Find out the different types of business insurance so you can pick the right policy and coverage for your small business.
From the day a small business owner starts a business they are opening themselves to losses. Before starting a website or hiring the first employee, consider having the proper types of business insurance figured out.
Some folks call insurance a ‘grudge purchase’ which can be extremely valuable when losses occur. Business insurance, in particular, can provide the necessary safeguards against losses suffered during the course of regular business activities.
In the event of a compensation claim, there are types of business insurance to protect the business owner and the claimant. Here are some insurance types that a business must have in place as soon as possible.
7 Different Types of Insurance
Wondering why insurance is needed? Here are some common types of insurance and what they protect small businesses from.
1. Professional Liability Insurance
Professional liability insurance (PLI), also called professional indemnity insurance (PII) but more commonly known as errors & omissions (E&O) in the US, is a form of liability insurance which helps protect professional advice- and service-providing individuals and companies from bearing the full cost of defending against a negligence claim made by a client, and damages awarded in such a civil lawsuit.
2. General Liability Insurance
Liability insurance is a part of the general insurance system of risk financing to protect the purchaser from the risks of liabilities imposed by lawsuits and similar claims. It protects the insured in the event he or she is sued for claims that come within the coverage of the insurance policy.
3. Property Insurance
Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, or boiler insurance. Property is insured in two main ways—open perils and named perils.
4. Business Owner’s Policy (BOP)
A business owner’s policy (also business owner’s policy, business owners policy or BOP) is a special type of commercial insurance designed for small and medium-sized businesses. By bundling general liability insurance and property insurance into a single policy, BOPs typically offer a reduced premium, often making them a more cost-effective option than separately purchased policies.
5. Commercial Auto Insurance
Commercial vehicle insurance is a policy of physical damage and liability coverages for amounts, situations, and usage not covered by a personal auto policy.
6. Worker’s Compensation
Workers’ compensation is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee’s right to sue their employer for the tort of negligence.
7. Directors and Officers Insurance
Directors and officers liability Insurance (often called “D&O”) is liability insurance payable to the directors and officers of a company, or to the organization(s) itself, as indemnification (reimbursement) for losses or advancement of defense costs in the event an insured suffers such a loss as a result of a legal action brought for alleged wrongful acts in their capacity as directors and officers.
What Does Business Insurance Cover?
Business insurance typically covers a wide range of options including employers liability insurance, public liability insurance, and professional indemnity insurance, among others.
Running a business is fraught with challenges. Any time a business interacts with the general public, and other stakeholders, it is imperative that protection is offered against litigation, damages, accidents, and theft.
Coverage options typically vary from one business to the next – some businesses require substantial protection, others less so.
Insurance Options for Online Businesses
Many more businesses have turned to online businesses and home-based operations to generate income.
These types of businesses are growing in number, and encompass freelancers, virtual assistants, online stores, consultants, therapists, motivational speakers, and other gig economy jobs.
Home-based businesses are the perfect candidates for business insurance. Here are some examples of how home-based businesses can benefit from business insurance:
- Businesses with physical stock inventories can benefit from stock cover insurance against damage, theft, and fire.
- Professional indemnity insurance is offered to businesses which provide online services as opposed to physical products.
- Public liability insurance should always be taken out if you have customers coming to your premises. As a business professional, you may find yourself dealing with intellectual property and personal client data. If this is the case, professional indemnity insurance is a valuable option.
Sole traders typically don’t need employers’ liability insurance, but there are various other considerations to bear in mind such as tradesman insurance policies.
Is Business Insurance Legally Required?
It varies from one business to the next, and one country to the next. If a business has staff, employers liability insurance is required. Professional indemnity insurance is typically required by regulatory authorities too.
Business owners are often mandated by law to provide some form of business insurance such as employers liability coverage. Various professions are also subject to insurance, such as lawyers, doctors, traders, and service professionals.
Sometimes, there is no legal requirement for business insurance, but this doesn’t negate the importance of having business insurance, or the protection that it offers when you least expect it. It is one of those purchases you make to protect your business from liability, loss, and legal fees.
Business Insurance Costs
Business insurance costs will vary from one client to the next. Everyone’s coverage needs differs, based on a host of factors including risk. As a rule, you can expect a high-risk business to be associated with higher insurance costs and increased insurance coverage.
The insurance premium you pay is dependent upon these factors, the type of coverage you need, and the size of your contracts. Insurance agents will calculate the likelihood that you will be making claims and the amount of those claims. If you are found to be a high-risk client, your premiums will be higher.
It’s important not to shoot too low when choosing coverage protection. High-risk industries often need maximum coverage to protect against accidents, theft, loss, fire, flooding, litigation and so forth.
