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Your Guide to Choosing Small Business Insurance 

Skye Schooley
Skye Schooley
Staff writer
Business News Daily Staff
Updated Oct 20, 2022

Learn about business insurance and how it can protect your business financially and legally.

  • Every small business needs some combination of business insurance for financial and legal protection against liability in a crisis.
  • Popular business insurance policies include general liability, business owners, business interruption, workers’ compensation and cyber insurance.
  • To choose the best insurance for your organization, analyze your business’s assets, liabilities and risks to determine how basic or comprehensive you want your coverage to be.
  • This article is for business owners and budding entrepreneurs who want to know what business insurance is and which policies they need.

When making financial decisions for your small business or startup, you may be tempted to cut costs by signing up for only the business insurance you’re legally required to have. However, just one uninsured accident can cost more than your monthly premium – it can cost you your entire business. 

With many types of business insurance available, it can be tough to know just which kinds you need. Analyze your organization to make strategic decisions about which coverage plans are right for you.

What is business insurance, and why do you need it?

When accidents happen, you want to be protected. Business insurance insulates your business from financial loss during times of crisis or unforeseen events. There is no one-size-fits-all business insurance; instead, there are several types of insurance that can protect your business. The exact combination of policies you need depends on your company’s unique circumstances. 

“[Business insurance] assists in legal payment, claims, employees’ issues and business property in case anything goes wrong because of your business activities,” said Phil Crippen, CEO of John Adams IT. “It can help toward the cost of compensation claims and legal fees, as well as damage to your property or employee-related issues.”

The benefits of insurance are often related to financial and legal protection. Insurance can protect you from a variety of losses – for example, if an employee is injured, your office building burns down, your business is sued or your business partner passes away. The right business insurance can help you recover and continue operating your company.

“As a business owner, you define what the right insurance is going to be,” said Seth Morton, owner of Morton Insurance. “Insurance itself is simply an agreement by an insurance company to pay the insured for business losses. To determine what should be insured, a business owner needs to analyze his risk. Once the scope has been established, the owner can evaluate the cost of insurance versus the risk of loss.”

TipTip: Use the legal defense your insurance provides to pay any legal fees incurred if you get sued for a covered claim.

Editor’s note: Looking for business liability insurance? For help finding the right solution for your business, fill out the below questionnaire to have our vendor partners contact you with free information.

What does business insurance cover?

Business insurance can cover a litany of things. It ranges from basic to comprehensive, so you’ll want to choose coverage that adequately protects your property, people and business processes.

Here are the common aspects of a business that insurance can cover and protect:

  • Lives of the business principals
  • Lives of key employees
  • Lives of an employee group
  • Long- and short-term disability of owners and employees
  • Liability for injury to owners and employees
  • Property and casualty coverage for buildings and machinery
  • Liability for and damage to business transportation assets
  • Product liability
  • Employee health insurance for sickness and injury
  • Workers’ compensation for earnings lost due to injury

Key TakeawayKey takeaway: Business insurance can financially and legally protect the main elements of your business, including your property, people and business processes.

How much does business insurance cost?

The type of business insurance you choose dictates your monthly costs. The average cost of business insurance is $65 per month for general liability and $111 per month for workers’ compensation. Some business owners purchase a business owners policy, which combines liability and property coverage into one policy. The average cost for a business owners policy is $101 per month.

Another factor that impacts how much you pay each month is your business type. For instance, builders pay a lot more for business insurance than accountants. The reason for the increase is related to the hazards associated with the job; there is a greater inherent risk of injury and potential damage if you operate a construction firm versus if you run a small accounting company.

Business size, or the number of employees your company has, is also a cost consideration. Each employee poses a potential risk for your business, which raises your monthly premium.

Coverage amounts influence cost too. The higher your coverage, the more you’ll pay. One way to offset the cost if you choose a higher coverage level is to have a higher deductible (which is the amount of money you pay out of pocket before the insurer will pay for a covered loss). Taking on greater risk can lower your monthly premiums. Insurance companies offer a range of deductible amounts, from a few hundred dollars to thousands of dollars.

In the event of a claim, business insurance is normally payable directly to the company. For instance, if your business is damaged during a fire, you would file a claim, and an adjuster would assess the damage and decide on the cost to repair or replace your damaged property or items. Once you pay your policy’s deductible, the insurance company would cut a check to your business based on the parameters of the policy.

Did you know?Did you know?: You can use online tools to compare small business insurance quotes.

What are the types of business insurance?

There are numerous types of business insurance available, and you’ll likely need a combination of policies to protect your company. Speak to an insurance expert to identify the specific policies necessary for your organization. However, these are some primary types of insurance that most small businesses need. 

