Having small business insurance is a big deal. In some states, it’s a legal requirement for operating a small business. Small business insurance should often be considered a financial necessity, even if it’s not legally mandated.
Some small business owners may think they can save money early on by neglecting certain types of insurance, costing you significantly more later. Your small business can’t afford not to have insurance, and attempting to pay for damages or claims out of pocket could be enough to bankrupt a small business.
Of course, not every business needs to have every type of insurance, and there are several different types of small business insurance coverage that you can receive. Here is a breakdown of some of the most common types of small business insurance, what they cover, and when you need them.
Best Small Business Insurance Types To Have
General Liability Insurance for Small Businesses
General liability insurance is the “standard” type for small businesses. This type of insurance provides coverage for claims of bodily harm, property damage, and advertising damage. General liability insurance for a small business can help pay for medical expenses and property repairs if such damages are covered under your plan.
What this means for your small business is that you have some protection if a customer is injured on your premises. If your business has general liability insurance, your policy will cover some or all medical expenses, rather than you (or them) needing to pay out of pocket.
The same concept applies if a customer’s property is damaged at your workplace.
In some cases, general liability insurance for small businesses can also provide to you directly. General liability insurance can cover expenses and legal fees if your small business suffers reputational harm, either through malicious attacks or claims of copyright infringement or false advertising. Lastly, general liability small business insurance protects you from some damages to your property. This is especially important for small businesses that are renting property. If your rented property is damaged through no fault of your own, and you don’t have insurance, you could pay out of pocket. But with general liability insurance, the cost to repair any such damages is covered by your coverage plan.
Professional Liability Insurance
Professional liability insurance is one of the best small business insurance types if your business provides professional services to clients. This type of insurance, also called “errors and omissions insurance, ” protects against claims of failure in professional service. There are some critical distinctions between what is covered by professional liability insurance versus general liability insurance for small businesses.
For instance, suppose you run a company that does electrical work in residential and professional spaces. If your business is contracted to install new wiring and lighting fixtures in a home, you are expected to fulfill all terms of the work agreement with your customer. If you fail to complete the job, or some of the installed electrical fixtures simply don’t work, you could be sued for negligence or misrepresentation of your services.
That is property damage, which your general liability insurance would cover, not professional liability insurance. So, your failure to leave the property in good standing could also be considered negligence.
You may think you don’t need professional liability insurance because you won’t make mistakes, and this thinking can lead to trouble. Even the best in the world can make mistakes, and it is always better to be protected by professional liability insurance.
Commercial Property Damage Insurance
Commercial property damage covers all kinds of injuries to your commercial property, including your physical store or office and any physical company property. Computers, company devices, and any machinery or equipment belonging to the company is commercial property.
Commercial property damage insurance covers damage to property and theft. If somebody breaks into your office and steals supplies and equipment, that burglary can be covered by your commercial property insurance. If you run a retail store and somebody steals parts of your inventory, Commercial property damage insurance covers the approximate cost to replace lost, stolen or damaged commercial property.
Some exceptions are not covered by commercial property insurance. For instance, this type of insurance does not protect company vehicles that are damaged on the road. Instead, these would be covered by a commercial auto insurance policy.
Workers’ Compensation Insurance
Worker’s compensation is one of small business owners’ most important types of insurance. This is true in most industries, especially those requiring physical labor.
Workers’ compensation insurance provides coverage for all work-related injuries and illnesses. Most workers’ compensation policies offer a wide range of coverage for work-related injuries. The most basic form of coverage would be for medical treatment and lost wages due to injury. In some cases, workers’ compensation policies will also cover recovery and rehabilitation costs and disability benefits. In the most unfortunate circumstances, this insurance can provide death benefits if a worker is killed by an on-the-job accident.
Workers’ compensation insurance can cover many types of injuries. A chef being burned by a flame in the kitchen and a broken foot would be covered by workers’ compensation. Even in office settings, many office workers can develop carpal tunnel syndrome or other physical disorders from performing office labor. These conditions qualify as workplace injuries and thus are covered by workers’ compensation insurance.
Another example that should be noted is injuries suffered during car accidents while on the job. If your business requires workers to travel for work, you absolutely must have workers’ compensation coverage. Any personal injury suffered from an auto accident while working would be covered by this insurance type. As you will see in a minute, multiple insurance types can be required for work-related auto accidents.
Commercial Auto Insurance
Commercial auto insurance is necessary if your small business owns any company vehicles. Commercial auto insurance covers any damages incurred while you or an employee are operating a company vehicle.
There are several major examples of types of businesses that need commercial auto insurance. Many contractors rely on company vehicles for transport to and from their work sites. These vehicles, whether the business owns a single truck or a fleet of vehicles, must be covered by commercial auto insurance.
