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Start Your Business Startup Basics

Small Business Insurance: What Do You Need?

Small Business Insurance: What Do You Need?
Credit: Tashatuvango/Shutterstock

In the excitement of starting a new business, it is easy to get caught up in marketing, setting up shop and planning the grand opening. While those are very visible aspects of your business, there are also behind-the-scenes matters to address, like business insurance. 

The right small business insurance package is critical to your company's long-term success. The type of industry you are in is the first factor to consider, but several others come into play when you're deciding on the best coverage. Insurance for a service business might not be the right option for a business that sells or manufactures products, for instance.

Having small business insurance helps protect your hard work and investment in your business when something unforeseen occurs. By working with an agent to choose the best coverage for your business, you can keep your business running in spite of those challenges and circumstances. [Small Business Insurance: Where to Start]

An insurance agent can evaluate your potential needs and risk, and come up with a plan to fit your business, said Jeremy Haldeman, an agent with American Family Insurance. To accomplish that, the agent will work with you to perform a risk management assessment, which will give you a list of potential events that could lead to a loss, determine the estimated cost of such a loss and tell you how best to address each risk.  

"Every business and business owner is unique and requires different levels of protection and care," State Farm agent Gary Albert said in a 2010 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. 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 life cycle."

The goal is for the agent to gain a good understanding of the business, and use this to identify potential risks to the customer, Haldeman said. This analysis can include an evaluation of possible property losses, business interruption losses, liability losses, key person losses, automobile losses and injury to employees.

Sharing specific details of your business purpose and location can aid your agent in suggesting the best coverages and the level of risk that you may incur. For example, 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. In this case, liability insurance is probably not as important as malpractice insurance.

"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," said Eli Lehrer, president and co-founder of the R Street Institute free-market think tank and former vice president of the Heartland Institute. "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 general-purpose insurance for small businesses — similar to home owner's insurance — is business owner's insurance. This is a combination of property insurance and liability insurance. 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.

Property damage can arise from physical damage due to such events as fires, windstorms, 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, covers those losses. This covers the loss of income when day-to-day operations are affected and revenue is lost due to a closure. The key is to select the right coverages that could impact your business the most, Haldeman said.

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 or destroyed as a result of your business operation. These risks are covered by general liability and professional liability insurance.

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 that typically operate with few employees. This protection is provided by business life insurance. Often found in multiple owner businesses or partnerships, this insurance provides compensation for the time or loss of work due to a key member's prolonged absence or death, as well as provides an avenue for the purchase of the key member's portion of the business.

A few more of the most common business insurance policies to add are business auto insurance, workers' compensation insurance, commercial liability umbrella policies, employment practices liability insurance and equipment breakdown coverage.

While the federal government does not require insurance for small businesses, most states do. Be sure to do your homework and to research your home state's laws around what type of insurance your business needs. The Small Business Administration website also offers a wealth of resources for business owners looking into insurance policies and requirements.

This article was originally published in 2010 and was updated Nov. 3, 2015. Additional reporting by Business News Daily contributor Michelle Bryner.