How to Buy Small Business Insurance

Why do businesses need insurance?

Owning a small business means expecting the unexpected. One day, your business could be thriving, and the next, it could be the victim of a cyberattack from which you must spend tens of thousands of dollars to recover. Or your employee could be injured in a car crash while driving a company vehicle on your behalf. In both cases, your company is on the hook for the costs involved — and without appropriate insurance plans in place, you’ll have to pay these costs out of pocket. [Read more about SMB issues: Report Examines SMB Pandemic Challenges, Tech Trends and Future Planning]

What types of business insurance are there?

Small businesses can be insured in many ways, and not every business needs every type of coverage. Here’s a brief rundown of the most common ways business owners insure their companies, though there are other types of plans as well.

• Business income insurance: A business income insurance plan covers your company if it loses income when physical property damage leads to a decrease in output or a suspension of your standard services. Business income insurance typically does not cover weather damage, as commercial property insurance usually covers this need.
• Business liability insurance: Ideal for small and midsize businesses, including single-person operations, business liability insurance protects your personal assets in the event you are sued. An LLC alone will not provide this protection.
• Business owner’s policy: A combination of property and general liability insurance, a business owner policy (BOP) is useful for SMB owners who work in a space they own, such as their primary residence. If you regularly see clients in your home or work out of a home office, a BOP may work for you.
• Commercial property insurance: For small and midsize businesses with a lot of physical assets, commercial property insurance is usually necessary. The cost and structure of a commercial property insurance policy depends on the specifics of your assets. The more property you cover, the higher the cost of the plan, so before you go insurance shopping, do a full inventory of the property your business owns.
• Contractors professional liability insurance: If you start a business that has to do with construction, building or related services (such as engineering, architecture or subcontracting), you will need some type of professional liability insurance, most likely contractors professional liability insurance. This insurance typically covers errors that can result in a lawsuit as well as liability claims for environmental impact.
• Cyber insurance: If your data is breached and bad actors obtain your customers’ sensitive information such as their credit card numbers, Social Security numbers or HIPAA-protected health records, your company can be held liable. A cyber insurance policy covers the costs associated with this liability.
• Employment practices liability insurance: SMB owners with employees may purchase employment practices liability insurance, which protects them in cases of wrongful employment practices, such as discrimination, sexual harassment and wrongful termination.
• Errors and omissions (E&O) insurance: Sometimes also called professional liability insurance, E&O insurance covers businesses that provide professional services (often to other businesses), protecting them from claims that their services caused financial distress for their clients. Consultants and financial services professionals usually seek out E&O insurance.
• General liability insurance: A general liability insurance policy protects your company if you are sued for claims involving property damage, personal injuries or advertising injuries. General liability insurance typically does not cover the liabilities covered by cyber insurance.
• Workers’ compensation insurance: A workers’ comp plan can help to cover your employees’ medical bills and lost wages resulting from on-the-job injuries or illnesses. Unlike the other insurance types listed here, workers’ comp is mandatory in every state except Texas.

What is the difference between general and professional liability insurance?

Most businesses should buy general liability insurance, whereas professional liability insurance is mostly a concern for consultants and finance professionals. That’s because general liability insurance covers your company in the event of property damage, personal injury or advertising injury claims — all circumstances that any business could experience. Professional liability insurance is more specific, covering your company if a client claims that your services led to financial hardship for them or their clients.

How do I know what type of business insurance to buy?

The type of insurance you choose should depend on the way you conduct business, the types of products and services you offer, the size and physical setup of your business, and various other factors that are impossible to flesh out in a short article. However, these basic steps should help you find the right type of insurance coverage for your unique small business — we recommend doing all four.

1. Consult a lawyer. The best person to illuminate weaknesses in your business, in terms of liability, is a lawyer who specializes in serving small business owners. A relationship with a lawyer whom you can consult from time to time on issues such as these could be invaluable.
2. Consult an accountant. If you already have a trusted accountant (and if you don’t, perhaps you should), ask their opinion on types of business insurance coverage. They are likely to shy away from offering you direct advice on this, but they may share some types of insurance that small and midsize businesses can invest in to avoid financial ruin from a lawsuit or a natural disaster.
3. Ask a peer or mentor. Local small business owners are your best resource for advice on choices like business insurance or hiring and firing guidelines. If you don’t already have small business connections in your area, network more, starting with your local chamber of commerce.
4. Dive into the research. In addition to asking the advice of others, do exactly what you’re doing now: research. Read about the types of plans that best apply to your business, and draw your own conclusions.

How much does insurance cost for small businesses?

No two small businesses will spend the same amount of money on insurance. Costs depend on company size and especially industry, as certain insurable events are far more likely in some sectors than others. Despite these variables, small business insurance provider Insureon lays out some average monthly costs for a useful reference point:

• General liability insurance: $42 per month
• BOP plans: $57 per month
• Workers’ comp: $45 per month

These average numbers add up to $144 per month. As you add more insurance policies, your monthly costs may reach into the higher hundreds or perhaps low thousands of dollars.

How should I choose an insurance provider?

Once you know the types of business insurance you plan to purchase, you can get quotes for price comparison and choose a provider from those. If you already have a preference, it’s fine to continue doing business with the same institution you use for other products, but we recommend getting at least three quotes as a best practice.

Comparison shopping can pay off in the form of better coverage as well as lower rates. It’s also not a bad idea to let the reps you’re talking to know that you’re shopping around. Plus, during the sales process, you can vet each company by paying close attention to not only their prices but also their general level of customer service. 

The right insurance protects you against the wrong outcomes

Although the vast majority of your business activities will lead to great outcomes, things can occasionally go wrong. Rarely, they’ll go very wrong — and just one of these moments can expose you to tremendous liability. Business insurance is worth obtaining to minimize or eliminate your financial obligations in these stressful times.

Editor’s note: The contents of this article do not offer legal, business or insurance advice related to the needs of any specific business. Please consult your attorney and/or small business insurer to discuss your situation and coverage.

Max Freedman contributed to this article.