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The Ultimate Guide to Small Business Insurance

Two women in workplace discussing small business insurance, one woman seated at office desk

Owning a small business comes with many rewards. Business owners are often motivated by a passion for their work. Startup founders, for example, are often driven by a desire for innovation. 

As rewarding as it can be, running a small business also comes with many risks. Every business faces a unique set of potential risks and liabilities. Modern businesses face especially tough challenges such as cyber attacks, as is made clear by a recent report from Embroker, Big Risks for Small Businesses

Big Risks for Small Businesses Report

Person with magnifying glass studying their protections against potential small business risk.

Is the Current Approach to Business Insurance a Match for Today’s Modern Risks?

Spoiler: It’s not.

Download the Report

That’s why business owners need to know about small business insurance. Learning about small business insurance will help protect you against the risks you will face as a business owner, keep you focused on running your company, and set you up for future success. 

This guide will cover the ins and outs of small business insurance: why you need it, what the legal requirements are, what types of insurance you will need, and how much it will cost you. 

What Small Business Insurance Is and Why You Need It

Two people thinking about what is small business insurance

Small business insurance covers a set of insurance policies that are designed to help protect business owners against financial losses and liabilities that result from normal operations. The aim of small business insurance is to protect your personal and business assets from unexpected losses. 

Each small business faces a unique set of risks and challenges depending on their industry, so the exact insurance coverage will be different from business to business. There are, however, several reasons why all small businesses need business insurance:

  • It is a legal requirement. As discussed below, there are federal and state requirements for insurance coverage that businesses have to satisfy. 
  • It protects you. Business insurance protects you and your business from lawsuits in relation to products, services, contracts, or workplace injuries. Given that many small businesses have limited funds, even one lawsuit could be financially devastating. 
  • It protects your workers. For small businesses with few employees or many, having the right insurance coverage is a must to protect the employees and guarantee their loyalty to your company. 
  • It improves your business prospects. Many clients, including different levels of government and large corporations, require insurance coverage from any potential contractors and business partners. Having the right insurance coverage will boost your chances of landing a contract and help you secure more clients. 

Are You Legally Required to Have Business Insurance? 

Small businesses have some legal protection based on the way they are structured, either as a corporation, limited partnership (LP), or limited liability company (LLC). Usually, that protection only goes as far as protecting the business owner’s personal property from lawsuits.

You will need insurance coverage to protect your business from everything else, including from losses due to injuries and accidents. Business insurance fills in that big gap to give you and your business fuller protection.

The first step in choosing a small business insurance policy is to find out what types of insurance your business will be required to have by law. Depending on your business, chances are you will be required to carry certain types of business insurance.

Some states might require other insurance policies, but laws vary by state. For specific information, you should consult the Small Business Association chapter in your state.

Remember that any failure to insure your small business can result in heavy fines or even civil and criminal charges.

What Kind of Insurance Should You Get for Your Small Business?

Two women in workplace researching on computer the different types of small business insurance

Once you have a clear understanding of the legal requirements for insuring your small business, you will have to decide which types of insurance are best suited for your business.

If you already have a business insurance policy in place, it’s important to review that policy to find out what it covers and what is missing in that coverage.

There are several important factors to consider before you decide on which insurance policies to purchase:

  • How big is your business?
  • What is the location of your business?
  • Do you have any employees?
  • How many employees work for your business?
  • Do you sell any products to your customers?
  • Do you provide any services to your customers or clients?
  • Does your business face any cybersecurity threats?
  • Does your business own or lease any commercial space, factory, or warehouse?
  • Do you have any work vehicles?
  • What kind of materials do you and your employees handle at work?

The answers to these questions will be different based on each business. Insuring your small business is all about assessing and managing the risks you face. As the business owner, you will have to consider what types of accidents, disasters, and lawsuits could pose a threat to your business, and take the necessary steps to purchase the insurance coverage that will protect you from those threats.

Types of Small Business Insurance

The types of insurance policies that a small business needs will depend on the nature of the business and its activities. Certain policies are required by most small businesses.

Small businesses often carry workers compensation insurance and general liability insurance, and will also need property insurance, unemployment insurance, and state disability insurance. Cyber liability insurance is also necessary not just for startups and tech companies, but increasingly for most other small businesses as well.

This section provides an overview of these as well as the other significant types of insurance that small businesses will need.

General Liability Insurance 

General liability insurance protects the business and its assets from lawsuits by third parties (someone other than the owner or employees) involving property damage or physical injuries.

General liability insurance is also known as business liability insurance or commercial liability insurance.

