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Small Business Insurance: What Do You Need?

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

If you're starting your first business, you likely have a plan for financing, marketing, sales, etc. But it's also critical to make sure you're guarded against common business risks – and that starts with securing a business insurance policy.

The right small business insurance package is essential to your company's long-term success. Having coverage helps protect your hard work and investment in your business if something unforeseen occurs. By purchasing insurance, you can keep your business running in spite of those challenges and circumstances.

"Defending a lawsuit can be crippling," said Kevin Kerridge, executive vice president of small business at Hiscox USA. "A small business can attract a lawsuit, even if they haven't made a mistake or done anything wrong. Just an allegation likely will trigger a costly defense. So new businesses often buy insurance to protect their investment – and hopes and dreams."

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.  

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.

For a new business considering their first insurance policy, it's wise to consider a provider that is specifically interested in small businesses, said Kerridge.

"There are a number of online providers [that] now specialize in small businesses with impressive online service and products that are geared to small business in terms of their price points and stripping away unnecessarily complex jargon," he told Business News Daily. "Quotes can often be obtained in minutes online, against days for more traditional methods."

While many types of business insurance are optional, there are a few instances in which a small business is obligated to have a policy.

"Obligations can stem from legal requirements, such as auto liability or workers' compensation, or from a landlord or client who requires the business to have insurance under their lease or services contract," Kerridge said.

If you're looking into other types of coverage to you better manage your risks, Kerridge noted that a commercial general liability (CGL) policy covers, among others things, claims and lawsuits by others who were injured or whose property was damaged by the policyholder. Of course, not all claims are covered, and Kerridge recommended owners seek insurance advice either online or from a licensed producer.

"Some insurers, like Hiscox, also may offer some coverage for loss or damage to the business's own property," he said. "For a business providing professional services, like a consultant, professional liability insurance covers accusations from a client about mistakes or negligence in providing services."

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.

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.

As a business grows, businesses typically purchase other products, such as cyber insurance, umbrella, crime and fidelity protection, said Kerridge.

"Again, when thinking about these insurance products, it's always worth seeking the advice of a good commercial insurance professional to explain what is covered so that a cost-benefit assessment can be considered," he added.

Be sure to do your homework and 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.

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.

Additional reporting by Michelle Bryner and Marci Martin. Some source interviews were conducted for a previous version of this article.

Nicole Fallon

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. Nicole served as the site's managing editor until January 2018, and now leads Purch's B2B copy and production team. Reach her by email, or follow her on Twitter.