Do I Need Business Insurance?
Insurance isn’t a fun purchase. In terms of your small business, it’s far more enjoyable to order business cards, design window decals, work on a marketing plan, and think about how to make your product the best you can. Some business owners push off business insurance because they can’t help asking: “Is this really necessary? Can I afford this extra expense for things that may or may not happen?”
The real question is: Can you afford not to insure your business? The commercial insurance company Insureon completed a study and discovered that only one in four businesses have adequate business insurance and 80% of businesses cannot recover after a disaster. With that in mind, business insurance is a small cost to pay to keep yourself safeguarded from financial ruin.
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Do I Need Business Insurance?
The insurance industry is in the business of doom and gloom and disasters. They see your cute storefront located right in the middle of flood territory and say, “Hey, business owner. Let’s imagine that river floods and you can’t open your shop and you lose sixty-percent of your inventory and now you can’t pay your employees and…”
And now you’re in the fetal position wondering if anything in life is worth the risk. Except, it doesn’t have to be like that. Unless you are a thrill seeker who likes to live dangerously, eschewing all ethical responsibilities to others, consider business insurance part of the cost of doing business.
What Is Business Insurance?
Business insurance protects you and your assets from disasters, accidents, lawsuits, theft of property, data breaches, and even mundane hassles like clogged drains. Commercial insurance plans are tailored specifically to your industry and your specific risks. Many factors affect insurance costs, including business location, number of employees, and risky behavior. For example, if you run the ax-throwing brewery near my house (this is a real thing) and want to put sharp objects in the hands of people also drinking beer, get yourself some insurance, people! (I’m confident they are well-insured. And I am also confident I will visit.)
Are You Legally Required To Have Business Insurance?
If you are a sole proprietor of your business and don’t have any employees or customers (see ax-throwing reference above) to protect, business insurance might legally be optional. However, the rules are often state specific, so it’s important to talk to a business lawyer or state insurance representative to make sure you are compliant with state requirements.
However, the government requires businesses with more than one employee to provide worker’s compensation, unemployment, and disability insurance. If you have employees driving business vehicles, you will also need commercial auto insurance, and some landlords and leaseholders require renter’s insurance or commercial property insurance as part of a rental agreement.
Another legal requirement might be health insurance. If you have fifty or more employees six months or more out of the year, then you are legally required by the federal government to provide health insurance. If you aren’t required legally to provide health insurance and you do anyway, then you’re eligible for a tax break.
Reasons You Should Have Business Insurance
Business owners might wonder why they should invest in protecting their business and assets. Here are some important reasons to consider as you weigh your insurance needs:
It Fulfills A Legal Requirement
If you have more than one employee, you need to provide worker’s compensation, disability, and unemployment insurance. Also, your landlord may legally require you to hold renter’s insurance. (These requirements are state specific, so check your state’s legal requirements.)
People Like To Sue Other People
Humans are litigious and sue-happy. No matter what business you start, there is the potential for someone, at some point, to become unhappy with the business or your product and engage you in a lawsuit. Handling a lawsuit without liability insurance could be disastrous to any small business — even if the business is eventually found not liable. (And, yup, if you aren’t fully covered, the plaintiff could come after your personal assets.) A lawsuit is costly and stressful. And insurance is more affordable than you might think — a sole proprietor of a business who wants one million dollars in liability coverage could pay as little as $30 a month for peace of mind.
Protects Your Business In The Event Of A Disaster
The word disaster in this scenario could be anything from an Act of God, a fire, theft or vandalism, or anything else that has the potential to stop your business from running smoothly or running altogether. A business owner’s policy that provides a package of general liability and commercial property insurance will protect from the most common disasters.
Protects The Humans You Employ
Insurance isn’t just doom and gloom. Offering insurance protection to your employees creates a positive work environment and sends the message that you care about the people working for you. While you may have to provide basic protections like worker’s compensation, disability, and unemployment, you can also offer health insurance (and if you aren’t legally required to provide it, you can receive a tax break for doing so) and life insurance policies to help attract and retain quality workers.
Provides Tax Breaks
Business insurance is a tax write-off and you can claim your premiums as deductions. (Except, funny tip: if you are a beneficiary for one of your employee’s life insurance policies, you can’t deduct that insurance policy…so, since tax laws become oddly specific, it’s important to check with a tax expert for your state.)
Contracts May Require Proof Of Insurance
If you want to borrow money for your business, the bank may require you to prove your business is insured. Also, if you work with clients or other businesses as independent contractors, they may also require proof of insurance before choosing to work with you. Insurance doesn’t just provide peace of mind for the business owner but also for the people who engage in the business.
What Type Of Business Insurance Do You Need?
Okay, you’ve made the wise choice to insure your business. Now you’ll need to research which policies are the best fit for your business model. Businesses in riskier industries will need more insurance, but there are options for all types of business owners, from sole proprietors to corporations. The most basic types of insurance types are:
- General Liability Insurance: General liability protects your business in the event of a disaster, lawsuit, or accident. Claims against a business can arrive in the form of bodily injury, property damage, personal injury to a customer (including slander or libel), or false advertisement.
- Commercial Property Insurance: A commercial policy insures your building, business products inside your building, and other people’s property while it’s in your care. Property damage due to theft also falls into this category.
- Professional Liability Insurance: Also referred to as E&O insurance, this is additional liability insurance that helps cover your business from professional liability of either errors (where your business caused a financial loss for a client) or omissions (an employee didn’t do his/her job as required).
- Worker’s Compensation Insurance: If an employee is injured at work, this will protect your employee and you if a lawsuit should arise. Worker’s compensation is a requirement for businesses with more than one employee.