This insurance policy covers claims that arise from the activities of the small business, including: 

  • Bodily injury: helps cover legal costs and medical expenses for customer/non-employee injured
  • Property damage: covers costs of damage to physical property of a third party caused by your business’ actions
  • Advertising injury (false advertising): costs due to claims of damage arising from your advertising
  • Reputational damage (libel and/or slander): costs related to libel or slander claims against your business
  • Product liability: costs associated with customer claims of injury due to your product

Workers Compensation Insurance

Workers compensation insurance is an insurance program required by every state except for Texas. It applies to all businesses with employees. Workers compensation provides employees with a range of benefits, including:

  • Medical expenses
  • Disability, both temporary and permanent
  • Job displacement
  • Legal fees owing to work-related injuries or illness
  • Death benefits & funeral costs

Workers compensation insurance is an effective way for small businesses to protect their employees.

Cyber Liability Insurance

Cyber liability insurance is designed to protect small businesses from electronic threats, including ransomware attacks, data breaches, and hacking. Cyber liability policies often include both first-party and third-party coverages.

First-party coverage includes:

  • Data restoration/recovery costs
  • Income loss from an attack
  • Extra expenses to restore operations 
  • Notification costs to notify those affected by security breaches
  • Extortion expenses, to pay a ransom or legal expenses
  • Crisis management, including forensics and attorney costs 

Third-party coverage includes:

  • Network security and privacy, for lawsuits against the business due to failure to provide adequate security or protect privacy
  • Electronic media liability for lawsuits against the business relating to slander, libel, defamation, copyright infringement, and privacy violations

Although cyber liability insurance coverage is relatively recent, it is an important type of small business insurance policy due to the increase in digital and cyber threats.

Cyber liability insurance is especially important for small businesses that manage customer personal data and other sensitive information.

Professional Liability Insurance (Errors & Omissions Insurance)

Professional liability insurance, also known as errors & omissions (E&O) insurance, can protect a small business from financial losses due to lawsuits and claims filed by customers and clients. The policy protects businesses and individuals from claims that allege negligence, wrong advice, misrepresentation, errors, or omissions.

Professional liability insurance is especially useful for small businesses whose services include giving advice or recommendations, creating designs, or providing various kinds of care. The policy can offer a small business protection from clients, customers, or patients who might claim that the small business failed to provide the expected service.

There are two coverage options available when choosing a professional liability insurance policy:

  • Claims made: policy must be in effect both during the time the alleged action occurred and when the lawsuit was filed
  • Occurrence: policy must be in effect during the time the action occurred, but the business will be protected even if it is sued while the business is not covered by the policy

Professional liability insurance includes legal professional liability insurance.

Property Insurance

Property insurance offers coverage for the property and physical items used by the small business, including the company’s inventory and technology. Depending on the plan, the policy provides coverage in the event of physical disasters, fires, vandalism, or theft.

Property insurance is an important type of small business insurance for businesses that have a physical location because it can protect the inventory and other valuable physical items that are essential for the way the business operates. Property insurance coverage generally includes restoration and repair costs.

Directors and Officers (D&O) Liability Insurance

Directors and officers liability insurance (D&O) is designed to help protect the leadership of a small business. The policy protects the personal assets of directors and officers of a business in the event that they are sued by any party regarding their management or leadership of the organization.

Directors and officers liability insurance is useful for small businesses that wish to provide greater protection for their leadership. The policy is especially important for tech startups because of the risks that tech CEOs and company leaders take in developing innovative technologies or making potentially risky investments to grow the business.

Commercial Auto Insurance

Commercial auto insurance is an important policy for small businesses that use work vehicles. As the name suggests, commercial auto insurance helps protect the business from liabilities and physical damages related to the vehicles used by the company. 

The policy is especially relevant for small businesses whose operations include making deliveries, transporting equipment, or driving clients. Small businesses that own or use vehicles are often required by law to have the state-mandated minimum level of auto insurance. 

There are two kinds of commercial auto insurance policies: the traditional commercial auto insurance policy provides coverage for vehicles owned and used by a small business, while the hired and non-owned auto insurance policy is for businesses whose employees use their personal vehicles or rent vehicles not owned by the business. 

Employment Practices Liability Insurance (EPLI)

Employment practices liability insurance (EPLI) is a policy that pays damages when an employer is legally liable for violating an employee’s civil or other legal rights. 

An EPLI policy can provide coverage for employee lawsuit claims that include:

  • Harassment
  • Discrimination 
  • Wrongful termination
  • Breach of contract 

Employment practices liability insurance can cover legal costs as well as the costs of litigation and settlements. 

