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Business Insurance Coverage You Should Have (But Might Not)

image for John Gomez/Shutterstock
John Gomez/Shutterstock

If you're a small business owner, your business is your lifeblood and deserves all the protection it can get. You need to look further than mandatory workers' compensation and general liability to make sure you are covered for every possible scenario, and avoid skimping on optional coverage.

We spoke to business owners and insurance and legal professionals to see what important policies many business owners should have but don't. 

If you own a business, this should be your first step in insurance. It protects you from a variety of claims, including bodily injury, property damage and personal injury. General liability coverage is typically combined with a business owners policy (BOP), which includes property and liability coverage.

Like general liability, a workers' compensation insurance policy generally comes with the territory of owning a business. Workers' comp covers medical expenses, a portion of lost wages, rehabilitation and death benefits should an employee get injured or become ill on the job.

Regulations vary from state to state, and employees are required to follow them.

Editor's note: Need a workers' comp insurance policy for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.

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Do you use your personal car and/or home for business purposes? If so, your regular insurance policy 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 hired and non-owned 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.

Tina Willis, Florida accident and injury lawyer at Tina Willis Law, added that many businesses do not have high enough policy limits to provide adequate coverage.

"Any business that uses automobiles as part of their business needs a high enough policy to avoid having their business assets and income at risk after a serious accident," she said. "$1 million in liability and auto coverage is common – most cases will not exceed $1 million in damages."

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

Fires, floods, building collapse, theft – any of these situations could make you have to temporarily shut down your business and consequently lose income.

"Anytime 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 from not being fully operational. The Insurance Information Institute provides more information about whether or not your company needs this type of insurance coverage.

If your business sells goods or services on credit, you open yourself up to the risk that the buyer won't 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 receivable and help with your customer credit management or debt collection.

According to research by the Ponemon Institute, more than 40% of U.S. companies have experienced a data breach in the last year – and 27% didn't have a data breach response plan or team in place. Klaras advises 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 insurance (EPLI) 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 fills in some of the gaps in general liability coverage. Some states require such insurance 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," he 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."

According to the 2015 Hiscox DNA of an Entrepreneur Report, less than half of small businesses carried professional liability insurance at that time.

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 advises 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.

Don't let the name fool you – this coverage has nothing to do with water. The Insurance Information Institute defines inland marine insurance as insurance that "covers products, materials and equipment when transported over land – e.g., via truck or train – or while temporarily warehoused by a third party." Collisions and cargo theft are the two most common reported losses under inland marine insurance.

For most businesses, your coverage under your BOP or commercial package policy (CPP) will be enough. However, if you frequently ship high-value products like computers, construction equipment or medical equipment over land, inland marine insurance might be necessary.

If you live in an area that's at high risk for floods, tornadoes, earthquakes or any other type of natural disaster, you should absolutely have insurance for it.

"If you think these coverages are too expensive, you need to rethink your business model," said Cate Steane, founder of Make It Happen Preparedness Services. "When the insurance premiums are high, it means the covered event is likely to occur and losses are likely to be catastrophic."

Steane also recommends storing videos of your office space, financial records and other important files in the cloud rather than relying on a physical space (or personal property) to avoid the records being destroyed. Pre-disaster videos of your space will help your insurance claim move more smoothly. 

Key person insurance is exactly what it sounds like – life insurance on a person whose absence or loss would mean the failure of the company.

Matt Ross, co-owner and COO of The Slumber Yard, said he purchased key person insurance for his co-founder when they founded their business, because "he's the face of the company and the business would be in a world of hurt if something happened to him."

Key person insurance works by a company purchasing a life insurance policy on its key employee(s) and paying the premiums on that policy. If the key person dies unexpectedly, the company will receive the insurance payoff to keep the company afloat in the aftermath of the death or to cover costs involved in closing the business down.

Business overhead expense insurance is similar to key person insurance in that it protects a critical member of your company – the business owner.

"In small businesses where the owner is likely responsible for much of the day-to-day, an extended absence can have a catastrophic effect on the balance sheet," said Raymer Malone, owner of High Income Protection Insurance Agency.

Business overhead expense insurance is a basic disability policy that covers business expenses such as rent, salaries and utilities if the owner becomes unable to work due to illness or injury.

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 timeframe 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 insurance basics, visit Business News Daily's guide.

Additional reporting by Nicole Fallon. Some source interviews were conducted for a previous version of this article.

Kiely Kuligowski

Kiely is a staff writer based in New York City. She worked as a marketing copywriter after graduating with her bachelor’s in English from Miami University (OH) and is now embracing her hipster side as a new resident of Brooklyn. You can reach her on Twitter or by email.