Business Insurance 101: What Small-Business Owners Should Know

When you’re running a small business, there’s always a million things to do. Insurance isn’t always top of mind until it’s needed.

However, life happens, including accidents and unexpected events during your normal operations. Aside from typical insurance scenarios such as a customer slipping and falling, there are other more nuanced risks that can be just as costly. For example, being accused of giving a client bad advice or having a power surge wipe out your laptop beyond repair. Without adequate coverage you would be on the hook to pay for related expenses yourself.

It also surprises business owners to know that insurance can help grow their business. Without having to fund unexpected costs out of pocket, you can put that money to better use like promotions or staffing. Being insured can also help you win lucrative commercial and government contracts.

What is business insurance?

Just as your homeowners insurance helps pay for repairs from weather damage after a storm, business insurance helps cover unexpected expenses related to your business, so you can move forward with minimal setbacks.

This is important because unless you have a large cash reserve, paying for things yourself can lead to financial struggles.

Smaller businesses are often the ones that need insurance the most because they often can’t absorb financial losses the same way larger companies can.

Covering a customer’s medical bills, legal fees for defending yourself, repairing a business vehicle or replacing damaged inventory can quickly overwhelm a business owner. Insurance helps ensure you’re not shouldering the damages alone.

Getting insured hasn’t been easy for business owners.

If you’re not insured, or have never thought about buying an insurance policy, don’t worry—you’re not alone. Many business owners have never been insured. They may think it’s not necessary for their business. They also may have tried to get insured and couldn’t, or found it too expensive.

When should business owners consider getting coverage?

Smaller businesses are often the ones that need insurance the most because they often can’t absorb financial losses the same way larger companies can.

Regardless of your industry, most business owners—both sole proprietors or self-employed—can benefit from having basic business insurance whether they’re just starting out or are experienced.

Generally, you should consider getting insured if you:

• Lease or own a highly-trafficked physical location (office or commercial space)
• Own property that isn’t easily replaceable (equipment, inventory, high-value items)
• Offer services or work that could damage property or cause a client to lose money
• Have employees
• Use a vehicle for work purposes

Why is insurance (and being insured) important?

If you’re not familiar with business insurance, here’s a closer look at why it’s important.

1. Insurance protects you from financial losses.

Chances are you’ll have to deal with the threat of legal action at some point. For example, say a competitor catches your employee bad-mouthing their business on social media and decides to sue for damages. Or, if you're a service provider, a client may feel they didn’t receive the services they were promised. They accuse you of not meeting contract obligations and take you to court. If both scenarios are covered by your policy, insurance can help pay for legal costs or settlements up to your policy’s limits.

Aside from the emotional impacts and time spent not focusing on running your business, litigation is costly. While insurance cannot erase the legal action, it can make it less expensive.

2. Being insured keeps you within regulatory compliance.

Some occupations, such as construction or plumbing, require you to have business insurance before you can work, hence the phrase “licensed and insured.” Without being properly insured, these higher risk occupations can face regulatory fines from local governments and authority boards.

Similarly, some state governments require certain kinds of insurance to operate. For example, if you employ someone, most states will require you to have workers’ compensation coverage. Or, if you have delivery vehicles, some states require that your business-owned vehicles are insured for certain types of accidents with commercial auto coverage. Both kinds of insurance are designed to mitigate their respective risks.

3. Insurance shifts risk to help you grow.

Although small-business owners take a big risk when they start their business, on average, they tend to be more risk-averse than the general population according to the U.S. Chamber of Commerce. They just can’t take the same hits a larger business can.

But insurance acts as a safety net when things go wrong because when activated, it helps your business carry on. This allows business owners to explore new opportunities; their insurance allows them to shift the risk. They can take more risks to grow their businesses, which in turn helps them compete and stick around longer.

4. Insurance can help secure contracts and jobs.

Finally, insurance can help you win jobs. High-value contracts or work with government agencies will often require specific coverage before applying.

Even if jobs don’t require insurance, having it can make you appear more professional and responsible in the eyes of a client.

What are the common types of business insurance?

The kind of coverage you’ll need varies by industry, work, equipment, employees and customers. Generally, these are the most common types of business insurance:

• General liability. This is one of the most common types of insurance. It covers common risks such as injuries to someone other than employees and damages to someone else’s property. Liability coverage also can help pay for legal defense if a client accuses you of libel, slander or copyright infringement.
• Workers’ compensation. It helps cover medical expenses and lost wages if you or an employee gets sick or hurt on the job. (Tip: You can include yourself in workers’ compensation as an owner add-on.)
• Commercial auto. Many people don’t realize that a personal auto insurance policy may not be enough protection if you get into an accident while driving for business purposes. This type of insurance can help pay for towing, car repairs, injuries and property damage due to an accident.
• Professional liability. Also known as E&O insurance, this coverage can help if a client accuses you of making a mistake that costs them financially.
• Commercial property. This coverage helps protect all the things you need to conduct business, including your building, equipment, inventory and more. It can protect against occurrences such as theft, fire or water damage and any repairs or replacements associated with the damage.

What should you look for when buying insurance?

When looking for coverage, ask yourself and a provider these questions:

• What’s included in this provider’s insurance coverage and what’s not?
• Can I customize my coverage or do I have to pay for insurance I don’t need?
• Does the insurance fit into my budget? Is it affordable?
• How fast can I get coverage? How long will it take to get a certificate of insurance (also known as proof of insurance)?
• Do I need to talk to an agent or can I file a claim and make changes to my coverage online by myself?
• What is the insurance provider’s customer service like? Can I get my questions answered by a human?

Modern insurance providers map closely to customer specifications. To keep up with customers, the industry is slowly evolving its practices and processes to accommodate what customers want. This is good news for consumers because it makes it easier to purchase the right coverage in the first place and simpler to maintain. Industry shifts include:

Faster Results

Today’s world moves fast. A 2021 McKinsey & Company report describes how today’s insurtechs are using tools like artificial intelligence (AI), process automation and real-time data analytics to offer smarter, faster insurance products.

Simple Online Tools and Processes

Everything can be handled online these days, insurance included. User-friendly interfaces, such as customer portals and mobile apps, allow customers to handle transactions themselves via self-service tools. From getting quotes to adding or canceling coverage, customers can get what they need without speaking with an agent.

More Customer Support Options

Sometimes you want the freedom to DIY via self-service tools and not have to call support. Other times you want to consult with an agent for clarification. Maybe you want to get answers by firing off a question when you’re on social media. Look for providers that offer multiple ways to conduct business and support customers.

Customized Coverage

A one-size-fits-all approach won’t cut it anymore when customers can easily switch to a competitor. Be wary of policies that charge for more coverage than you need and aren’t tailored to your specific business.

Once you’ve considered all of the above factors, you’ll be in the perfect position to get the protection you need to help your business grow and move forward.

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