The 9 Essential Types of Small Business Insurance
The 9 Essential Types of Small Business Insurance
- Workers Compensation Insurance (Required)
- Unemployment Compensation Insurance (Required)
- Disability Insurance (Required in Some States)
- General Liability Insurance
- Commercial Property Insurance
- Professional Liability Insurance Insurance
- Product Liability Insurance
- Employment Practices Liability Insurance
- Key Person Insurance
As with health insurance or car insurance, small business insurance is hopefully something you never have to use. But when something unexpected happens, having business insurance can be the difference between your business’s continued success or failure.
Unfortunately, a lot of businesses aren’t covered. According to Next Insurance, 44% of small business owners have never purchased business insurance, even after operating for at least one year. By purchasing the right types of business insurance, you can protect your company’s assets against damage and legal claims.
Many small business owners give up on purchasing business insurance because of how confusing the process can be. Every business will need a slightly different insurance package depending on the size of the company, the location, and the industry—and the choices can be overwhelming. In this guide, we’ll break down the different types of business insurance coverage, how much they cost, and the purchasing process.
Why You Should Purchase Small Business Insurance
You don’t need us to tell you that starting a business entails a lot of risk. Nearly one-third of businesses fail before their second year. This could be due to any number of reasons, such as a poor economic climate, a bigger competitor’s entry into the market, or difficulty obtaining business financing.
Having business insurance won’t stem the market risks that come with owning a business, but it will safeguard your business (and your employees in some cases) against property damage and legal claims. Between 36% and 53% of small businesses face litigation in any given year. Most small business owners do not have the financial means to deal with such issues on their own, so the cost of not having insurance is often a lot higher than the cost of purchasing coverage.
Certain kinds of insurance are required by law. For instance, most states require businesses with employees to purchase workers compensation insurance and unemployment insurance. In some states disability insurance is required, as well.
Beyond this, you might be obligated to buy insurance coverage when raising money from investors or getting a business loan. Requirements also vary by industry. For instance, a real estate agent with a car will likely need to buy commercial auto insurance. And a company that handles sensitive data online should purchase cyber liability coverage.
Small Business Insurance: The 9 Essential Types
When you start shopping around for business insurance, one of the first things you’ll notice is that there are several different types. You might find the choices overwhelming. You don’t want to have too little coverage, but you also don’t want to overspend.
Small businesses should consider purchasing the following types of business insurance.
9 Essential Types of Small Business Insurance
Type of Insurance | Cost | What It Covers |
---|---|---|
Workers compensation (required)
|
$0.75 to $3 per month per $100 of payroll
|
Claims resulting from work-related injuries
|
Unemployment insurance (required)
|
Varies by state (0.6% federal tax rate for most businesses)
|
Guarantees a portion of employee’s wages after a job loss
|
Disability insurance (required)
|
0.25% to 0.5% of payroll
|
Guarantees a portion of employee’s wages after illness or injury
|
General liability insurance
|
$400 to $600 per year
|
Certain losses that your business causes to another company, client, or vendor
|
Commercial property insurance
|
$1,000 to $2,000 per year
|
Theft, fire, vandalism, and some weather-related property damage
|
Professional liability insurance
|
$900 to $1,800 per year
|
Financial losses arising from your business’s negligence or malpractice
|
Product liability insurance
|
25 cents per $100 of product sales
|
Design flaws, manufacturing flaws, or insufficient product instructions
|
Employment practices liability insurance
|
$800 to $3,000 per year
|
Wrongful termination or discrimination claims
|
Key person insurance
|
Less than $1,000 per year
|
Replaces lost income from an owner’s or key executive’s death or disability
|
1. Workers Compensation Insurance (Required)
States require most employers to carry workers compensation insurance in case employees are hurt on the job. This is definitely a requirement that you don’t want to take lightly. Failure to purchase the required amount of coverage can result in fines and, rarely, even in criminal penalties.
If an employee experiences a work-related injury, workers comp will cover their medical expenses and pay them with a portion of their wages while they recover. For example, workers comp would cover an employee’s back pain that stems from poor ergonomic desk setup. If an employee sues your company for work-related injuries, workers compensation insurance usually covers the cost of defending the lawsuit.