- Commercial Auto Insurance: If your business involves a fleet of vehicles or if an automobile is needed, you will want to cover those vehicles under a commercial insurance plan.
- Business Owner’s Policy: This is a policy offered by most insurance companies; it includes both general liability and commercial property protection.
- Renter’s Insurance: This might be a requirement if you are renting/leasing business space. This protects your location from damage and liabilities for that damage.
- Business Interruption Insurance: If something stops your business from functioning (a flood, an Act of God, or an illness or other accident), this insurance will help pay for lost income incurred during the interruption. This insurance specifically covers income and profits and covering the cost of getting your business back up and running.
Industry Specific Insurance
The type of insurance your business needs is directly correlated to the type of business you run. Again, if you are running an ax-throwing business and putting beer in those customers’ hands, you will need a larger liability package than say someone who is working as a freelance writer (loss of limbs versus paper cuts, possibly?) and so knowing what kind of insurance might be specific to your industry is important.
Insurance For Retail
In addition to the basic coverage types mentioned above, there are a few other insurance policies that are specifically for small business retail owners. Franchise upgrade insurance, for example, helps a franchise pay for the cost of an upgrade required by your franchise agreement. Also, if your retail store is dependent on other businesses to provide you supplies, then you can request business income from dependent properties insurance which pays you out if your business is harmed due a business interruption from someone you work with.
Insurance For Restaurants
If you serve alcohol in your establishment, then liquor liability insurance is an important policy that specifically protects you from the damages caused by someone drinking too much in your establishment or even starting an alcohol-induced fight. Any lawsuits, costs, or damages that arise from serving liquor can be covered by that policy. Another restaurant industry-specific policy is a temperature change policy. If you lose power and your refrigeration unit shuts down (or breaks) and you have spoiled food, a temperature change policy will cover the cost to replace any lost product.
Insurance For The Self-Employed
If you are self-employed, you might have many concerns about how your business might impact your quality of life. Renter’s insurance and/or homeowner’s insurance will protect the items in your business should your house suffer an accident or disaster (flood, fire, theft). It’s important to check with your insurance company to see if your homeowner’s insurance protects businesses run within the home, and if it doesn’t, then discuss an add-on liability package to cover your business.
Insurance For Professional Services
If you run a professional service (legal, accounting, consulting, engineering), several types of insurance options might make sense for your business. The first is director & officers insurance (D&O) which protects the individual directors and board members in your business from lawsuits claiming their decisions had a direct financial impact on the plaintiff. While D&O insurance is mostly for larger corporations, small businesses and even non-profits are starting to see the importance of adding a D&O policy. Your managers could make a mistake and be personally liable for that mistake; this policy protects them and the company from the cost of lawsuits targeting a specific individual’s actions.
There are a few other policies that might be worthwhile. If you are a firm that runs a cloud-based storage system for clients and the cloud goes down, you could have a policy to protect yourself from damages related to lost files. And if you have physical files stored somewhere and they are ruined by wind, rain, fire, valuable papers and records coverage will cover the cost to replace and reproduce documents.
Insurance For Technology
Today, most companies should absolutely prepare for a data breach if they collect sensitive information like social security or credit card numbers. Data breach coverage pays for costs that incur because of the loss of information, including notifying impacted clients, advertising the data breach to get the word out, and paying the cost of PR firm to help navigate the media. If personal information is lost or stolen from your technology business, you have legal requirements to follow in the aftermath and having data breach coverage will help you follow the law.
Insurance For Manufacturing & Wholesale
Product liability is a needed coverage to add to your general liability package that products your company in the event that someone sues you because of injuries or damage caused by your product. If you manufacture goods, product liability is a smart bet to protect against any litigation that comes your way. (Weird and true lawsuit fun fact: The widow of the murderer in the 1984 San Diego McDonald’s massacre sued McDonald’s saying their product, fast food, caused her husband to go into their establishment and kill 21 people. She lost.) Protect yourself now and worry about all the weird ways people might sue you over your product later.
Insurance For Real Estate
Employees practices liability coverage protects your real estate agency from claims of discrimination, breach of contract, harassment, wrongful termination, among other employee-related lawsuits. It covers your defense and legal costs related to a claim, but it won’t cover any punitive damages that may occur as a result. (Damages are usually covered in a general liability policy.)
Insurance For Construction
Construction jobs are risky and involve many moving parts. Sometimes a construction business has a physical store location in addition to a traveling business of workers in and out of other people’s homes. A specific brand of liability insurance specially designed for construction businesses will protect your business when things do go wrong. Construction insurance covers claims related to any part of your construction business, including medical and faulty workmanship.
Insurance For Personal Care Services
Do you run a hair salon? Does extra hair clog your drains? Well, there’s insurance to cover that. Back up of sewers and drains coverage is designed to cover all claims related to flooding caused by a sewer drain (no matter the reason it floods). Or computers and media coverage helps insure the technology needed to run your small business.
How Much Does Business Insurance Cost?
The cost of business insurance will vary depending on all your individual business factors. Are you a home-based business or do you have a storefront? Do you have employees or are you working solo? What are the risks involved with running your business (see: ax-throwing brewery) and do you have a product to protect? Business insurance might not be a fun expense, but it’s necessary to be one of the 20% of businesses that will survive a disaster.
While the average cost will vary depending on the industry requirements, for a business owner looking for a basic business owner’s policy for a small business, the average yearly premium is $1200. However, policies can start as low as $300.
Meet with an insurance expert to assess your individual needs and discuss the ways you can protect the business you love.