If you’re an American adult, you’re probably familiar with the importance of insurance. In fact, you likely have insurance—for your home, car, health, travel and even your life itself. Insurance helps protect us from the costs and damage that can arise from an unexpected event. We don’t ever want to use it, but if we need to, we’re grateful that we have coverage. Have you ever wondered if you need small business insurance?
It’s something many entrepreneurs don’t think about. In fact, a Next Insurance survey found that 44% of small businesses have never had it. We can understand why.
Do You Really Need Small Business Insurance?
Some businesses seem like naturally risky professions. If you run an in-home daycare center or heli-skiing business, you’ve probably thought about liability issues.
But what about professions like freelance social media community manager, app developer, graphic designer or writer? It’s hard to imagine that sitting behind a computer at home can put you in any danger of a lawsuit.
While managing a blog is exponentially less risky than running an amusement park, you still need to be aware of your personal liability. No matter your industry, things can happen. A freelance writer might be accused of plagiarizing. An app developer could be sued for patent infringement. A public relations consultant may be accused of giving “bad” advice to an unreasonable client. Or a major client might fail to pay you, so you can’t meet your financial obligations.
Worst-case scenarios to be sure, but they do happen. It’s your responsibility to protect yourself, your business and your income. That’s where small business insurance comes in.
In this guide, we’ll break down some of the important small business insurance coverages you should consider.
Understanding Liability and Your Business Structure
Before we dive into the details of insurance, it’s important to realize that the way you’ve structured your business will affect your liability.
If you’re a sole proprietor or have a partnership, there’s no separation between you and your business. If your business is sued, you’re personally on the hook for any payments. In the U.S., the statute of limitations for creditor judgments varies by state, but is typically between 10 and 20 years. This means that if you’re sued today, your assets may be vulnerable for up to 20 years. A lot can happen in that time.
LIMITED LIABILITY COMPANY (LLC)
If you’re incorporated, or have formed an LLC or LLP (limited liability partnership), you’ve separated your business from any of your personal finances. Your business is its own entity, and is responsible for its debts and liabilities. This is often called the “corporate shield” as it protects the owner’s personal assets from the business.
Unless your business is particularly complex or you’re dealing with millions of dollars upfront, you should be able to incorporate or form an LLC for your business online without the help of an attorney.
If you’re a freelancer in the U.S., it’s typically better to incorporate in the state where you actually live or have a physical presence. In particular, the LLC is a great option for the small business, since it protects the personal assets of the business owner without the paperwork and formalities of a corporation.
LLCS AND PERSONAL LIABILITY
However, don’t assume an incorporated business will unconditionally protect you from personal liability. Whether your business is a corporation or sole proprietorship, there are several circumstances where you can be personally liable, including when you:
- Personally guarantee a loan for your business. This scenario is quite common as banks typically require a personal guarantee until your business builds its own business credit.
- Commit a crime or operate your business illegally. A corporation or LLC won’t protect you if you break the law.
- You do not operate your business as a separate entity. If you commingle your personal and business finances (i.e., you use the same bank account for both), your “corporate shield” can be pierced and your personal assets are vulnerable.
- Your actions injure someone. Many professionals (i.e., doctors, drivers) take out a professional liability insurance policy to protect against malpractice or negligence claims.
When it comes to liability, the bottom line is that you should take your business and personal liability seriously, no matter how small your business.
What Types of Small Business Insurance Do You Need?
Your specific insurance needs are going to depend on your business type and risk tolerance, but here are some of the common insurance types:
GENERAL LIABILITY INSURANCE
If you’re only going to get one type of insurance coverage, this is the one. Every business—big or small, located on a jobsite, in an office or at home—can benefit from this coverage.
General liability insurance is basic protection that broadly covers your business against accidents, injuries and negligence claims. It can help cover:
- Medical expenses
- Attorney fees
- Damages if someone gets hurt on your property, or when there are damages caused by you or an employee
- Claims of false advertising, slander or copyright infringement
The amount of coverage you need will depend on the type of business you’re in. For example, a homebuilder will need more coverage than a web designer because there are more opportunities for injury or damage.
Your general liability plan will outline the maximum the insurance company will pay against a claim. Just make sure this amount is in line with the level of risk for your type of business.
PROFESSIONAL LIABILITY INSURANCE
Also known as errors and omissions (E&O) insurance, professional liability insurance protects businesses against negligence claims that arise from mistakes or failure to perform. It is most applicable to businesses that provide a service, such as consultants, lawyers or accountants.
This insurance protects you against claims of malpractice and negligence, which are not part of your general liability policy. If there’s the possibility of a client suing you over bad advice, or for providing a service that damages their business or reputation in some way, this is a coverage that you should consider. Every industry and small business will have its own set of concerns, and policies are typically customized to address their needs.
COMMERCIAL PROPERTY INSURANCE
If your business owns or leases any kind of property, such as a building, office, expensive tools and equipment, you will need property insurance to cover any losses or damage as a result of events like fire, smoke, vandalism, etc.
A commercial property insurance policy typically includes coverage for assets like:
- Furniture and other equipment
- Lost income when business operations are suspended after a covered loss
You can usually customize your coverage to include extra protections, such as valuable papers and records coverage that can help pay to reproduce important documents, provide temporary storage and move records.
COMMERCIAL AUTO INSURANCE
If you or any of your employees use a vehicle for work-related purposes, you should consider taking on commercial auto insurance. It helps cover the cost of an accident if you or an employee is at fault. It can also help pay for damaged property and medical expenses, for you, a pedestrian or other driver that you hit by accident.
