Small Business Insurance


Unless you’re an employer, business insurance is usually  legally required.  Operating without insurance is very risky given the tendency of people to file lawsuits at the drop of a hat.  Small businesses represent a significant investment of time and money, and your assets need protection.  Accidents, injuries, and natural disasters can strike at any time.

If you’re incorporated or operating as a limited liability company, your personal assets are not at risk for business liabilities.  Liability insurance is highly advised to protect your business from potential losses.  If you financed your company with a loan, the bank may require various forms of insurance to protect its investment.


State Requirements

If you have employees, most states mandate that you have unemployment, workers’ compensation, and state disability insurance.  Beyond that, insurance may be required if you engage in certain activities as part of your business.  Any vehicles that you use for business purposes would likely need commercial auto insurance coverage.

Home-based Business

Your homeowners’ policy may not cover risks tied directly to your business.  While the structure you work in is covered, your policy may not cover business equipment loss.  You may be able to add special riders to your policy to cover property damage.  An additional policy will be needed for professional and general liability risks.

Professional Liability

If you provide a service to consumers, you should consider protection against errors, omissions, negligence, and malpractice.  States generally require this coverage for attorneys, physicians, and other professionals as a condition for maintaining their license to practice.  Even if you aren’t a licensed professional, it’s a good idea to carry this coverage.  As an example, if you’re a home-based bookkeeper for a small company, you want protection should you make a mistake and misreport profits and losses.

General Liability

This is a form of catch-all coverage that protects your business against accidents and injuries to both property and individuals.  These policies pay for medical expenses for bodily injury, lawsuit expenses, and settlement bonds.  They also cover negligence claims and damage to reputations caused by libel and slander.

Commercial Property

What constitutes property is broadly defined, and normally includes buildings, office equipment, cost of business interruption, money, and company documents.  The insurance can cover loss and damage from a wide variety of possible risks including vandalism, theft, civil disobedience, hail, wind, fire, and smoke.  There are two basic types of property insurance:
  1. All-risk which covers a broad spectrum of perils except those specifically excluded in the policy 
  2. Peril-specific which covers only those perils included in the policy
For the average small business, an all-risk policy makes the most sense.  If you’re in a high crime area or your geographic location is susceptible to perils such as flooding or earthquakes, then consider a policy that addresses those specific risks.

Product Liability

Product liability laws are designed to protect consumers from possible defects that might cause physical injury.  If you sell products, you need protection from the financial loss arising from product liability lawsuits.  This includes any business involved in the manufacturing, distribution, wholesaling, or retailing of products since any company in the production chain could be sued.

The amount of coverage is largely dependent on the nature of the product and its potential risk to the average consumer.  Selling clothing is obviously much safer than selling chainsaws.

Buying Insurance

The type and amount of insurance you buy is a very important long-term decision.  A catastrophic loss could wipe out your company if you don’t have appropriate coverage.  Here are some things to consider when selecting your policy.

  • Find a licensed agent who has an excellent reputation and understands your specific business.  When commercial brokers sell policies, they receive commissions from the insurance companies they represent.  So it’s critical that you find a specialist who is looking out for your interests.  Check with your state license bureau to verify credentials and work history.
  • Take time to review multiple options offered by at least three different companies.  The National Federation of Independent Businesses is a good information resource to help you zero in on the right coverages for your business.
  • Make sure you fully understand your risks and ability to assume some risk.  Premiums will be based on the underwriter’s risk assessment, and those premiums can vary widely due to a number of factors: Type of business, policy value, building type, location, and proximity to a fire station and law enforcement.  You can influence the premium by assuming a higher deductible and optimizing the other factors driving the premium rates.
  • You might get a better deal and simplify the process by purchasing a Business Owner’s Policy (BOP).  This combines a variety of policies into a standard package that typically includes liability, property, business interruption, vehicles, and other common risks.  A BOP may lower your premium, but make sure it provides you with the comprehensive coverage you need for your business.
  • Review your policy every year and make adjustments as needed, especially if your business has expanded.

Summary

There are business groups such as the Handcrafted Soapmakers Guild that provide insurance as a benefit of membership.  If you’re a member of an organization like this, check to see if they offer an insurance package that’s tailored to your craft.  These groups have buying power that allows them to negotiate policy terms and premiums that are more affordable to small business owners.

Choosing the right insurance is a very important decision.  All it takes is one disaster to completely wipe out everything you’ve worked for.  Do it right the first time and you’ll save yourself time and money, along with providing some well-earned peace of mind.


Geoffrey Michael is a freelance writer specializing in business, marketing, personal finance, law, science, aviation, sports, entertainment, travel, and political analysis.  He graduated from the United States Air Force Academy and is also licensed to practice law in California and New Hampshire.  Geoffrey wrote this feature article exclusively for Debbie May.com (www.DebbieMay.com), an organization dedicated to helping small businesses succeed.