Small Business Health Insurance 

Small business health insurance is a policy that can provide group health coverage as well as medical benefits for employees of a small business. 

Like many other small business insurance policies, health insurance may not be required and might be optional depending on the industry. However, it can make a great deal of sense for a small business to have health insurance in place to protect against unexpected accidents, injuries, or other losses. 

Having a small business health insurance policy can also help protect small business owners from potential risks and liabilities, allowing them to stay focused on keeping their business running. 

Disability Insurance

Disability insurance covers a certain portion of an employee’s or business owner’s lost income if the employee or owner is unable to work for a given period of time. 

As with small business health insurance, this policy can be essential for business owners who are responsible for the day-to-day activities of their business. If the business can’t keep going without you being there, it’s best to have the right insurance coverage in place to protect your business in case you might need to take a leave of absence due to an injury or for other health reasons. 

Unemployment Insurance

Unemployment insurance is required by federal law. The requirement applies to employers who pay more than $1,500 in wages during a quarter or who have at least one employee for at least 20 weeks per year.

Unemployment insurance covers some portion of wages lost by employees who lose their jobs due to particular circumstances, such as workers who are laid off by their respective employers.

Product Liability Insurance

Product liability insurance is a policy that can provide protection for small businesses that make goods from claims involving physical, bodily injury, or property damage.

This type of insurance coverage is particularly relevant to small businesses that focus on designing or manufacturing goods.

Commercial Umbrella Insurance

Commercial umbrella insurance is a type of policy that provides coverage beyond other liability coverages. This policy is for incidents and situations that require a small business to look for coverage in addition to other insurance policies. 

In cases where a business is faced with exceptionally high losses, a commercial umbrella insurance policy might be needed if the losses go beyond the limits of the other policies already taken out by the business. 

Should You Buy a Business Owners Policy (BOP)?

Woman presenting a security protection shield as an example of BOP coverage for small business insurance

One option available to small businesses is a package policy. An insurance carrier may offer a package policy that combines several different coverages and policies into one single contract.

The benefit of a package policy for small businesses is that it offers a wide variety of coverages and policies at a lower price than would be possible if those coverages were purchased separately.

The most common type of package policy is the Business Owners Policy (BOP). A business owners policy is a type of insurance package that combines coverage for the property and liability insurance risks that are most common, along with other coverage areas. It’s a policy package specifically created with small businesses in mind.

Embroker’s Business Owners Policy, for example, includes market-leading commercial property, general liability, and business interruption insurance.

The Costs of Small Business Insurance

Faced with all these coverage choices, you are no doubt wondering how much it will cost for small business insurance. 

The cost of a small business insurance package will depend on the type of coverage that is included. There are many other factors involved. As a general rule, small businesses that are in industries considered lower-risk will be paying less for insurance than businesses in riskier industries, because businesses in lower-risk industries are less likely to experience losses.

Here is an overview of some key factors that determine costs for small business insurance:

  • Location
  • Age of business (how many years in business)
  • Legal structure of business (sole proprietorship, LP, LLC, or corporation) 
  • Products, goods, or services 
  • Assets (vehicles, buildings, inventory, equipment)
  • Number of employees
  • Industry (lower or higher risk)
  • Claims history 

Some small businesses, especially startups, may be faced with high costs that have nothing to do with how their business is run but more with the risk profile of their industry. Tech startups, for example, can face high insurance costs because of the perceived risk-taking, which is necessary for innovation. For such small businesses, Embroker has proven to be a reliable insurance partner offering the right kind of insurance at a fair price. 

To find out how much business insurance will end up costing your startup, check out Embroker’s Startup Package Calculator.

Insuring Your Small Business for Future Growth

Man with crossed arms standing next to trophy with rocket launching on the front to symbolize startup growth with small business insurance

Many small business owners, faced with the costs of running their business and pricey insurance options, decide to go uninsured except when it’s absolutely mandatory.

Being uninsured, however, carries great risks that can end up costing you more in the end. For many small businesses, a single lawsuit or accident can be damaging enough to risk the future of the entire business. It might even lead to bankruptcy.

Keep in mind that as your business grows, your business insurance needs will change. Working with a trusted insurer will help you navigate the different requirements your business will need at every stage of the growth process.

Protecting your business with the right kind of small business insurance coverage at every step is necessary for the continued success of your business, and will ensure that you can plan for the future.

To learn more about the best coverage for your business, check out Embroker’s digital insurance platform.

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