While making plans to start a new business, your instinct is probably to focus in on the positives. It’s not fun to sit around contemplating all the worst-case-scenarios that may occur — and even harder still to wrap your head around ways to protect yourself.
Business insurance may not seem like an encouraging object of focus when you’re just starting out, but it is one way small businesses can safeguard themselves, their employees, and clients from the everyday or occasional challenges that arise while running a business. The old adage says to hope for the best and plan for the worst; business insurance is there to give your brain a break from worry. You can rest assured that if something from the worst-case column happens, you’re covered.
But how do you know what kind of business insurance you should have? What insurance policiesÂ are required by law, and where do you even get started? In this post, we’ll cover the business insurance basics and explain the seven major types of business insurance so you can know exactly which insurance policies your business needs.
The Basics Of Business Insurance
For small business owners, constant rumination about risk and uncertainty is just a part of daily existence. There are numerous decisions to juggle, and you must account for all possibilities, including mistakes, mishaps, disasters, emergencies, and unexpected life events. Worries about how negative events could impact a business run the gamut, but there are many types of insurance policies designed to ease those worries and provide you with peace of mind.
Whether the intent is to purchase protection from flooding, damage to equipment, litigious employees and clients — or even from pollution, terrorism, and data breaches — small business owners need to carefully consider and examine which types of business insurance will work best for them (and which might be required by state law).
What Kind Of Business Insurance Is Compulsory?
Are you legally required to have business insurance?
The short answer is that mandatory business insuranceÂ varies by your company type, size, and the state you do business in. This is why it’s important to understand federal and state laws and to consult with an insurance professional to ensure that your business is compliant with all mandatory insurance requirements.
Most compulsory business insurance requirements are focused on making sure you treat your employees fairly and can compensate them in an emergency. The Federal Government requires that businesses with one or more employees provide unemployment and workersâ compensation insurance. State laws vary regarding compulsory business insurance, but most often their policies revolve around worker’s compensation, disability, and unemployment. Depending on how many employees a business has, a health insurance option might also be compulsory to comply with the Affordable Care Act. Renter’s insurance or property insurance may also be a requirement depending on your landlord and lease agreement.
|Most Common Types of Compulsory Business Insurance|
7 Major Types of Business Insurance
There are several major types of business insurance. While not every type is required by law, many are still a must-have for small businesses looking to safeguard and protect their business. Without the right type of business insurance coverage, a small business may have to face the brunt end of lawsuits, natural disasters, and other damages that could leave them bankrupt. And while no one likes the idea of paying extra for insurance, purchasing the right business insurance policy is a small price to pay to keep your business afloat.
Here are the seven most common types of business insurance that you may need:
1. General Liability
While general liability insurance isn’t required by law, for most small businesses some type of general liability insurance is a good idea as this type of insurance protects you in the event of a lawsuit or an accident. Claims against a business can arrive in the form of bodily injury, property damage, personal injury to a customer (including slander or libel), or false advertisement. General liability insurance guards a business against financial ruin if a client slips and falls on a wet floor or an employee damages a customerâs home. For all types of business owners, general liability also offers comfort to clients and ensures that they wonât be abandoned if an accident occurs.
2. Property Insurance
This type of insurance protects all of the property needed to run your business. A commercial policy would likely cover your building, business products inside your building, and other peopleâs property while itâs in your care. Property damage due to theft also falls into this category. The policy might be required for a lease agreement with a property management group, so if your business has a physical location, check with your landlord.
3. Business Interruption
If a business needs to close its doors due to a disaster — natural or otherwise–, business interruption service will repay the business the costs of lost revenue and business expenses accrued during the interruption. For example, if your store is flooded, your property insurance will get you back up and running in terms of damage, but if you had to close your doors for a few weeks, business interruption service will help offset the financial loss. Also, if you need to move your business to a new location because of damage, the policy will often pay for relocation and assist with lost income.
4. Commercial Auto Insurance
Commercial auto insurance protects business vehicles and drivers in the event of accident, natural disaster, vandalism, and theft. If your vehicle is an essential part of your business, ensuring and protecting the goods/services it provides is also essential. A commercial plan keeps the owner protected should driving mishaps occur, and it might be a necessary addition as many personal auto plans do not include provisions to cover vehicles used for business.