Business insurance options include:
- public liability insurance
- professional indemnity insurance
- business buildings insurance
- employers liability insurance
- product liability insurance
- stock insurance
- business interruption insurance
- personal accident insurance
- stock insurance
- business legal protection insurance
Each insurance option is designed for specific types of protection. If your business currently employs people, personal accident insurance is essential. Public liability insurance, on the other hand, is equally important when your business deals with members of the public.
When Should You Get Business Insurance?
The good news is that you can get business insurance even before your business has been registered.
That means you can pick a business insurance policy before you start your business. Whether you are a close corporation, S corporation, or a sole trader, you can simply complete the necessary paperwork to apply for a company registration and then buy your business insurance.
Remember though, your business doesn’t have to be registered before you purchase business insurance. However, the insurance company will need to have certain details available, including your projected revenue, the type of business activity you conducting, and your business address.
- Small business insurance coverage offers protection against many types of perils.
- General liability insurance covers accidents and property damage, legal fees, personal injury, and medical fees.
- Professional liability insurance (errors & omissions) is ideal for business owners who are being accused of professional errors.
- Commercial auto insurance is ideal for any damages incurred by your business through your business vehicle.
If ever you’re involved in an accident, commercial auto insurance can help you. Workers compensation insurance is for anyone who works at a company and gets hurt on a job. This insurance pays out medical expenses and lost wages. It also means that employers will be protected against negligence lawsuits.
4 Risks of Operating a Business Without Insurance
Every good business owner knows the way to maximize profits is to minimize expenses. Looking for ways to do more with less is one of the smartest things any entrepreneur can do. Within that though, you must be careful to avoid instances of false economy.
Some tactics can look like they’ll garner savings — and might even do so for a while — then turn out to be more costly. This is one of the primary risks of operating a business without liability insurance. While it might look like you’re conserving your capital, you could be setting yourself up for catastrophic expenditures down the road.
Let’s take a look at some of these risks.
1. Violating the Law
In some instances, you might be legally required to purchase certain types of business insurance. This is particularly true if the conduct of your business could expose the general public to injury or property damage. For instance, independent contractors in some states must carry a license and proof they have a minimum amount of insurance.
If an incident occurs and finds you lacking the proper insurance coverage, you’ll be forced to pay out of your own pocket. One expensive incident like this could drive your business into bankruptcy.
2. Customer Lawsuits
If you visit a client’s workplace or home, have access to their equipment, or represent their business, you’re open to liability claims. In the event of an unfortunate incident that occurs in any of the above scenarios, you’ll be responsible for shouldering the financial burden.
If that should happen to be the loss of a life or a permanent disability, you could well find yourself making payments the injured party for the rest of your days.
You need liability insurance if your business:
- Has a location that is open to the public
- Interacts with third parties on job sites
- Handles client property
- Rents an office or a storefront
- Sells products or offers services to customers
- Advertises or markets its services
- Uses social media and has an internet presence
All of these activities put you at risk for lawsuits arising from allegations of damage or injury to others.
Carrying a General Liability policy from a provider like Verifly will protect you against:
- Bodily injury to third parties
- Medical expenses for third parties
- Personal/advertising injury to third parties
- Property damage to third parties
- Legal expenses associated with these claims
3. Exclusion from Business Opportunities
There are situations in which you’ll need to have proof of General Liability insurance to qualify to bid on a contract. Potential partners and clients want to know they will be indemnified from any damage or injury you, your employees, or a piece of your equipment might cause.
If you cannot show proof of insurance, you’ll lose out on the opportunity in favor of a competitor who can provide a certificate of insurance.
4. Loss of Your Investment, Business, and Personal Property
You could lose your business if you’re found culpable in a lawsuit and lack insurance — ordered to pay thousands or even millions of dollars in damages.
After all, the money will have to come from somewhere.
You could be forced to liquidate your assets to satisfy the judgment and — if the settlement order is for more than you can get from the sale — your personal property could be at risk too.
It’s Not Worth the Risk
Bottom line, the potential risks of operating a business without liability insurance are overwhelming. While avoiding the purchase of a General Liability policy might feel like you’re saving money, you’re betting against fate.
Yes, you might get away with it — anything is possible.
However, the costs of getting caught up in a claim are so much greater than the savings you’ll achieve. Why put in the time, energy, and resources to build your future, only to leave it subject to destruction by an unforeseen incident?
After all, anything is possible.
This brief intro to business insurance provides a basic framework within which your business can protect itself and its stakeholders.
The costs of business insurance depend on multiple factors including the location of your business, the number of people you employ, and your type of industry.
Other factors to consider include your scope of operations, your experience, and your small business budget.
Generally, the longer you have been in business, the lower your insurance premiums.