As the owner of a small company, you end up learning about many subjects that are not core to your business. Bookkeeping. Taxes. Inventory control. Property. And business insurance. Making decisions in these areas is critical to your success, but it is time-consuming and takes you away from the part of your work you love.
So, this comprehensive guide covers twelve types of small business insurance. Look at each one to see what applies to your situation, and make sure you are covered. Here’s the list.
- General Liability Insurance
- Business Interruption Insurance
- Workers Compensation Insurance
- Business Personal Property Insurance
- Commercial Property Insurance
- Commercial Auto Insurance
- Professional Liability Insurance (E&O)
- Umbrella Insurance
- Flood Insurance
- Bond Insurance
- Life Insurance
- Packaging a policy with a (BOP) business owner policy
Each type of insurance coverage provides specific benefits for your small business. Scrutinize each one carefully to reveal what combination works best for you and your company in your industry. Too much coverage wastes money, but too little coverage can be a disaster. Don’t leave yourself open to either possibility.
General Liability Insurance
Every business, even home-based businesses, needs general liability insurance. This policy provides damages to pay for property damage or bodily injury to a third party. So, it covers you, your products or services and your employees.
General liability insurance (GL), protects you and your business as broad coverage from a liability claim that alleges:
- Property Damages
- Bodily Injury
- Slander
- Libel
General Liability Business Insurance Coverage
Business general liability insurance pays toward legal costs and medical expenses when an incident leads to a lawsuit to cover costs from these kinds of claims:
- Property damage or bodily injury caused by you, your business, your product or service or your employees
- Harm to someone’s reputation because of slander, malicious prosecution, libel, violation of the right of privacy, wrongful eviction, and more
- Injuries from advertising like copyright infringements
- The medical costs if a customer hurts themselves during a visit to your business
- Damages to a rented property from an explosion, fire, or lightning strike
Estimates suggest that four out of ten American small business owners will experience some sort of general liability claim over the next decade. Claims include unexpected events like burglaries and accidents, because slips and falls by a customer can result in an injury.
General Liability Insurance Costs
The premiums for general liability insurance depend on:
- Industry – Higher-risk companies pay higher premiums. For example, a construction company will pay higher premiums than a consulting company where everyone works in offices.
- Experience – The more experience you have in your field, the lower your rates.
- Location – Big cities, rough neighborhoods and areas with high claim rates pay more.
- Size – The more people, products, and services you insure, the more you pay.
- Condition of Your Building – Newer or recently renovated buildings can lower your rates.
- Claims History – If you or your company have a clean claims history, expect lower premiums.
- Policy Details – Coverage limits and deductibles impact the amount you pay significantly.
Do I Have to Carry General Liability Business Insurance?
Every state has its own insurance requirements, so check with a licensed insurance agent in your state to confirm any mandated coverage. General liability business insurance won’t usually be legally required, but it is still recommended. You want to protect both your personal and business assets, especially if there is a judgment against you. General liability policies also protect you if you damage a rented property.
Business Interruption Insurance
During a disaster, business operations get interrupted. It doesn’t take a global pandemic, either! Your business could suffer losing income if your staff can’t work at the office, your production line shuts down, or your reps can’t make sales calls. Business interruption insurance applies especially to companies that need a physical location.
How Much Business Interruption Insurance Coverage Do You Need?
There is always a dilemma over how much insurance to purchase. Business interruption insurance specifically requires a few calculations.
Projections – Income losses are the amount of money the company loses during a shut down. The most the insurance company pays you is the policy limit. To decide on an adequate limit, consider:
- The expected income over the next year. Business income limits are estimates of future revenues.
- The time required to repair property damages after physical losses. How much time so you need to make the repairs to get the business up and running? This time is called the period of restoration.
These projections are essential in determining the right coverage amount.
The Meaning of Business Income
Start by understanding that business income is when you consider these amounts together:
- Net Income – Net profit/loss before income tax
- Normal Operating Expenses – These continue after the loss, including payroll.
- Rental Income – You can choose to include or exclude rental income. For companies that only generate income from rental properties, it must be included.
Calculate Business Income
Accurately project your 12-month income using a business income worksheet. Use a standard ISO worksheet or ask for one from your insurer.
- The worksheet’s step-by-step process calculates your income exposure.
- First, you determine your business income from the previous twelve-months.
- Then, estimate the income for the next twelve months. Adjust your historical figure to reflect expected changes. So, if you expect sales to go up by 10 percent, increase your projection accordingly.
If the worksheet gets too confusing, your accountant can complete it for you.
