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Small Business Insurance: What Do You Need?

While figuring out your company's insurance coverage is likely not as sexy as putting the final touches on your website or planning your grand opening it's just as important. Several factors come into play when deciding on the best coverage, the most important of which is the nature of the business. Insurance for a service business might not be what’s needed for a business that sells or manufactures products.

The general-purpose insurance for small businesses – similar to home owner’s insurance – is business owner’s insurance, said Eli Lehrer, national director at the Center on Finance, Insurance and Real Estate at the Heartland Institute, a think tank in Chicago. “[Business owner’s insurance] is a combination of property insurance against fire loss and so forth with liability insurance,” Lehrer said. While this is a good place to start, especially for small businesses that own a building or land, “there are a number of things it doesn’t cover,” Lehrer said.

The first stop for additional insurance should be looking into your state's requirements for small businesses . While the federal government does not require insurance for small businesses, most states do. Here’s a good resource to find your state’s insurance department website.

Risk assessment

Next is where some legwork is required: The Small Business Administration (SBA) suggests doing a risk management assessment, which will give you a list of potential events that could lead to a loss, the estimated cost of such a loss, and how best to address each risk (insurance coverage will be one of these solutions). This analysis will most likely include: property losses, business interruption losses, liability losses, key person losses, automobile losses and injury to employees, according to a document published by the SBA.

An insurance agent will typically do the risk assessment, usually at no cost to the business owner, Lehrer said. “Probably the best way to [select an insurance agent] is to find out who other similar businesses use in your area,” Lehrer said.

Why not go at in on your own?

“Every business and business owner is unique and requires different levels of protection and care,” State Farm agent Gary Albert of Charlottesville, Va., said in an email interview. “An experienced agent with a proven brand can offer resources to benefit the customer that otherwise may not be available from a call center or internet-only based carrier,” Albert said. “There is also some personal accountability with a local agent to help with this process, as well as a trusted resource to turn to throughout the business lifecycle.”

The upside of this help is that “an insurance agent’s job is to sell you insurance so they have plenty of incentive to look for risks and a good agent will be able to find risks that you may not have thought of,” Lehrer said. “On the other hand, if you have limited capital, it may not always be the best idea to insure against every single possible risk,” Lehrer said.

Consider a doctor or lawyer who has an office in a building owned by someone else, no inventory and office equipment that isn’t worth a lot, Lehrer said. In this case, liability insurance is probably not as important as malpractice insurance, Lehrer said.

“If you run your business entirely out of your car, it may be much more important to have a commercial auto policy than it would be to have a business owner’s policy,” Lehrer said. “If you run a catering company with the premises that nobody visits you may not really need a business owner’s policy but you probably do need some product liability coverage in case you serve somebody spoiled food.”

The basics

A few of the most common business insurance policies are General Liability, Business Auto Insurance, Worker’s Compensation Insurance, Commercial Liability Umbrella Policies, Professional Liability, and Employment Practices Liability Insurance, and Equipment Breakdown Coverage.

Property damage can arise from physical damage due to such things as fire, windstorm, lightning and vandalism; loss of use of property caused by something other than physical damage; and criminal activity, which includes burglary and embezzlement. 

While property losses due to a fire, for example, are covered by property insurance, this same insurance typically doesn’t provide money for indirect losses, such as those encountered while a business is down for repairs. A separate insurance, called business interruption insurance, “reimburses policyholders for the difference between normal income and the income earned during the enforced shutdown period,” said SBA in a published document.

Small businesses will also typically face liability losses, or at least a risk for these losses. A business could be sued if someone is injured or someone’s property is damaged/destroyed as a result of your business operation. The SBA recommends businesses seek professional help when determining what type and how much liability coverage makes sense. 

Protection of financial loss due to the death or illness of a key business member is important for all businesses, but even more so for small businesses which typically operate with few employees. This protection is provided by business life insurance

To protect your business against such losses, the SBA suggests small businesses, at a minimum, have four “essential” types of insurance. These are: automobile, fire, liability and workers' compensation.

Beyond the “essentials,” SBA suggests a list of insurance that is “not absolutely necessary … [but] will greatly add to the security of your business.”

These are: business interruption, crime, glass, rental, boiler and machinery insurance. This list is much more dependent on type of business, as an Internet startup may not need machinery insurance.

Lastly, for businesses with employees, the SBA suggests insurance coverage for employee benefits, including group life insurance, group health insurance, disability insurance and retirement income.