Small business insurance: Everything you need to know

Who needs small business insurance?

For financial and legal reasons, most small business owners need insurance. Small business insurance policies offer financial protection for your company against common risks – such as fire, theft, bodily injuries and lawsuits –  and some policies may be required by law or your customers. 

But your own insurance needs depend on the type of work you do, the size of your business and your level of risk.

“No business is immune from disaster. Every year, businesses temporarily shut down—or close forever—because of a disaster such as a flood, fire, hurricane or tornado,” says Mark Friedlander, director of corporate communications at the Insurance Information Institute, a trade association. “According to the Federal Emergency Management Agency, 40% of companies do not reopen after a disaster, and another 25% fail within one year after suffering a major loss.”

Types of business insurance

There are many kinds of small business insurance that protect your business from physical and financial harm. Each of these policies insure against different types of risks, so you may need more than one to fully protect your bottom line..

Commercial property insurance

Insures against damage to your business property from fire, smoke, vandalism, wind and hail. It’s often required to qualify for commercial leases and contracts.

Business owner’s policy (BOP)

Combines general liability coverage and commercial property insurance into one policy. It’s typically less expensive than buying these policies separately.

Workers’ compensation insurance

Required by most states for businesses with one or more employees. It may also be required for sole proprietors in riskier professions, such as roofing. It covers the medical bills and lost wages that result from work-related injuries and illnesses.

Professional liability

Professional liability, also known as errors omissions (E&O) insurance, covers customer lawsuits and legal judgments over accusations of unsatisfactory work. In the medical field, this coverage is known as medical malpractice insurance.

Commercial auto insurance

Most states require commercial auto coverage for all business-owned vehicles.

How does small business insurance work?

Small business insurance provides financial protection against risks in exchange for a premium that you pay to your insurance provider. If you face a loss from a covered risk, you’d file a claim with your insurance company. You would pay for the cost of your deductible – the amount you agree to pay out of pocket when you file a claim – then your insurance would kick in to cover the rest of your loss, up to your policy limit.

Most policies have a per-occurrence limit and an aggregate limit. A per-occurrence limit is how much your insurance company will pay for a covered incident. The aggregate limit is how much your insurance will cover during a policy period, which is usually one year.

What are the benefits of small business insurance?

There are multiple benefits to having small business insurance. It offers your business a layer of financial protection in case of a mishap, and it can help you qualify for leases and contracts. Certain policies may also be required by the laws in your state, or to maintain a professional license. Here’s a bit more on what small business insurance can do:

Can provide financial protection

One of the most significant benefits of small business insurance is that it protects the financial security and profitability of your business.

Imagine how expensive it would be if your business property was stolen or damaged. Your business might have to shut down for a while, and you’d have to repair or replace lost equipment or inventories. You might even have to relocate.

An expensive lawsuit could also damage your business. Even if you’ve done nothing wrong, a frivolous lawsuit could result in significant attorney fees and court costs.

Can help qualify for leases, contracts and loans

Commercial landlords typically require commercial property insurance to sign a lease. You might also need certain types of coverage to obtain a business loan or to sign a contract.

Can help meet legal compliance

Most states require workers’ comp insurance for any business with one or more employees, and commercial vehicle insurance for business-owned vehicles. If you have a professional license with your state, you’ll probably need professional liability or errors and omissions coverage.

Failure to comply with the insurance laws in your state could mean fines, jail time and a revocation of any professional licenses you have.

Which insurance companies sell small business insurance?

In addition to the top five property and casualty insurance companies – State Farm, Progressive, Berkshire Hathaway, Allstate and Liberty Mutual – there are many companies that sell small business insurance, including:

• Berxi offers small business insurance, with a focus on dental and medical malpractice coverage.
• The Hartford boasts that it has more than 200 years in the insurance business, with more than 30 years devoted to small businesses.
• Hiscox bills itself as “America’s leading small business insurer.”
• Next Insurance says it offers “tailored business insurance” depending on your profession.
• Thimble offers small business insurance, with more than 100,000 policies sold.

When shopping for small business insurance, you should compare at least three different quotes. That said, you should consider more than price. A company’s financial stability and its customer services are two other factors you should consider. The best small business insurance companies make it easy to get small business insurance quotes online and compare policies

How much does small business insurance cost?

The cost of small business insurance depends on several factors such as your location, the type of work you do, how much business property you have, the number of employees you have and how much equipment or vehicles you own. Any insurance claims you’ve had in the past can also affect your cost of coverage.

According to Insureon.com the average premium cost of some of the more common business insurance policies are:

• General liability: $42 per month, or $500 a year
• Property insurance: $67 per month, or about $800 a year
• Business owner’s policy (BOP): $57 per month, or about $680 a year
• Professional liability/E&O: $61 per month, or about $730 a year
• Commercial auto: $147 per month, or $1,760 a year

How to buy small business insurance

Before you shop for small business insurance, you’ll need to figure out the types of business risks you face and how much financial protection you need. Here are a few things to consider:

Your location

Is your business in an area prone to natural disasters, such as wildfires or hurricanes? Is crime, such as theft or vandalism, a threat to your business?

Foot traffic

Do customers visit your business, either to shop or meet with you? The more people that visit your business, the greater your risk of an injury and lawsuit.

Your profession

Certain businesses naturally face more risks than others. A bar or liquor store faces different risks than a retail shop. Those in the building trades face risks of damaging someone’s property, or people being injured on a job site.

Your bottom line

How long could you survive if your business had to close for a while? How much of a financial cushion do you have against unforeseen expenses, such as property damage or fighting a lawsuit?

Then, when shopping, the U.S. Small Business Administration recommends these four steps:

• Assess your risks. SBA says to consider the accidents, natural disasters, or lawsuits could affect  your business. Among the questions the agency says you should ask: Is your business located in a commercial area that is at risk from seasonal events? If so, commercial property insurance will help protect against loss.
• Find a reputable licensed agent. These professionals can help you find the right policies for your needs. But be sure to work with a  licensed agent who is as interested in your needs as his or her own.
• Shop around. SBA notes that prices and benefits vary significantly so small business owners should compare rates, terms, and offerings from several different agents.
• Reassess your insurance needs every year. Owners strive to grow their businesses, but as a company expands so do its liability.  If you have bought or replaced equipment or expanded operations, the SBA recommends that you contact your insurance agent to discuss how your business has changed and how those changes affect your coverage.

Your friends and business associates could help you find a licensed insurance agent, perhaps one that specializes in your type of business.

Of course, shopping online makes it easy to compare policies from different sources and get free quotes on different amounts of coverage.

Small business insurance requirements

Your own small business insurance requirements depend on the types of risks you face, the laws in your state and any professional or business licenses you have. You might also need certain types of coverage to meet any contractual obligations.

What our expert says

Q: Do all small businesses need insurance?

Mark Friedlander Director of corporate communications at the Insurance Information Institute, a trade association.

"No business is immune from disaster. Every year, businesses temporarily shut down—or close forever—because of a disaster such as a flood, fire, hurricane or tornado."