Do you run your business out of your home? It’s important to realize that your standard homeowners’ insurance policy usually doesn’t cover a home-based business.
For example, if there’s a robbery at your home and your computers and other technology are stolen, your general policy might not cover the loss. Your insurance company may even choose to cancel your policy because you failed to disclose a home-based business.
The easiest and most affordable way to protect your home-based business is to get an add-on (or rider) to your existing policy to cover your business. These types of policies generally provide about $2,500 of additional coverage, which might be enough for a solo business without a lot of valuable equipment that doesn’t have a lot of people visiting the home for business matters. If you need more coverage, consider an in-home business policy that usually covers equipment and liability of people coming in and out.
Do you run a small business out of a rented home? Homeowner’s insurance has a subset coverage designed for these circumstances. It protects against damage to the property, its contents and personal injury on-site.
DATA BREACH INSURANCE
If you deal with sensitive information about employees or clients, you should consider a data breach policy that will protect you from either an electronic (e.g., cyber attack/hack) or physical (e.g., stolen files) breach. This is especially important if you collect, store and retain customer data, and/or use the internet to do business.
As larger companies are taking increasingly sophisticated measures to protect their data, hackers are turning their attention to small- and medium-sized businesses. Considering that a single cyber attack can cost a business up to $15,000 and damage their reputation, this is one modern-day coverage you should seriously consider.
WORKERS’ COMPENSATION INSURANCE
If you have even one full-time employee, you will require this type of protection that covers work-related injuries or illnesses. It typically includes coverage of their medical care, lost wages and disability benefits. It can also help cover your legal costs if an employee or their family sues. To know your requirements, contact your state’s insurance commissioner’s office to learn what exactly you need as an employer.
EMPLOYMENT PRACTICES LIABILITY INSURANCE
This coverage protects your business from employment discrimination or wrongful termination claims brought forward from employees. It would cover the cost of defending claims like discrimination, harassment or wrongful dismissal.
BUSINESS INTERRUPTION INSURANCE
The last thing you want to think about after a catastrophic event is running a business. With life or death matters on your mind, you likely won’t be able to even consider it. Business interruption insurance covers the lost income of you or staff’s inability to work. It’s especially important for companies that need a physical location to do business. The coverage may help pay for rent at a temporary office while repairs are in progress.
BUSINESS OWNER’S POLICY (BOP)
If you’re a small business owner who needs extensive coverage (i.e., more than $10,000), you should consider a BOP. This type of insurance usually covers things like:
- Damages to business equipment
- Liability for customer injuries
- Malpractice claims
- Loss from business interruptions
- Protection when driving a personal vehicle for business
For example, a wedding videographer may want the coverage for their expensive equipment, driving to event sites and any losses that occur to clients’ photos. In many cases, packaging all this coverage into a BOP can be more affordable than looking for separate coverage for each.
COMMERCIAL UMBRELLA INSURANCE
This is extra liability coverage to help pay costs that go over your general liability or other liability policy limits. It can top up any legal fees, medical bills or damage expenses. It’s helpful protection to have if you think the cost of a claim could ever exceed your liability limits.
For example, a contractor who has a workshop with a lot of dangerous equipment, and heavy employee and customer traffic may consider umbrella coverage to be sure that they are fully protected in the event of an accident.
How to Shop for Small Business Insurance
Bryan Smith, VP of the small commercial unit at The Hartford, an investment and insurance company, acknowledges that selecting insurance coverage can be a dizzying prospect. The Hartford offers more than 240 coverages for small business owners alone! That’s why it’s helpful to work with an independent agent or broker like us to help determine your specific needs.
“An independent agent is not tied to one company. They will have relationships with multiple carriers, which gives them the flexibility to pair the small business owner with the right carrier who fits their needs the best,” said Smith.
LOOK BEYOND STANDARD OPTIONS
Whether you’re working with an agent or sourcing your own insurance company, he suggests looking beyond standard coverages and into the service you can expect. “The most common request we get from a service perspective is when our small business owners have to provide a certificate of insurance as proof so they can continue operating. They need to get those quickly, so it’s important to find a company that’s committed to serving you quickly. Some even allow you to self-serve online, which can be very helpful,” said Smith.
DO YOUR HOMEWORK
A good reputation when it comes to claims support is also critical when choosing an insurance provider. “Make sure you look at reviews and testimonials, and find out who gets the best ratings for claims coverage,” advises Smith. “An independent agent can help with that. Who will come to your aid quickly and get you on your feet as quickly as possible? That’s who you want to work with.”
And before you engage anyone in the industry, he recommends educating yourself about small business insurance. There are plenty of opportunities to learn about insurance coverage online. Large, reputable insurance companies generally have resources on their websites that will help you get up to speed on the terminology of the insurance world so you can ask the right questions.
When it comes to cost, coverage and individual policies vary a lot by state, region, and the nature and complexity of your business. “You can expect to pay anywhere from as low as $500 per year to $2,500 per year for starters. Small business insurance is unique and dynamic. It’s hard to pin it down to one number,” said Smith.
Thinking about insurance of any kind can be an uncomfortable experience for anyone. It requires you to consider the possibility of a terrible event you never want to occur. But, like most things, the more you know about how you can protect yourself, the more confident you’ll feel.
When you have the right small business insurance coverage in place, you can make smart business decisions, now and in the future.
This blog content was provided by The Hartford, March 2, 2020.