The senior small business columnist for USA Today, Steve is also a brand ambassador with 20 years of experience and the author of 18 books, including his latest, Your Small Business Boom.
Understanding types of business insurance
July 23, 2024 | 9 minute read
Written by
Steve Strauss
Founder
MrAllBiz
Safeguarding a business against unforeseen circumstances is a crucial element of owning and operating a company. Business insurance can act as a safety net, providing protection from losses that result from accidents, property damage or lawsuits. That is why, as a business owner, it is important to understand the different types of plans available to protect a business. In this article, we’ll explore why insurance is important for businesses, the common types of coverage available and how to obtain coverage.
Why is business insurance important?
The primary purpose of business insurance is to mitigate risk and protect an owner’s investment. Whether it’s property damage, liability claims, or unexpected disruptions, unforeseen events pose the potential to jeopardize the stability and continuity of a business. Having the right insurance can provide peace of mind and financial protection against these risks by covering possible costs, such as property repairs, medical expenses and lost income.
Common types of business insurance coverage
1. General liability
Overview |
General liability is a type of coverage that can protect a business from financial loss if it is found legally responsible for injuries or damages to someone else. |
Risks it covers |
Examples of the types of risks covered by general liability can include customer injuries, property damage and advertising injury caused by the business’s products, services or operations. |
Expenses it covers |
Examples of expenses that may be covered by general liability insurance are medical expenses, legal fees, settlement costs and repair costs. |
Businesses that need additional coverage may consider a commercial umbrella policy. This type of policy extends beyond a company’s primary general liability plan and is intended to protect against large or unexpected claims.
2. Professional liability
Overview |
Professional liability insurance, also known as errors and omission (E&O) insurance can protect businesses and professionals from claims of negligence or inadequate work. Common professions that leverage this type of coverage are healthcare providers, consultants, legal professionals and financial advisors. |
Risks it covers |
Professional liability can protect against customer claims of negligence, mistakes or inadequate service. |
Expenses it covers |
Examples of expenses that may be covered by professional liability insurance are legal fees, settlements and judgements, damages and court costs. |
3. Cyber liability
Overview |
Cyber liability insurance helps businesses mitigate losses and liabilities resulting from cyberattacks, data breaches and other cyber incidents. This type of coverage is typically leveraged by businesses that handle sensitive client data. |
Risks it covers |
Cyber liability can include protection against data breaches, business interruption, legal costs and regulatory fines. |
Expenses it covers |
Examples of expenses that may be covered by cyber liability coverage are notification costs (to impacted individuals), data recovery, data restoration and legal defense. |
4. Commercial property
Overview |
Commercial property insurance protects against damages to the physical assets of a business, such as buildings and equipment. |
Risks it covers |
Examples of risks covered by commercial property insurance include fire, natural disasters, theft or vandalism. |
Expenses it covers |
Examples of expenses covered by commercial property may include replacement or repair of buildings, furniture and inventory. |
Business renters’ insurance, also known as commercial renters’ insurance, provides coverage for businesses that lease, instead of own, their workspace. This coverage is intended to protect the business owner’s personal property within the rented space, such as equipment, furniture, and inventory, and does not include the physical space itself.
5. Commercial auto
Overview |
Commercial auto insurance can protect vehicles used by a business for business purposes. Coverage can also extend to employees driving in work-related activities. |
Risks it covers |
Commercial auto can protect vehicles from accidents, vandalism or theft. |
Expenses it covers |
Examples of expenses covered by commercial auto include costs of injury and property damage, as well as costs of litigation and settlement. |
6. Business interruption (Business income insurance)
Overview |
Business interruption insurance, also known as business income insurance, may help businesses recover lost income when they must shut down or operate in a limited capacity due to unexpected circumstances. |
Risks it covers |
Risks covered by business interruption insurance can include impact to business operations due to fire, natural disaster or other unexpected incidents. |
Expenses it covers |
Examples of expenses typically covered by business interruption insurance include lost profits, fixed costs (such as rent, utilities, and payroll) and relocation. |
7. Key person
Overview |
Key person business insurance is a type of life insurance policy that a business takes out on employees who are vital to the business’s success. These are employees who are considered to have skills, experience or leadership roles crucial to the operation of the business. |
Risks it covers |
Key person insurance provides coverage against the potential negative impacts that a business can experience as the result of the passing of a key employee. |
Expenses it covers |
Examples of expenses covered by key person insurance may include lost income, costs of hiring and training a new employee and costs associated with business disruption (such as project delays). |
8. Workers’ compensation
Overview |
Workers’ compensation is a type of insurance coverage that businesses provide for their employees. It helps with an employee’s medical expenses and lost wages if the employee is injured or becomes ill due to their job. |
Risks it covers |
Workers’ compensation provides protection against workplace injuries and illnesses. |
Expenses it covers |
Examples of expenses covered by workers compensation include medical expenses, lost wages, rehabilitation costs and permanent or temporary disability. |
9. Business Owner’s Policy (BOP)
Overview |
A Business Owner’s Policy (BOP) is an insurance package designed for small and medium-sized businesses. Depending on the business’s specific needs, it can be tailored to include several types of coverage bundled into one policy. |
Risks it covers |
The coverage provided by a BOP will ultimately depend on the type of package that’s created by the business. Common types of coverage included in a bundle are property insurance, liability insurance and business interruption insurance. |
Expenses it covers |
The types of expenses covered under a BOP will depend on the type of coverage selected, but can include lost income, rent payments and employee wages. |
Finding the right business insurance
Choosing the right business insurance is important because it can help avoid leaving certain aspects of the business unprotected or overpaying for coverage. Before committing to a policy, make sure to ask questions specific to the business, compare quotes, and consider consulting with an expert who can help better evaluate the business’s needs.
- Assess business needs. Consider the business’s overall risk, including risks specific to the industry, location and daily operations. Depending on the state(s) where the business operates, certain types of coverage may be required. Some important questions to answer include:
- Number of employees
- Location: does the business operate in a physical space or is it online only?
- Is there business equipment that needs to be insured?
- Are there any vehicles that need to be covered?
- What happens if the business is interrupted by a natural disaster?
- Research insurance providers and request quotes. Look for insurance providers that specialize in business insurance or provide BOPs. Consider additional factors such as reputation, customer reviews and the range of coverage options that they offer. If possible, ask for recommendations from other business owners in your field.
- Consult with an expert. Consider working with an insurance agent or broker to review quotes. They can provide expert advice and help determine the right coverage.
- Review and purchase. Carefully review any terms and conditions. Once the right coverage and provider has been selected, an application will need to be submitted before the policy can be purchased.
- Update regularly. Periodically review coverage to ensure that it is aligned with the business’s goals and any changes in operations.
Final thoughts
While it’s important as a business owner to stay positive and focus on growth, expecting the unexpected is a crucial part of running a successful business. Securing the right insurance is a prudent step that may help protects one’s investment, and it may also safeguard against potential risks. Understanding the importance of insurance, the types of coverage available, and how to obtain coverage is a proactive approach that can help ensure a business’s ability to remain resilient and positioned to thrive, even through uncertainty.
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