Project the Period of Restoration
After completing the 12-month projection, estimate the period of restoration using a worst-case scenario. For example, if you own a warehouse and the building was destroyed by an explosion, fire or tornado, how long do you need to get back to work?
Reconstructing is complex. First, an adjuster evaluates the loss. Then, you get an architect and a contractor. Think through the steps in rebuilding to estimate how long they will take. An estimated period of restoration is often six months, a year, or even longer.
Coinsurance Penalties
A coinsurance clause imposes a penalty if the limits of your policy are less than required. Check the declarations on your policy to see if a coinsurance percentage applies. The percentages range from 50 to 125 percent. This percentage indicates how much insurance you have to carry to avoid paying a penalty.
For example, if you purchase business income insurance for a projected income of $1 million, and your policy shows the coinsurance requirement as 80 percent. To avoid paying a penalty, you should purchase at least $800,000 (80 percent of $1 million). But you decide to only $700,000 to save money.
Then three months later, there is a fire in your warehouse. The damages to the building force you to close your business for a few weeks while you make repairs. The business suffers a $175,000 income loss during the time you close. Your under-insured business income exposure is $100,000.
But your insurer calculates it this way:
Maximum Loss Payment = Actual Loss Amount multiplied by the Limit Purchased, divided by the Limit Required. You receive $175,000 X 700,000 / 800,000 = $153,125. You are on the hook for $21,875. This amount is a coinsurance penalty.
Avoid that penalty just by purchasing the business income coverage required. Alternately, avoid coinsurance by purchasing your business income coverage on a value agreed on with your insurer.
Premium Adjustment Endorsements
If you buy more than the amount required by the insurer’s coinsurance clause, you simply waste money. Premium Adjustment Endorsements solve this problem. This way, you get a refund if the business income limit goes over the amount required in the coinsurance clause. You submit a couple of reports on your business income to the insurer. File one at the beginning, then the second within 120 days of when the policy ends.
The insurer compares the limit purchased to the required limit using the actual values. If the limit purchased is more than the required limit, you get a refund on the excess premium.
Workers Compensation Insurance
Once you hire your first employee, you need to add workers’ compensation (WC) insurance to your business insurance policy. This policy covers medical treatments, disability, and death benefits for employees. If an employee gets injured or dies on the job, you need coverage. Even employees performing low-risk jobs have slip-and-fall injuries or conditions like carpal tunnel syndrome that then result in expensive claims.
WC insurance guarantees wage replacement to those employees injured while working. In exchange, the employee gives up the right to sue the employer over the incident.
As the owner of a small business, it is critical to carry worker’s compensation insurance because of the unique protections. WC protects you and the company from complicated legal issues. State laws vary, but every state requires you to carry workers’ compensation insurance if you employ W2 workers. Non-compliance penalties are exceptionally stiff.
Business Personal Property Insurance
Business personal property (BPP) insurance covers movable items your business owns. Office supplies, computers, furniture, machinery – but not the building. Much like contents insurance for your home, BPP covers the items inside your commercial location.
BPP (Business personal property) is:
- Furniture: tables, chairs, desks, outdoor furniture, fixtures, built-in bookcases
- Office supplies: calculators, pens, staplers
- Furnishings: curtains, rugs, blinds, cabinets,
- Electronics: tablets, smartphones
- Computers: laptops, desktops
- Heavy equipment: excavators, forklifts
- Machines and equipment permanently installed: furnaces, boilers, and air conditioning units, refrigerators, dishwashers, fire extinguishers
Keep track of business personal property and the value to assure your insurance can protect the business assets.
Company-owned vehicles are not business personal property. Carry commercial auto insurance to cover those.
Business personal property protects the company assets in case of:
- Fire
- Vandalism
- Theft
- Smoke damage
- Electronic data, as a special consideration, require fees on top of the regular premiums.
BPP coverage expressly excludes land, plants, water, roads, crops, cash, accounts, trees, and underground pipes or drains. Vehicles, aircraft, and watercraft —unless explicitly named on the policy as insured—are excluded. Also excluded is loss due to wear and tear because the business property gets old. Check your policy to be sure it covers what you own. If the coverage is inadequate, you can usually purchase more coverage.
When you purchase business personal property, it is a tax-deductible expense. So, the cost of insuring it is, too.
Limits on BPP insurance coverage apply individually for each loss. So, payouts are not subject to aggregate limits that cap recoverable totals during the policy year.
Commercial Property Insurance
Property insurance is a must, no matter whether the business leases or owns the space. This coverage protects inventory, equipment, signage, and furniture after a storm, fire, or theft.
