action instituted against your business.
There are certain circumstances in which business insurance does not cover lawsuits, such as if an injury or damage was caused on purpose (this is called an “intentional act exclusion” under insurance policies), and some policies exclude coverage of certain types of damages in a lawsuit (such as additional punitive or consequential damages). Make sure to look over your policy thoroughly to make sure you understand what is covered and what isn’t.
How Do I Get Business Insurance?
There’s a lot of great companies for you to obtain business insurance from. You can do some online shopping to compare policies, or call a representative for an insurance company. You also have the option to talk to an independent insurance agent who can check rates from multiple insurance companies and find the best quote for you, as well as track down a policy that fits your business’s specific needs. TLP recommends starting with whoever you currently purchase your insurance from (State Farm, Progressive, AllState, etc) and ask if they provide business insurance. It's wise to do some shopping around before you sign onto any business insurance policy because you want to make sure that you are getting the coverage you need at a price that is sustainable for both you and your small business.
Business insurance may seem super scary and complex, but there are tons of resources that you can find to make sure that you get the policy that is right for you. TLP wants to make sure that you have all of the information and tools you need in order to run a successful and thriving small business. Business insurance is absolutely a necessity for small businesses and should be incorporated into the way you run your business.
And, the best part? Knowing you’re covered should something happen! That kind of peace-of-mind is truly priceless.
THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. EVERY SITUATION IS DIFFERENT & IS FACT-SPECIFIC. A proper legal analysis is necessary based on your location and contract. Consult an attorney in your home state for advice regarding your contract or specific legal situation.