Delivery drivers and Uber drivers also must be covered by commercial auto insurance. With the recent influx of new delivery services (i.e., DoorDash, GrubHub, Uber Eats, etc.), this has become an important issue for millions of workers. Most of the major delivery and rideshare companies provide commercial auto insurance for their drivers. So while a company like Uber does not own your personal vehicle, they do provide coverage for you while you are working as an Uber driver.
This coverage includes damage to the vehicle and personal injuries to anyone involved. If your company car hits a pedestrian requiring medical care, your commercial auto insurance can cover their expenses. If you are involved in a multi-vehicle collision, your commercial auto insurance can pay for the medical costs of other drivers or passengers. Your commercial auto insurance will also cover any damages to your company vehicle or other damaged vehicles. You or your employees can also have your injury expenses covered by commercial auto insurance. However, workers’ compensation coverage is needed to protect lost income from work-related injuries.
Business Income Coverage
Business income coverage is a type of business interruption insurance that provides coverage if your company loses income through specific means. The most common example would be covered property damage which prevents a small business from conducting business. For instance, suppose your small business needs to close temporarily due to fire damage on your property. Business income coverage would provide income relief for employees who lose income during the closure period.
Business interruption insurance became a hot topic of debate during the COVID-19 pandemic. As so many companies were forced to shut down early in the pandemic, there were questions about whether the pandemic was covered under interruption insurance or income coverage. There was no universal answer to these questions, and it ultimately came down to the exact terms of specific policies. Most insurance companies argued that standard business income insurance policies did not cover pandemic-related losses. However, some all-inclusive coverage plans did provide some businesses with protection against the pandemic. In 2021, congress introduced several new bills intended to make it easier for business insurance policies to cover pandemic-related losses.
Business income insurance may not seem like the most urgent type of small business insurance. But if your business experiences any unforeseen and uncontrollable stoppages, income coverage can be the difference between your business surviving or going bankrupt.
Employment Practices Liability Insurance
Employment practices liability insurance protects your business against claims of wrongful termination, discrimination, workplace harassment, and wage disputes.
It is illegal for companies to discriminate based on age, race or ethnicity, sex, orientation, or religious affiliation. Employment practices liability insurance can provide coverage for legal fees if a business is sued for any of these types of discrimination or harassment. Discrimination charges can cover hiring and employment practices, workplace conditions, or employee wages.
Even if you don’t believe you will need this type of coverage, it can be beneficial. Employment practices liability coverage protects you if you are sued, even if you are not in the wrong. The cost of legal fees alone can be enough to leave lasting damage to many small businesses. Workplace discrimination is extremely serious in all forms. Even if you do not believe it will happen to you, all business owners should protect themselves against discrimination claims and law suits.
Data Breach Insurance/Cyber Insurance
Cyber data is a regular part of doing business in the modern world. Even if your small business does not actively collect client data, you may still possess sensitive information. Simply managing digital payments from online bank accounts requires access to sensitive cyber data. Cyber insurance provides coverage in the event of a data breach, and this type of insurance helps companies respond to data breaches or hacking attempts that expose sensitive data.
Not every small business will need cyber insurance coverage. You will likely not need it if you do not actively collect and store personally identifying information. But if your small business relies on collecting and storing such information, then cyber insurance is a sound investment. For example, a small business that works in healthcare is likely to collect sensitive medical data from their clients. Keeping that data secure is crucial in order for that business to maintain public trust. Other industries that often need cyber insurance include banking/financing, and education. Cyber insurance can help cover the costs of notifying affected customers and offering credit monitoring services in case of fraud.
Business Owner’s Policy: Best Insurance for Small Business Owners
If all of the above insurance types were too much to keep track of, don’t worry. Many small business owners opt for a Business Owner’s Policy (BOP). This type of insurance bundles all the essential small business insurance types into a single policy. Rather than needing to keep track of several insurance policies for every instance, your BOP covers everything in one neat package.
The most basic type of Business Owner’s Policy covers general liability, professional liability, business income insurance, and workers’ compensation. However, more policies can be added to your BOP to match your business’s coverage needs. For instance, small businesses that use company vehicles, like a landscaping company that provides work trucks to its crew, can often add commercial auto insurance to their policy. Businesses that use and store sensitive information can add cyber insurance. And so on.
Many small business owners choose a custom Business Owner’s Policy to insure their business. These policies give you very good flexibility to control what is covered. It is also easier (and more practical) to have every coverage policy housed in one place rather than going through several different insurance companies for other procedures.
Blueacorn is a lending service provider that helps connect small businesses with the best technological and financial resources. Our mission is to help America’s small businesses have better access to financial management tools. Small business insurance is one of many critical financial aspects of running a small business.