But mass-destruction events like earthquakes or floods do not fall under standard property insurance policy coverage. For areas prone to these issues, your insurer prices out a separate policy.
Commercial Auto Insurance
If you have company vehicles, fully insure them to protect your business against liability in case of an accident. Insure against any third-party injury, but also comprehensive insurance covers your company’s vehicle, too. Business auto insurance protects your company vehicles. Protect vehicles carrying employees, equipment, or products. Insure work cars, vans, SUVs, and trucks from collision damage.
When employees drive their own cars, their personal insurance covers them. A major exception is when you pay a fee for them to deliver goods or services. This includes your delivery personnel.
But you need non-owned auto liability for the company’s protection in case an employee has inadequate coverage. Ask to have the non-owned coverage added to your base policy.
Professional Liability Insurance (E&O)
Errors and Omissions Insurance provides defense and damages if you make a mistake. Failure to or improperly rendering professional services is not covered on your general liability policy.
Professional liability insurance (E&O) applies to many professional firms like lawyers, consultants, accountants, notaries, insurance agents, real estate agents, hair salons and tech providers. Those who require professional liability insurance usually know about it, since their professional training outlined the details of the coverage.
This business coverage defends against negligence claims based on harm resulting from mistakes or a failure to perform. Each industry uses a customized policy as each faces different risks.
Umbrella Insurance
Some extra coverage, in addition to insurance policies you carry already, is where umbrella insurance becomes a consideration. This insurance extends an existing insurance policy to create coverage beyond the initial policy.
Umbrella insurance covers various claims. Usually, sold in increments of $1 million, then used only as liability on other policies as they run out.
Flood Insurance
Commercial flood insurance is not usually covered on a commercial property insurance policy. You require a separate policy to protect your business assets from flood damages.
Commercial flood insurance protects your business from the costs of damages from floodwaters. A flood insurance policy protects your business location, the physical contents, and your assets. Commercial flood insurance protection protects your company’s:
- Inventory
- Furniture
- Ceilings
- Floors
- Walls
- Equipment
- Fixtures
If your commercial property insurance does not cover flood damage – and that is typical – add flood insurance to your policy. Even businesses in areas that don’t flood need flood insurance if:
- There are cold, snowy winters followed by warm springs. Melting snow is a top cause of commercial flooding claims.
- There is moderate rainfall in your area. Even moderate rainfall causes flood damage if a drain becomes clogged. The water eventually overflows into your place and causes flood damage.
- You have a sprinkler system in your building, a hot water tank, or another water source that could leak and cause water damage.
Broken dams or levees and new building developments change the flow of water to trigger floods. Flooding happens anytime, anywhere. Commercial flood insurance helps protect you and your business by mitigating the financial losses from a flood.
FEMA and NFIP
Federal Emergency Management Agency (FEMA) manages the federal government flood insurance through the National Flood Insurance Program (NFIP.)
Congress established NFIP in 1968 to protect property owners from the financial losses that floods cause. So, the NFIP offers commercial flood insurance in the communities participating in flood plain management programs reducing potential risks for floods.
The government-mandated waiting period for a new commercial flood insurance policy is 30 days. So, buy your coverage well in advance of any potential flooding event or season headed in your direction.
Bond Insurance
Surety bonds provide their customers with a guarantee of completion for their work. Some contracts, especially when put out to bid, require that the businesses offering the bids and doing the work have proper bonds.
Guaranteed surety bonds help small businesses compete to get contracts for work. Some contracts do require specific surety bonds because they cover particular situations. Surety bonds cover several major categories of work product:
- Bid Bonds – Ensure performance bonding and full payment from contract bidders.
- Payment Bonds – Ensure full payment to all suppliers and subcontractors.
- Performance Bonds – Ensure completion of the contract by the small business.
- Ancillary Bonds – Ensure completion of additional requirements not included in performance or payment, like maintenance.
Eligibility
Your small business must meet bond insurance requirements:
- Small business – Considered a small business using the SBA size standards.
- Small contracts – Limitations placed on the size of the contracts. Usually, federal contract size limits are larger.
- Evaluation – Pass the credit, character, and capacity requirements.
There are over 25,000 types of surety bonds, so various small businesses might need different ones before opening their business.
The difference between a surety bond and other types of business insurance is who it protects. Surety bonds do not protect your business. They protect your customers.
If your customer feels wronged, they make a claim against your company’s surety bond.
License and Permit Bonds
License and Permit Bonds might be necessary before you can get a business license.
