Small Business Insurance Types

If you own a small business, you will want to invest in business insurance. This type of insurance protects your business from losses, many of which occur during everyday business situations. For example, if one of your employees trips and falls while on the job, your insurance policy would help cover medical expenses.

It will also protect you and your business if the employee decides to sue for liability for sustained injuries. Small business insurance will cover you and your business for property damage, bodily injury, personal injury (such as defamation or libel), and general liability (such as workers’ comp, professional liability, and data breach). 

Having the right type and amount of insurance can protect your business and livelihood if the unexpected occurs. Depending on the state in which you reside, the type of business, and the number of employees you have, the law may require you to have at least certain types of business insurance, such as workers’ compensation, commercial auto insurance, or liquor liability insurance.

If you’re not sure of the laws that apply to you, what type of business insurance you should buy, or the amount of coverage you need, you can speak with a licensed agent to help guide you. Keep reading to learn more about some of the different insurance options you may want to consider for your small business. 

Commercial Property Insurance

One of the essential types of small business insurance is “commercial property insurance.” This type of policy protects the property where you run your business (owned or rented). In addition, the business’s physical space also protects equipment, tools, inventory, furnishings, and other personal property. Consider the financial hardship your business would endure if a fire or lightning damaged your computer systems or someone robbed or vandalized your building. Commercial property insurance can help you feel secure that your assets are protected in these unforeseen circumstances.  

You might think that this type of insurance policy only applies to business owners who run their business out of a separate commercial building. Still, it is also critical for those who run a business out of their house. Most homeowner policies do not provide business-related coverage, so adding a commercial property coverage policy will give the amount of extra protection needed. 

Business Organization Interruption Insurance

When you first start your small business, it’s hard to think of a circumstance when you may need to shut it down temporarily due to an unforeseen event. However, these circumstances do happen regularly, and having a “Business Interruption Insurance” policy can protect your business from loss of income during these times. For example, suppose a fire or natural disaster severely damages your business. In that case, the interruption insurance will cover your operating expenses, payroll, taxes, loan payments, and even a move to a temporary location.

This coverage is different from the “Commercial Property” coverage, which will only reimburse you for the physical damages. The insurance company will determine the amount paid out during these events based on the business’s past financial records. It will cover the expenses until the property is repaired and returned to the condition it was in before the disaster. 

Note, however, that although many businesses temporarily shut down due to the recent pandemic, most Business Interruption Insurance policies will not reimburse the policyholder for events where the business must shut down due to a pandemic or similar occurrence.

Business Liability Insurance

As a business owner, you are legally responsible for things that happen on your business property or that are associated with your business. For example, suppose you own a store and a customer slips and falls on a hazard from the floor. In that case, your business could be held responsible for the medical bills and other expenses associated with the incident. (including things like lost income or emotional distress).

Even one such incident of this type could financially devastate a small business, making having a policy critical for any small business owner. Business Liability Insurance will also cover you if someone’s personal property is damaged at your business and other instances when an individual may sue you for advertising, slander (or damage to someone’s reputation), or copyright infringement.   

Generally, Business Liability insurance covers three main categories—general liability, professional liability, and product liability. The cost that a business owner can expect to pay for coverage depends on the type of business they own and the location of the business. For example, a business located in a high-flood area can expect to pay a higher premium than one in an area that does not experience frequent flooding. 

Commercial Automobile Insurance

If your business operates any company-owned vehicles for business purposes, you will need a “Commercial Auto Insurance” policy. Even if you do not own an extensive fleet of vehicles, you need a separate policy for any vehicles used to conduct business on your behalf. Your personal automobile insurance policy will not cover these types of claims. Note that some states will require this type of coverage if your business operates commercial vehicles. However, even if your state does not require it by law, you should strongly consider purchasing a “Commercial Auto Insurance” policy if your business:

  • Owns, leases, or rents vehicles
  • Has employees who drive personal vehicles for business purposes  
  • Has employees that use company vehicles 

A “Commercial Automobile Insurance” policy can protect against numerous events such as accidents that injure people, damage vehicles, or other property types (i.e., a mailbox or fence). 

Most commercial insurance policies include bodily injury liability coverage, property damage liability coverage, and collision coverage. However, your policy can also include other options such as comprehensive coverage, medical payments coverage, uninsured/underinsured motorist coverage, rental car coverage, personal injury protection (PIP), and hired and non-owned auto insurance coverage. 

