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How to Buy Small Business Insurance

Mona Bushnell
Mona Bushnell
Staff Writer

This guide will help you start assessing your business insurance needs and find a provider that can get you the coverage you require at a price you can afford.

  • Small business insurance provides a safety net when unexpected events substantially affect your bottom line.
  • Some common insurance types are business owner's policies, cyberinsurance, general liability insurance and workers' comp.
  • To decide which insurance policies your company should take out, consult experts and others in your industry.
  • This article is for business owners interested in obtaining small business insurance.

When you started your business, you were probably preoccupied with cash flow, staffing and growth. At some point, though, it's essential to invest in business insurance. This insurance protects your assets and acts as a safeguard against personal lawsuits.

Unfortunately, many small businesses may think they are protected from lawsuits simply by forming a limited liability company (LLC). While these entities do protect the business owner's personal assets in the event of a lawsuit, they do not always offer protection in cases of intellectual property law violations and employee lawsuits.

This guide will answer your preliminary questions about business insurance and help you find the right plan and provider for your company.  

 

Editor's note: Looking for the right liability insurance for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

 

Why do businesses need insurance?

Owning a small business means expecting the unexpected. One day, your business could be thriving, and the next, it could be the victim of a cyberattack from which you must spend tens of thousands of dollars to recover – or your employee could be injured in a car crash while driving a company vehicle on your behalf. In both cases, your company is on the hook for the costs involved – and without appropriate insurance plans in place, you'll have to pay these costs out of pocket.

Key takeaway: Small business insurance provides a safety net for unforeseen events that substantially impact your bottom line.

What types of business insurance are there?

Small businesses can be insured in many ways, and not every business needs every type of coverage. Here's a brief rundown of the most common ways business owners insure their companies, though there are other types of plans as well.

  • Business income insurance: A business income insurance plan covers your company if it loses income when physical property damage leads to a decrease in output or a suspension of your standard services. Business income insurance typically does not cover weather damage, as commercial property insurance usually covers this need.

  • Business liability insurance: Ideal for small and midsize businesses, including single-person operations, business liability insurance protects your personal assets in the event you are sued. An LLC alone will not provide 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, such as 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 and midsize 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 start a business that has to do with construction, building, or related services (such as engineering, architecture or subcontracting), you will need some type of professional liability insurance, most likely contractors professional liability insurance. This insurance typically covers errors that can result in a lawsuit as well as liability claims for environmental impact.

  • Cyberinsurance: If your data is breached and bad actors obtain your customers' sensitive information such as their credit card numbers, Social Security numbers, or HIPAA-protected health records, your company can be held liable. A cyberinsurance policy covers the costs associated with this liability.

  • Employment practices liability insurance: SMB owners with employees may purchase employment practices liability insurance, which protects them in cases of 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), protecting them from claims that their services caused financial distress for their clients. Consultants and financial services professionals usually seek out E&O insurance.

  • General liability insurance: A general liability insurance policy protects your company if you are sued for claims involving property damage, personal injuries or advertising injuries. General liability insurance typically does not cover the liabilities covered by cyberinsurance.

  • Workers' compensation insurance: A workers' comp plan can help to cover your employees' medical bills and lost wages resulting from on-the-job injuries or illnesses. Unlike the other insurance types listed here, workers' comp is mandatory in every state except Texas.

Key takeaway: Common business insurance types include business owner's policies, cyberinsurance, general liability insurance and workers' comp.

What is the difference between general and professional liability insurance?

Most businesses should buy general liability insurance, whereas professional liability insurance is mostly a concern for consultants and finance professionals. That's because general liability insurance covers your company in the event of property damage, personal injury or advertising injury claims – all circumstances that any business could experience. Professional liability insurance is more specific, covering your company if a client claims that your services led to financial hardship for them or their clients.

How do I know what type of business insurance to buy?

The type of insurance you choose should depend on the way you conduct business, the types of products and services you offer, the size and physical setup of your business, and various other factors that are impossible to flesh out 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.

  1. 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. It could be invaluable to maintain a relationship with a lawyer whom you can consult from time to time on issues such as these.   

  2. 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 advice on this, but they may share some types of insurance that small and midsize businesses can invest in to avoid financial ruin from a lawsuit or a natural disaster.

  3. Ask a peer or mentor. Local small business owners are your best resource for advice on choices like your business insurance and your 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.

  4. Dive into the research. In addition to getting the advice of others, you should do exactly what you're doing now: Do your own research. Read about the types of plans that seem most likely to apply to your business, and make your own conclusions.

Key takeaway: To help you decide which types of insurance to buy, consult experts and others in your industry.

How much does insurance cost for small businesses?

No two small businesses will spend the same amount of money on insurance. Costs vary by company size and especially industry, as some insurable events are far more likely in some sectors than others. Despite these variables, small business insurance provider Insureon lays out some average monthly costs for a useful reference point:

  • General liability insurance: $65 per month
  • BOP plans: $99 per month
  • Workers' comp: $111 per month

These average numbers add up to $275 per month. As you add more insurance policies, your monthly costs may reach into the higher hundreds or perhaps low thousands of dollars.

How should I choose an insurance provider?

Once you know the types of business insurance you plan to purchase, you can get quotes for price comparison and choose a provider from those. 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. It's also not a bad idea to let the reps you're talking to know that you're shopping around. Plus, during the sales process, you can vet each company by paying close attention to not just 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 business. Please consult your attorney and/or small business insurer to discuss your situation and coverage.

Max Freedman contributed to the writing and research in this article.

Image Credit: Gajus / Getty Images
Mona Bushnell
Mona Bushnell
Business News Daily Staff
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I'm a Staff Writer for business.com and Business News Daily.