Common license and permit bonds:
- Private Investigator Bond
- Mortgage Lender/Broker Bond
- Notary Bond
- Contractor License Bond
- Motor Vehicle Dealer Bond
- Collection Agency Bond
These License and Permit Bonds are legally required. So, if your license needs a surety bond, the licensing agency lets you know.
Fidelity Bonds
To protect your business, you buy insurance. But what kind of insurance protects you against employee theft, fraud or embezzlement? Fidelity Bonds do.
Fidelity Bonds protect your business from financial losses.
You can protect your business from bookkeepers or any employee directly responsible for handling money. Then the coverage protects you if an employee steals or embezzles your money.
These Fidelity Bonds are not legally required, so they are generally voluntary. It is your choice to decide if you want this type of coverage for your business.
Business Service Bonds
Fidelity Bonds protect your company from employees that steal from you. But what kind of coverage provides protection from employees stealing from customers? Business Service Bonds do.
Business Service Bonds protect customers if an employee steals from them while they work.
For example, janitors or cleaning staff enter the private property of client homes and businesses to clean. So, if your cleaning staff employees steals something from your customer’s home or office, the value is covered by your Business Service Bond.
Often Business Service Bonds are called Janitorial Service Bonds because of this rather typical example.
100% voluntary, but relatively inexpensive Business Service Bonds help communicate trust to your customers.
Contract Bonds
Contract Bonds are different from License and Permit Bonds. They cover the specific performance on the contract, so they are more job-specific. Contract bonds cover details like staying on budget, meeting a deadline, paying suppliers, or following bid promises.
Common kinds of Contract Bonds:
- Bid Bond
- Performance Bond
- Payment Bond
Construction contracts commonly require a Contract Bond. If you need one, you receive notification in the initial bid.
Court Bonds
Not common for a small business, court bonds are to deal with a civil court proceeding. The court may require you to purchase a court bond before the trial starts.
Court bonds for small businesses might be:
- Appeal Bonds
- Injunction Bonds
- Cost Bonds
- Garnishment Bonds
Should You Get Surety Bond Insurance Coverage?
Surety bond insurance coverage for small businesses is not a large expense. You don’t pay the whole bond amount in order to get bonded.
For example, for a $10,000 bond, you don’t pay $10,000. You only pay between 1% and 15% of the bond’s face amount. So, a $10,000 bond could only cost $100.
Life Insurance
Simply put, life insurance protects you against dying. If your business has life insurance on your life, the insurance company pays the death benefit of the policy to the company as the beneficiary when you die.
The company pays a (usually tax-deductible) premium in exchange for the death benefit payment. Many company owners favor business life insurance because it works well for their corporate and personal taxes.
Life insurance allows for great peace of mind. Finally, you can know your loved ones will not be financially burdened upon your death.
Packaging a Policy with a (BOP) Business Owner Policy
A business owner policy (BOP) packages up all the essential coverage you, as a business owner needs. Often, a BOP includes property and vehicle insurance, business interruption insurance, liability insurance coverage, and crime insurance.
Above all, you have the choice to alter what is in your BOP, as you assess your company’s specific requirements. Typically, you find you save money by choosing to bundle insurance products in a BOP because the services cost less than the individual policies.
Reassess Your Commercial Insurance Coverage
Just as it is best to reassess your personal financial situation, including your insurance coverage annually, so it is with your business. If you have not looked at your commercial coverage lately, it is time.
Then, develop an annual schedule. Ask your insurance agent to contact you annually. Make a point to contact them at the same time every year.
Don’t wait until your coverage ends. Give yourself the time and space you need to make well-considered decisions about your commercial coverage. This planning process helps you keep your premiums as low as possible, and your coverage suitable to your needs.
Summary
Small business owners face many decisions every day. So, choosing exactly the right insurance could be one of the most critical choices you make. The right insurance coverage means in a disaster, like fire, theft, or vehicle accident, your business continues to function. But without adequate coverage, you risk losing your livelihood, and perhaps even some personal assets.
In conclusion, it takes time to analyze exactly what coverage is right for you. A professional insurance agent takes the time to offer suggestions and outline your options. Then compare the information in this article to what your agent says to make well-informed decisions to protect yourself, your business, and your family.
Most business insurance concepts are similar enough to personal insurance coverage concepts that this was probably not new to you. So, the most significant difference is that commercial insurance protects you from greater risks.
Contact your insurance agent now to assess your current coverage. A dozen types of insurance outlined in this article makes the process seem complicated, but your agent knows what is essential for you and what isn’t. If you do not have an agent available to help visit our website and find an agent near you.