  • Business owners policy (BOP): A BOP is usually a combination of general liability coverage (e.g., bodily injury, property damage, personal or advertising injury, medical payments, products-completed operations, and damages to premises rented) and property insurance. You can also add an employment practices liability insurance policy to your BOP to cover your employees.
  • Business interruption insurance: Also known as business income insurance, this is one of the most common types of business insurance. It helps you recover lost income and pay operating expenses (e.g., mortgage, rent, payroll, loan payments and taxes) if your business is forced to shut down because of a disaster, like a fire, flood, theft or collapsed building. It can sometimes be bundled with your BOP.
  • Management liability insurance: Another comprehensive insurance package you may need is management liability insurance. This often combines insurance coverage like employment practices liability (essential protection for businesses with employees), fiduciary liability, and directors and officers (D&O) liability (essential protection for businesses with a board of directors).
  • Workers’ compensation insurance: If an employee is injured at work, workers’ comp can cover their medical costs or lost wages. Workers’ compensation and disability insurance are often required by law.
  • Errors and omissions (E&O) insurance: If you offer professional services, you’ll want to acquire E&O insurance, also known as professional liability insurance. This type of coverage protects you in the event of a customer or client claiming your services caused them financial distress. This is especially important for consultants and financial advisors.
  • Product liability insurance: Small businesses often need product liability insurance to protect themselves against product-related claims. If your product causes damage or injury to a third party or your business faces a product-related lawsuit, product liability insurance can help ensure your protection and security.
  • Auto insurance: If you or your employees use vehicles for business purposes, you will need some form of vehicle insurance. Whether you need personal or commercial auto insurance depends on the types of vehicles you use, what you use them for and how much coverage you need. [Visit autoinsurance.com for recommended providers.]
  • Cyber insurance: Every small business owner should protect their data and technology with cyber insurance. If your business technology is hacked or data is leaked, cyber insurance (also known as data breach insurance or cyber liability insurance) can help cover the costs of the damage.

These are just a few of the most common types of insurance small business owners should consider. You should seek professional assistance to find the coverages that best protect your specific business. 

How do you determine what types of insurance your business needs?

The best insurance for your business depends on your unique needs, as well as the laws regulating your state and industry. To determine which types of insurance you need, you’ll have to undertake a careful analysis of your business. It is always advisable to speak with an insurance expert to find the right combination of coverage to keep your business legally compliant and financially protected.

To get started, follow these steps.

1. Analyze your legal responsibilities and business assets.

First and foremost, you should do a careful evaluation of your business and assets to determine what you want to insure. What insurance are you legally required to have, and where do your additional liabilities lie?

For example, Morton said a machine shop might want to insure employees for injury, whereas a jeweler might want protection against theft. Owners of a large distribution company would insure inventory as well as employees, as required by law.

“Each state has different requirements, and business owners should consult with professionals in the state where they operate to determine what to insure,” said Morton.

2. Analyze your risk.

Analyze your additional risk and liability. This will help you determine which insurance will offer the right type of protection for your company. For example, if your business is situated on the bottom floor of an office building in a region prone to floods, you’ll likely want comprehensive flood insurance, whereas a business operating in a dangerous industry will probably want insurance to cover the risk of its employees getting injured.

“In general, careful analysis of business operations, including human resources and facilities, helps determine where the risks are and what should be insured,” said Morton. 

Morton continued, “Beyond what could be called insurance for the operation of the business, there is the question of succession planning. What is the plan if an owner dies or is incapacitated, and how is it funded? It is an area often overlooked by business owners and requires professional help to set it up correctly.”

3. Determine how comprehensive you want your insurance to be.

Depending on what you’re insuring, you may need a basic level of insurance or comprehensive insurance that covers all aspects of the potential loss. Factor in how costly the loss would be, and assess the probability of it happening. This will minimize the risk of overpaying for coverage you don’t need or skimping on coverage that is imperative for your protection.

4. Pick a provider.

Insurance providers aren’t all the same. Policies, premiums and coverage vary, so research to find the best one to protect your business. Choose a few top providers and compare them by policy coverage, cost, reliability, customer service and how they handle claims. This will help you find the best insurer for your business. [Read related article: How to Buy Small Business Insurance]

Key TakeawayKey takeaway: To determine which types of business insurance you need, you should analyze your operations, assets, risks and liabilities. Then, decide how comprehensive you want your policies to be and compare providers.

Insuring your business for long-term success

Business insurance is essential for all businesses. The protections it provides can mean the difference between having a claim covered by your insurer and having to pay the claim yourself, which could cause serious financial distress for your company. Getting the right policies will ensure you’re covered for your most likely claims. Insurance doesn’t need to be expensive; you can get a general liability policy for as little as $25 per month, with the average policy costing $65 per month. 

Kimberlee Leonard contributed to the writing and research in this article. Source interviews were conducted for a previous version of this article. 

Image Credit: Jirapong Manustrong / Getty Images
Skye Schooley
Skye Schooley
Business News Daily Staff
Skye Schooley is a human resources writer at business.com and Business News Daily, where she has researched and written more than 300 articles on HR-focused topics including human resources operations, management leadership, and HR technology. In addition to researching and analyzing products and services that help business owners run a smoother human resources department, such as HR software, PEOs, HROs, employee monitoring software and time and attendance systems, Skye investigates and writes on topics aimed at building better professional culture, like protecting employee privacy, managing human capital, improving communication, and fostering workplace diversity and culture.