Business Owners Policy (BOP) Insurance

This insurance policy provides coverage by bundling commercial property and commercial liability insurance. It provides comprehensive protection for various significant liability and property risks and simplifies coverage needs. Your BOP policy will also include all items covered under the individual “Commercial Property” and “Business Liability” policies. 

In addition, most insurance companies allow small businesses to customize their BOP policy further to add more specific things they require, such as data breach insurance and other specialized policies. Your insurance agent will help you determine any other specialized coverage you need to add. 

Every small business owner should consider this comprehensive coverage to protect them against anything unexpected that could cause financial hardship. However, a BOP is a must for anyone who rents or owns a workspace or has clients with contracts that require a general liability insurance policy. It is also essential for business owners that have a possibility of getting sued or have costly assets that could get stolen or damaged.  

Data Breach & Cyber Liability Insurance

These days, many businesses rely on technology for their day-to-day operations and hold customer records and information. A “Data Breach & Cyber Liability” insurance policy provides you with protection against things such as data breaches and hacking. 

In most cases, small business owners will have enough protection with a “Data Breach” policy. However, larger businesses will require “Cyber Liability” insurance as it offers more protection against preparing for and responding to more extensive cyberattacks. 

Both types of coverage protect you and your business in certain events, such as if your business computers expose sensitive and personal information because of a virus or hackers, you need to protect your business’s reputation after a breach, or customers sue you after exposing personal and private information through a breach. 

Your policy immediately after any breach, and the insurance company will notify any potential customers whose data was exposed. They will also hire a public relations firm to repair your reputation and pay for credit monitoring services for the customers who were victims of the data breach. 

You can customize some policies to include additional types of protection such as business income and extra expense coverage, prior acts coverage, and extortion coverage. The cost of this type of policy often depends on how large your customer base is, the types of information you store (and how sensitive it is), and your claims history and business revenue.

Errors and Omissions (E&O) Insurance

With any business that offers professional services, there is always the chance for an error or omission, even a small one, to prove quite costly. If someone sues your business because of such an error, this policy can offer you protection and legal representation. 

Any business that provides professional services to customers should look into carrying E&O insurance. In particular, the following groups have a high possibility of being sued because of mistakes or misrepresentation: 

  • Accountants
  • Educators
  • Barbershops/Hair Salons
  • Financial Advisors/Tax Preparers  
  • Advertising/Marketing Firms
  • Realtors 
  • Website Developers
  • Pet Groomers/Veterinarians 
  • Travel Agents 

Any claim that a customer brings against your business can be enough to devastate you financially in terms of court fees, settlement claims, lawyer fees, etc. Even if the customer eventually drops their claim, these fees will accumulate quickly. In addition to covering common errors and omissions, other common claims that this type of insurance will help with include negligence, misrepresentation, violation of good faith, and inaccurate advice.   

Commercial Umbrella Insurance

Sometimes you want the peace of mind of having an extra layer of financial protection against costs associated with business losses or lawsuits. These instances are when an umbrella insurance policy proves helpful. A “Commercial Umbrella” insurance policy pays for the costs that exceed the liability limits set by your other business insurance policies. These costs can include medical bills, property damage, legal costs, and judgments and settlements.

For example, suppose someone sues your business for defamation, and you need to pay out a $1,000,000 settlement. However, your liability policy only covers up to $500,000. In this case, the umbrella policy will cover the remaining $500,000. Without this policy, that extra cost would have to come out of your pocket and could cause financial ruin for your small business. Note that commercial umbrella policies have specific limits, ranging from $1 million to $15 million. 

It is also important to be aware that commercial umbrella insurance does not extend coverage for all types of business insurance. For example, commercial property insurance policies are not applicable for this type of extended coverage. So if a fire severely damages your business and the costs exceed the limits of your commercial property insurance policy, you will have to pay the remaining costs out-of-pocket. 

Although any small business owner may find that a commercial umbrella policy is well-suited for their needs, certain businesses should be more inclined to purchase this extended type of coverage. These businesses frequently interact with customers, have the public inside the business during open hours (i.e., a store or restaurant), or work on someone else’s property (such as a painter or contractor). 

Workers’ Compensation Insurance

As a small business owner, you may have to purchase a certain amount of workers’ compensation insurance because many states require it by law. You should always check the rules for the state where your business is located and make sure that you meet the requirements. Although they may be similar, the rules do vary somewhat by state, and some states exclude certain types of businesses from legally having to purchase them.

This type of insurance benefits your employees if they are injured or experience illness (i.e., reaction to chemicals used for the job) due to a work-related accident. No type of business is exempt from these accidents and mishaps on the job. 