You can purchase workers compensation insurance through a broker or private carrier. The cost typically runs $0.75 to $3 per month per $100 in employee wages. Many states, such as New York, offer a state-run insurance fund that sells workers comp insurance at regulated rates. Larger businesses might even have the option to self-insure. You can learn more information by contacting your state’s insurance department or workers compensation board.
2. Unemployment Insurance (Required)
Unemployment insurance is another government-required type of insurance coverage. This insurance covers your employees in case of a job loss or termination. Unlike workers comp or general property insurance, unemployment insurance is not something that you purchase from an insurance carrier.
Instead, along with other payroll taxes, employers pay federal unemployment taxes (FUTA) and state unemployment taxes (SUTA). The state administers the program for employers and employees. Your tax burden depends on the number of employees you have, your employee turnover, and whether you’re a new or established business. While an individual is out of work, they can apply to receive unemployment benefits.
Employers can calculate and make FUTA and SUTA payments on their own, but it’s often easier to let your HR software or payroll service take care of the calculations for you. Just don’t forget to contact your state’s unemployment agency and sign up for an employer account when you hire your first employee.
3. Disability Insurance (Required)
Disability insurance provides guaranteed payments to employees at a percentage of their income if they’re unable to work due to an illness or injury. Unlike with workers compensation, the illness or injury does not have to be work-related. For instance, a pregnant employee can receive disability benefits after giving birth.
Currently, five states—New York, California, Hawaii, New Jersey, and Rhode Island—require employers to provide some level of short-term disability insurance (SDI). SDI covers employees for three to six months after they’ve been injured or fallen ill.
Even if you’re not in one of those five states, short-disability coverage can provide peace of mind to your employees and make you a more competitive employer. Long-term disability coverage, which is more rarely provided, lasts until the expiration date stated in the policy or until the employee is able to return to work. The typical cost of disability insurance is 0.25% to 0.50% of your payroll.
4. General Liability Insurance
Businesses are not legally required to purchase general liability insurance, but there’s very good reason to. General liability insurance protects your business if a third party—such as a client, vendor, or customers—get injured from your business’s property, products, or services.
The following specific types of losses are covered:
- Physical injuries on business property
- Property damage to another individual or business while carrying out your work
- Advertising injuries (libel, slander, misappropriation, etc.)
This is a must-have type of coverage, particularly if you’re in an industry where accidents are more likely to occur. Examples include landscaping businesses, manufacturing companies, and construction companies. The cost of a general liability policy typically ranges between $400 to $600 per year, though that could vary significantly based on the level of risk in your industry.
5. Commercial Property Insurance
Commercial property coverage insures your business’s inventory, equipment, office space, and other property against loss or damage. Commercial property insurance is a must-have for many types of businesses, especially those with a brick and mortar location.
This includes incidents of small business theft, fires, vandalism, and some weather-related damage. Most commercial property policies will cover flooding damage and damage from accidents, like a burst pipe. However, not all will cover natural disasters like earthquakes or tornadoes. Depending on where your business is located and the specific likelihood of different types of disasters there, you might have to add on specific coverage for these at an additional cost.
Look for business interruption insurance as a rider or add-on to your commercial property policy. This insures against lost income when you experience property damage or an accident. For instance, if your shop burns down from a fire, you’ll lose a lot of income while rebuilding it. Business interruption insurance will cover that loss of income. Cyber insurance coverage is also an important add-on to any online business that handles customer data.
6. Professional Liability Insurance
Professional liability insurance, also known as errors and omissions insurance or malpractice insurance, is something that people normally associate with doctors, lawyers, and other professional service providers. For example, if a doctor makes a mistake during surgery, their malpractice insurance will cover the costs associated with an ensuing lawsuit.
But doctors and lawyers aren’t the only ones who should have errors and omissions coverage. It’s possible for many types of business owners to commit professional negligence. For instance, a designer could fail to have[…]
# # #
Continue to read this article.