When you first started your business, you were probably most preoccupied with cash flow, staffing and growth, but at a certain point, it becomes essential to invest in business insurance. Business insurance protects your assets and acts as a safeguard against personal lawsuits.
Unfortunately, according to the U.S. Small Business Administration, "many small businesses often assume that by forming a Limited Liability Company (LLC), they'll be afforded protection in the event of a lawsuit. However, while this structure can protect you from personal liability for business decisions or actions of the LLC – the liability protection is limited. For example, if you inadvertently break intellectual property laws or are sued by an employee, you could face a lawsuit and potential losses that being an LLC cannot protect you against."
This guide will help answer your preliminary questions about business insurance and find the right plan and provider for your company.
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What types of business insurance are there?
Small businesses can be insured in lots of ways, and not every business needs every type of coverage. Here's a brief rundown of the most common ways business owners insure, but keep in mind this is not comprehensive, there are other types of plans as well:
Business liability insurance: Ideal for small to medium businesses, including single person operations, business liability insurance protects your personal assets in the event you are sued. An LLC alone will not provide you with this protection.
Business owner's policy: A combination of property and general liability insurance, a business owner policy (BOP) is often purchased by SMB owners who work in a space they own, including their primary residence. If you regularly see clients in your home or work out of a home office, a BOP may work for you.
Commercial property insurance: For small to medium businesses with lots of physical assets, commercial property insurance is usually necessary. The cost and structure of a commercial property insurance policy varies wildly based on the specifics of your assets, the more you cover, the higher the cost of the plan, so before you go insurance shopping, do a full inventory of your business's property.
Contractors professional liability insurance: If you're even thinking about starting a business that has to do with construction or building, or other related services (such as engineering or architecture or subcontracting), you will need some type of professional liability insurance, most likely contractors professional liability insurance, which typically covers errors that can result in a lawsuit as well as liability claims for environmental impact.
Employment practices liability insurance: SMB owners with employees may purchase employment practices liability insurance (EPLI), which provides employers with protection in cases related to wrongful employment practices, such as discrimination, sexual harassment and wrongful termination.
Errors and omissions insurance: Sometimes also called professional liability insurance, E&O insurance covers businesses that provide professional services (often to other businesses) and protects them from claims that their services caused financial distress for their clients. Consultants and financial services professionals usually seek out E&O insurance.
How do I know what type of business insurance to buy?
The type of insurance you choose depends on the way you conduct business, the types of products and services you offer, the size of your business, the physical setup of your business, and a few other factors that are impossible to flesh out entirely in a short article. However, these basic steps should help you find the right type of insurance coverage for your unique small business – we recommend doing all three.
Consult a lawyer: The best person to illuminate weaknesses in your business, in terms of liability, is a lawyer who specializes in serving small business owners. Having a relationship with a lawyer whom you can consult from time to time on issues such as these may prove invaluable.
Consult an accountant: If you already have a trusted accountant (and if you don't, perhaps you should) ask their opinion on types of business insurance coverage. They are likely to shy away from offering you direct, "you should do this" advice, but they may share some common types of insurance that other small to medium business owners like you can invest in to avoid financial ruin from a lawsuit or a plain old natural disaster.
Ask a peer or mentor: Local small business owners are your best resource for getting advice on anything from business insurance to writing out hiring and firing guidelines. If you don't already have small business connections in your area, make an effort to network more, starting with your local chamber of commerce.
Dive into the research: In addition to getting the advice of others, you should do exactly what you're doing now: Seek out research yourself. Read about the types of plans that seem most likely to apply to your business and make your own conclusion.
How should I choose an insurance provider?
Once you know the type or types of business insurance you plan on purchasing, get quotes and choose a provider. If you already have a preference, it's fine to continue doing business with the same institution you use for other products, but we recommend getting at least three quotes as a best practice.
Comparison shopping can pay off big in the form of better coverage as well as lower rates; letting the reps you're talking to know you're shopping around isn't a bad idea either. Plus, during the sales process, you can vet each company by paying close attention not just to their prices but also their general level of customer service.
Editor's Note: The contents of this article do not offer legal, business or insurance advice related to the needs of any specific individual business. Please consult your attorney and/or small business insurer to discuss your situation and coverages.