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Start Your Business Startup Basics

Business Insurance Coverage You Should Have (But Might Not)

Business Insurance Coverage You Should Have (But Might Not)
Credit: Rawpixel/Shutterstock

Like home and auto insurance, business insurance provides you with financial protection, should your company suffer from damages, lawsuits or some other costly event that involves your business. In addition to mandatory workers' compensation and unemployment insurance (if a business has employees), most business owners know they should have some sort of general liability or business owner's policy. But these policies don't cover every scenario — and just because most types of business insurance are optional, that doesn't mean you should skimp on your coverage.

Insurance experts shared a few important policies that many business owners should have but may not have thought to purchase.

Do you use your personal car and/or home for business purposes? If so, your regular insurance policies for these assets may not fully protect you. Dan Klaras, president of Assurance insurance agency, said that if you don't own a separate commercial vehicle, you should get nonowned and hired auto liability insurance. This covers any claims against your business for incidents that occur while you or your employees are driving your car during a workday.

Additionally, homeowner's insurance is not designed to provide business coverage, so Klaras advised home-based business owners to speak with an agent about adding endorsements or riders to their policy to cover their business activities. [5 Websites for Comparing Small Business Insurance Quotes]

Fires, floods, building collapse, theft. Any of these situations — and others — could make you have to temporarily shut down your business and a consequent loss of income.

"Any time you have a loss of income [as a small business], a couple of months could put you out of business," Klaras said.

Business interruption insurance will compensate you for some or all of the money you lose by not being fully operational. The Insurance Information Institute provides more information about whether or not your company needs this type of coverage.

If your business sells goods or services on credit, you open yourself up to the risk that the buyer may not come through with the money. Credit insurance provides coverage for a variety of losses related to bad debt situations, Klaras said. Depending on your policy, credit insurance may cover all or part of your accounts receivables and help with your customer credit management/debt collection.

According to research by the Ponemon Institute, more than 40 percent of U.S. companies have experienced a data breach in the last year — and yet 27 percent didn't have a data breach response plan or team in place. Klaras advised all business owners to look into cyberinsurance to protect sensitive employee, client and financial information in the event of a data breach.

"If a small business has a website, it has exposure [and] needs to have this coverage," Klaras told Business News Daily. "Cybercriminals are focused on small businesses for the simple reason that they know network security is much less sophisticated. It's easier to get in and get the information. In having [cyber] coverage, you're getting ... the best practices to keep a cyber breach from happening, and that value alone is important."

Employers are required by law to have certain types of insurance to cover their employees, but what about protection for your business if an employee sues? Because of the close-knit culture of most small businesses, Klaras said that many owners see their employees as friends, and don't believe they'd ever sue. However, should a disgruntled worker take you to court for an issue like wrongful termination or sexual harassment, you could lose a significant amount of money, even if you're not guilty. Employment practices liability ensures that your business won't go bankrupt defending itself if an employee files a claim.

Most small business owners don't think it will ever happen to them, but lawsuits can and do frequently occur when business disputes need to be settled. Errors and omissions (E&O) insurance, also known as professional liability insurance, protects your business and reputation in the event that a client or customer files a lawsuit, Klaras said. This is most important for service-based businesses, and helps fill in some of the gaps in general liability coverage. In certain states such insurance is required for certain professions, such as medical doctors.

Hunter Hoffmann, head of U.S. communications at small business insurer Hiscox, agreed that professional liability insurance is a key consideration for any business owner.

"Professional liability insurance protects you and your employees if you're sued for errors or negligence," Hoffmann said. "Even if you've done nothing wrong, the costs to defend against a lawsuit can be significant for a small business, and insurance provides for both legal representation and payment of any judgment made against you."

Less than half of small businesses carried professional liability insurance, according to the 2015 Hiscox DNA of an Entrepreneur Report.

As a business owner, you have a certain responsibility to the people who purchase your products. Ted Devine, CEO of small business insurance provider Insureon, said that U.S. laws have evolved in recent years to favor consumers by applying a "strict liability" doctrine. This means that anyone — vendor, distributor, manufacturer, etc. — involved in the sale of a product that causes injury or illness when it is used correctly can be held legally and financially responsible for those damages.

While product liability itself is often covered within a general liability policy (though Devine advised double-checking to make sure), you're not covered if you need to undergo the expensive, time-consuming and potentially reputation-damaging process of a recall. To help you with this, product recall insurance may be available as a rider to your general liability policy.

"Product recall insurance ... can cover the cost of recalling products, including getting them off the shelves, destroying them and running a PR or advertising campaign to rebuild public trust," Devine said.

Every company has different insurance needs, depending on the industry, location and nature of the business. While the above-named policies are recommended, they may or may not be right for your business. Be sure to consult with your insurance agent frequently to assess your risks and ensure that your business is getting all the protection it needs.

"Set up a regular time frame to meet with your agent and update him or her on your business and any changes [that have occurred] to make sure you're adding the coverage you need," Klaras said.

"Do your research ... and make sure you're covered," Hoffmann added. "The costs can be very reasonable and insurance provides the protection you need to make sure somebody else doesn't get in the way of your path to success."

For more information on insurance basics, visit Business News Daily's guide.

Nicole Fallon Taylor

Nicole received her Bachelor's degree in Media, Culture and Communication from New York University. She began freelancing for Business News Daily in 2010 and joined the team as a staff writer three years later. She currently serves as the assistant editor. Reach her by email, or follow her on Twitter.