According to the Insurance Information Institute, there are over eight million small businesses in the United States, and legal action or a catastrophic event could bankrupt any one of them. That is, unless you have the right insurance program in place.
My client had a busy salon: hair, nails, facials, etc. Business was great until an electrical fire destroyed the building. She had trouble finding a temporary location, and by the time she did, she had lost months of revenue. And to top it off, she lacked sufficient coverage to replace the building with one of the same size and specifications. She’s working for someone else now.
Essential Business Insurance Coverage Types
As a small business owner, you need to understand all the available coverages and how they might apply to your situation.
General liability insurance.
Your business space may host many visitors, especially if you’re a retailer. General liability helps cover the cost of medical treatment and legal defense if someone slips and falls on your premises. This coverage is typically the backbone of a comprehensive small business insurance program.
Commercial property insurance.
Although some entrepreneurs might assume that commercial property insurance falls under the general liability umbrella, that’s not true. This policy covers the buildings, tools, and equipment needed to perform your duties.
Take care when calculating the value of your property, to ensure that you can afford to replace anything stolen or, say, damaged by a severe weather event.
Workers’ compensation insurance.
Most states mandate that you carry workers’ compensation insurance if you have employees. This policy helps pay for medical treatment and replaces some lost wages if a worker is injured on the job.
I once insured a painting contractor. Their foreman fell from a ladder, from a fair height. The employee was out of work for six months and underwent many medical procedures and months of physical therapy. Workers’ comp helped take the bite out of the cost of the employee’s rehabilitation.
Professional liability insurance.
Professional liability is also referred to as errors and omission insurance (E&O). It covers claims that might arise if a business owner or their employees make mistakes or experience oversights in business operations.
An investment advisor is a good example of a professional who might need this coverage, because their advice can potentially cause their client financial harm. These types of claims can be difficult to defend and may take months to resolve. A professional liability policy can help cover the costs of legal action taken by clients.
What Business Insurance Typically Doesn’t Cover
You might have a handle on what your policies will cover. But that’s only half the battle. It’s critical to also know what the policy does not cover.
- Flood or earthquake insurance typically must be secured through separate riders or policies.
- The cost of data breaches or cyberattacks can be covered by cyber liability insurance.
- Crime coverage helps if employees steal from the business.
- Intentional or illegal acts committed by the named insured are generally not covered under any circumstances.
- Normal wear and tear or maintenance issues are simply a part of the product life cycle and as such are removed from the reach of business insurance coverage.
Your business policy will always include a list of exclusions like these, so familiarize yourself or speak with your agent. Unpleasant surprises are never a good thing.
Determining Your Coverage Needs
You know your business better than anyone. To calculate the proper types and amounts of insurance coverage you need, start by asking and answering these questions:
- What assets could my business not operate without?
- Would I be able to pay out of pocket for large losses?
- How much do portable electronic devices and computers factor into my operations?
- Has my business undergone significant material changes since my last policy review?
I tell each business client that general liability is a must. Then we discuss assets, employees (if any), and operations, and decide upon additional coverages. Professional and cyber liability typically come next, with commercial auto and workers’ comp added as needed.
You want to balance necessary coverage with your budget considerations. Construct the best insurance program you can without overtaxing your cash flow.
Your Next Steps
Business insurance allows you to set your mind at ease while you perform your daily duties and responsibilities. But take some time to understand your current policy — what it covers and what it does not. Each year, review your policy carefully and obtain some quotes to see if you can save some money.
You’ve built this business brick by brick. Keep it strong by protecting everything that got you here.