5. Worker’s Compensation
Workersâ Compensation insurance safeguards your business from any costs or lawsuits that may arise from job-related injuries, illnesses, or –gulp — death.
Any business with more than one employee is required to provide workers compensation for their employees;Â however, more specific guidelines are set by the state.
6. Professional Liability (E&O)
Professional liability insurance (commonly referred to as errors and omissions or E&O) covers the cost of defending your company in a lawsuit where the claim is that your business caused a financial loss for a client (errors) or did not perform a service as required (omissions). This type of insurance may be required for medical and legal businesses, but it is generally an add-on to liability insurance.
7. Umbrella Insurance
It’s true that insurance is in the business of worst-case-scenarios, but sometimes general liability insurance is not enough to protect you from the costs of litigation. Becoming the target of a lawsuit is a great fear and the outcome can be ruinous to a company ill-prepared to handle the financial burden. General liability provides an identified amount of coverage, but what if the claims exceed what liability coverage a business already has? Umbrella insurance swoops in and extends the ceiling on those general liability claims.
Additional Insurance Coverage Available For Your Business
While the seven insurance options above are the basics of business insurance, there are other types of insurance coverage to assist business owners with protection. Depending on your business type or industry, these additional coverage options may be a good idea to keep your company protected.
- Business Owners Policy: Since so many businesses require both general liability and property insurance, many insurers offer a fancy package that includes both liability and property coverage. If an insurer references a business owners policy (BOP), it is a combo deal to cover both requirements.
- Product Liability:Â Product liability exists to cover the damages of a lawsuit brought on by a faulty product.
- Home-Based Business Coverage:Â Home-based business coverage is specific to entrepreneurs running out of their homes who might have home offices that need protection outside of a homeowner’s insurance policy.
- Renter’s Insurance:Â If you’ve ever rented an apartment or house, you’re probably familiar with renters’ insurance, but it plays a role for businesses as well. Renter’s insurance might be needed if you are renting or leasing a location for your small business.
- Cyber Insurance Or Data Breach Insurance:Â Cyber insurance or data breach insurance is there to protect businesses from the costly after-effects of a data breach. This policy also gives the insurer access to people who can assist them through the legal scrutiny of following data-breach protocol.
- Directors & Officers Insurance:Â Directors and officers insurance is designed to offer financial protection in case a director or officer in your business faces legal trouble due to business-related actions.
What About Health Insurance?
In 2010, the Federal Government passed the Affordable Care Act (ACA). Since that time, tens of millions more Americans have had access to health care through a health care mandate. Many of these newly insured were small businesses owners, small business employees, or the self-employed. Through a marketplace specifically for small business owners called the Small Business Health Options Program (SHOP), more people had the opportunity to secure health insurance.
So, what does the Affordable Care Act (ACA) mandate for small businesses in terms of health care? If your business is considered an Applicable Large Employer (ALEs) with 50 or more full-time employees for more than six months out of the year, then you will need to provide your employees with health insurance as a legal requirement of the ACA. In short: an ALE will need to comply with the ACA. (A quick zip-code check over on healthcare.gov will direct you to the SHOP or health care program available in your state.)
If your business is not an ALE, then supplying health care for your employees is a choice. There are several options available for small businesses who want to remain competitive by offering insurance options. Another perk of choosing to offer health insurance to your employees is that you may be eligible for the Small Business Health Care Tax Credit if you provide insurance.
How To Choose Business Coverage Insurance
All small business are different and have different needs. When considering what types of small business insurance you need, first check state laws to ensure you are following all legal requirements and mandates. After you know what insurance you are legally required to have, it’s time to start thinking about other types of insurance would benefit your business.
To determine which type of insurance is right for you, outline the biggest risks in your industry and choose a plan that suits those risks the best. Do you have vehicles running around for you? Commercial auto is a must. Is your business located in a place that might be impacted by the weather every year? Business interruption service might be perfect for you.
When it comes to running a business, you can never be too prepared. In the end, choosing the perfect type of business insurance can protect your business from claims, property damage, and other disasters, and can give you peace of mind, so you can stop worrying and get back to business. Always consult with an insurance professional for the best advice on what type of insurance is right for your business.
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