After you’ve formed your small business, a critical next step is to determine the extent of your liabilities. As part of this process, you’ll want to perform a risk analysis to decide what types of small business insurance you need.
While structuring your business as a LLC or corporation protects your personal assets from business-related lawsuits, the more assets your company uses, the greater its own liabilities will be. Insurance can help protect your business’ assets, making it a must-have for any new business owner. Drawing on my years of experience working with small business owners, I’ve put together a guide to the different types of small business liability insurance.
Determine the Risks To Your Small Business
An insurance policy is a tool designed to pool risk. Your small business (and other companies in similar situations) pay premiums to an insurance company. By accepting your payments, the insurance company also accepts the risk for whatever catastrophic event they are insuring against.
For example, most businesses will not be robbed, so the insurance provider still comes out ahead even if a few of their many clients do get robbed. However, if your small business is robbed and uninsured, the losses could quickly ruin the company.
To avoid the worst-case scenario, assess your small business’ risks. The U.S. Small Business Administration and the National Federation of Independent Businesses provide tools for determining the extent of your small business’ potential exposure.
In general, a few questions you should ask are:
- Does my small business have employees?
- Does my small business own real property?
- Does my small business have a store-front or offer in-person interaction with clients?
- Does my small business have vehicles?
- Does my small business have inventory?
- How does my small business generate income?
- Does my small business store personal information on its customers or employees?
The answer to those questions will provide a roadmap for selecting the insurance products your business needs. For example, if your business never uses cars or trucks, you will not need commercial vehicle insurance.
Insurance Required by the Government
A first-step as a small business owner is ensuring compliance with both federal and state laws. Businesses that have employees are generally required to maintain workers’ compensation, unemployment, and disability insurance. State laws vary, and may require small businesses to carry additional insurance. Be sure to review your state’s insurance requirements to ensure your small business has all necessary insurance.
Workers’ Compensation Insurance
A small business with employees, whether full or part-time, needs workers’ compensation insurance. Workers’ compensation covers any liabilities from injuries suffered on the job and provides supplemental income or disability payments to the injured employee. Generally, it also protects your business from any lawsuits stemming from the injury. Make sure you pay attention to your state’s laws governing employees versus independent contractors to avoid large potential liabilities.
Complying with your state’s unemployment insurance system is mandatory for companies with employees. Usually, this insurance premium is paid directly to the state through payroll taxes and will cover eligible employees after they depart your company.
If an employee needs to take federal or state-mandated leave for non-employment related illnesses or injuries, disability insurance will help your company cover the required wage supplements.
Choose Insurance Products Tailored To Your Business
After obtaining the minimum lines of insurance necessary to keep your business legally compliant, you should tailor your insurance program to the risks your business presents. I recommend considering the following insurance products depending on your type of business:
General Liability Insurance
Regardless of the size or type of your business, it is worth researching general liability insurance. This basic line of insurance will cover your business if it is accused of causing bodily injury or property damage. A basic policy will generally cover you, your employees, and your products or services.
The amount of general liability insurance you will need to carry will depend on the particulars of your business. Operating a store-front creates the risk of slip and fall accidents for your customers. Running a bounce house rental business opens the doors to physical injury through play. Providing information technology services exposes your business to private information and trade secrets. All industries are different and all businesses within each industry are different. As such your general liability insurance policy needs to be tailored to the risks your business faces. Without general liability insurance, your business would have to cover the costs of lawsuits and other risks it faces when the sky falls on your business.
Commercial Property Insurance
Even if your small business does not own real property, commercial property insurance can help protect business equipment such as computers, servers, and office furniture. Commercial property insurance will also cover loss of inventory. These policies are designed to kick in after a fire or natural disaster or to cover such things as vandalism, theft, or civil disobedience.
Commercial Auto Insurance
If your business uses vehicles for any part of its operations, many states require that you maintain adequate commercial vehicle coverage. This is true even if you use your personal vehicle for work and already have auto insurance for the personal use of that vehicle. These policies can be customized based on whether you own, lease, or rent vehicles, and the extent to which your employees utilize cars and trucks. Even if your business only requires employees to drive their own personal vehicles on business tasks from time to time, commercial vehicle insurance will protect the company from any accidents on a work-related trip.
Also known as data breach insurance, small business cyber insurance protects your company from financial loss related to a hack of your servers or other data compromise. Especially if your business has a robust website that tracks its visitors’ data, cyber insurance should be in place to cover certain costs. Your business will need to contact your affected clients, offer them credit-monitoring services or other remedies, and create a PR strategy to address the potential fallout after a breach; all of which are extremely expensive endeavors. Cyber insurance helps cover those costs.
Product Liability Insurance
Any business that sells a product, whether at wholesale or retail, should investigate product liability insurance. If a defect leads to harm or injuries, product liability insurance is intended to cover the business’ exposure. A policy may also cover the costs related to a product recall.
Professional Liability Insurance
Similar to product liability insurance, if your small business offers professional services, this insurance will cover you against malpractice suits or other losses stemming from error or negligence.
Business Interruption Insurance
Business interruption insurance, also known as business income insurance, can protect from losses stemming from temporary shut-downs and keep your small business afloat after a fire or robbery. For example, a roofing company with business income insurance can recoup lost income from canceled installations after a fire destroyed its warehouse.
Consider a Business Owner’s Policy
Many small businesses decide to go with a package policy that covers all of their insurance needs together. A business owner’s policy (BOP) provides the convenience of only needing to pay one bill and deal with one insurance company. Generally, a BOP will also offer cost savings over taking out multiple lines of insurance individually.
While an insurance agent will be best positioned to explain the benefits of a BOP, a standard BOP will protect a small business owner from:
- Property damage
- Liability claims
- Lost income
Most BOPs provide initial protection that can then be supplemented by the particular needs of your small business.
Personal Insurance Policies
A final step every small business owner should consider when reviewing their insurance needs is whether you require additional personal insurance. For example, for home based businesses, home insurance or renter’s insurance riders may provide adequate coverage for occasional client visits. Riders could also cover a limited amount of business equipment like computers or furniture.
Personal umbrella insurance is another option a small business owner should consider. By its nature, insurance attempts to predict future risks, but the future always remains unknown. An umbrella policy can be used to cover any gaps in your coverage should the need arise. These policies can mean the difference between stability and ruin in extreme cases.
As a small business lawyer, I have seen the damage that inadequate insurance coverage can cause. An experienced business attorney can work with your insurance broker to evaluate your business’ potential liabilities and ensure your business has the best insurance coverage for its operations. At Mod Law Firm we work with some outstanding business insurance brokers and are happy to help you navigate the process of getting insured. Schedule an initial consultation with Mod Law Firm today to start a conversation about your business’ insurance needs.