Your business will face penalties if you do not have workers’ compensation insurance that meets minimum standards. Some of the costs that this type of insurance covers includes medical expenses, rehabilitation, missed wages, and death benefits. The premium that you pay for coverage will also vary by state, as it is calculated by a risk assessment based on the specific economy of that state and the risks it presents.

In addition, the state also determines through which channel you must purchase the required insurance, so you may not always have the option to secure it through a private company of your choosing. For example, some states require that you purchase it through state-run agencies or the state itself.  

Product Liability Insurance

If your business makes, sells, or distributes any consumer product, you will want to look into purchasing product liability insurance. The primary protection that this type of coverage offers is that it helps cover the costs associated with claims that someone files against your business and the medical costs of the person who suffered an injury from the use of your product. According to the law, your company is liable for any types of products that you make, distribute, or sell. If a product is faulty and causes injury or damage, your company could be responsible. 

In addition to manufacturers, retailers, suppliers, and distributors, certain tradespeople will also want to secure this coverage. These people include contractors, construction professionals, and other installers, as they need protection for any injury or property damage that occurs after they have already completed their work. For example, suppose a construction company improperly installs the sub-floor in a house, and it later collapses and injures someone. In that case, this policy will help pay for the legal costs associated with the inevitable lawsuit. 

Keep in mind that this type of insurance does not cover everything product-related. There are usually exclusions to the policy that include product recalls, improper quality control standards for manufacturing, failure to report a new manufacturing method for a product, and products that contain certain materials or ingredients. 

Inland Marine Insurance

Inland Marine insurance protects against gaps in your business property insurance. These gaps usually include coverage for your business property when not physically at your primary business location. In other words, your regular commercial property insurance will only cover your property when it’s at your primary business location. If your property is being transported or housed somewhere beyond the distance of your property, it will not cover any associated losses. That’s where Inland Marine insurance proves helpful. 

In general, you can expect that this type of insurance will protect your property in the following types of situations: 

  • It is stored in a moving vehicle (i.e., a cargo van or food truck)
  • It is moving between locations overland (i.e., construction equipment) 
  • You are keeping it at an off-site warehouse or location. 
  • It is part of the infrastructure in an area(such as bridges or communication towers) 
  • It is a high-value piece of property temporarily located at your business (i.e., you store someone’s valuable artwork at your auction business).  

Because the costs associated with losses from these situations can be extremely high, having a good Inland Marine policy will ensure that your business is not interrupted in unforeseen circumstances. One example would be a truck crash that results in the loss of an expensive bulldozer or a robbery that damages a piece of valuable artwork. 

Directors & Officers (D&O) Liability Insurance

Suppose you serve as a Director or Officer of a business. In that case, you have visibility and responsibility for the business that may place you in the path of certain types of lawsuits from employees, customers, and other individuals. This type of insurance will protect your assets and cover the legal fees (including defense fees) and other types of financial losses the organization may incur due to these lawsuits.

The policies can also extend to defense costs from criminal and regulatory investigations that may include the Directors and Officers of a business. Note that most policies exclude coverage for fraud and intentional criminal offenses. 

This type of insurance does not only apply to Directors and Officers of for-profit businesses but can also cover those individuals at non-profit organizations. It gives them security, knowing that they will not be held personally liable for claims arising from their decisions or actions within their regular scope of duties. It acknowledges that even these employees can make mistakes, and those mistakes may not fall under the scope of intended “wrongful acts.” 

Once a Director or Officer receives the notification of a lawsuit or claim against them, they contact the legal department and inform them of the situation. The legal department handles it from there and informs the insurance company of the details of the claim. The insurance company will pay for the associated legal defense costs if the claim is covered.

If the company or individual loses the court case, the insurance company will not only pay the legal defense costs but will also pay for the loss. As you can see, this process greatly protects the Directors and Officers of a business from significant personal financial loss associated with claims made against them. 

Companies can purchase three types of D&O agreements:

  • Side A protects the personal assets of the individual directors and officers for claims in which the company cannot legally or financially fund indemnification. 
  • Side B reimburses the company to the extent that it grants indemnification and provides the payment of legal fees on behalf of the directors and officers. 
  • Side C covers the company for security claims only. 

Most publicly listed companies purchase ABC policies for the maximum coverage, whereas private and non-profit companies may only need to purchase AB policies. Your insurance agent can determine which policy would best suit your business based on its size, industry, and other risk factors. 

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