What Are the Common Types of Business Insurance?

Do you need business insurance? For most businesses, the answer is yes.

If you have employees, the federal government requires that you carry workers’ compensation and unemployment insurance. Even if you don’t, ask yourself the following two questions:

• If you lost all of your business property (e.g. inventory, computers, office furnishings) tomorrow, could you easily replace it all?
• Is there a reasonable chance that your business can be sued?

Unless you confidently answered “no” to both questions, you need business insurance. Without it, common losses can be catastrophic – and potentially damaging enough to destroy your business. Having insurance may also make it possible to win new business that would otherwise be out of reach.

You may feel an urgency to pick up your phone and call a broker. Before you do, familiarize yourself with business insurance basics, and consider what kind of coverage (and how much) best suits your business. Your answers will be shaped by the nature of your business, how many employees you have, and your personal tolerance for risk, among other factors.

Business insurance can show everyone, from contractors and vendors to your landlord, that you are proactive in managing risks.

3 Main Types of Business Insurance  

If you have employees, three main types of policies should form the baseline of your business insurance coverage.

1. Workers' Compensation Insurance

Workers’ compensation insurance covers necessary medical treatments and lost wages for an employee who is injured on the job. Given that medical treatment can easily run into thousands of dollars – or hundreds of thousands – a single claim can more than justify the cost of the coverage.

"Workers’ comp," as it’s commonly known, helps protect the employer as well. Workers protected by insurance have limited rights to sue you for their injuries.

Don’t fall under the illusion that you need workers’ compensation coverage only if you run a machine shop or construction company. An office worker could trip over a misplaced cord or slip on a wet floor at any time.

2. Disability Insurance

Disability insurance pays employees part of their wages if they’re unable to work due to an injury or illness unrelated to the job. As a business owner, you may wonder whether anything that happens off the job is really your problem. Although it's not federally mandated, several states, including California, New York, and New Jersey, require businesses to carry disability coverage.

3. Unemployment Insurance

Unemployment insurance pays reduced wages to employees who have lost their jobs for certain eligible reasons, such as a layoff. Unemployment insurance is administered at the state level, and details may vary between states. Premiums are often paid indirectly, such as through payroll taxes, but how much you pay may be determined by how many claims are made against your company.

Other Types of Business Insurance to Consider

Additional types of coverage can help protect your business from further threats. This isn’t an exhaustive list, but it highlights the coverage that experts often recommend for small businesses.

General Liability Insurance

General liability insurance is probably the best known and most commonly purchased type of business insurance. It can help offer protection against losses from a range of claims, such as property damage, bodily injury, and libel. General liability coverage can offer value to any business. 

Product Liability Insurance

Product liability insurance is relevant only if you manufacture, distribute, or retail a product. It helps protect you from claims stemming from product defects or failure. 

Professional Liability Insurance

Professional liability insurance, sometimes called errors and omissions coverage, is similar to product liability insurance but helps protect against losses stemming from negligent provision of services. Medical malpractice insurance is one well-known form; other policies help protect attorneys, architects, consultants, financial advisors, and other professionals.

Another variation of liability insurance helps protect businesses from claims that they have violated an employee’s legal or civil rights. Such policies generally also cover the cost of legal defense. 

Commercial Property Insurance

Commercial property insurance helps protect valuable assets, such as a warehouse full of inventory or a medical office that relies on expensive diagnostic equipment. This coverage can reimburse you for loss due to fire, smoke, hail, vandalism, and other threats.

Home-Based Insurance

Home-based business insurance is generally not a separate policy but a rider added to a homeowner’s policy. As the name suggests, the coverage is designed for people who operate a business out of their home. The insurance typically offers limited property and liability coverage.

Business Auto Insurance

Business auto insurance helps to protect you if your business owns vehicles and uses them in the course of doing business. For example, if you own a plumbing company and your employees use company vehicles, the business could be liable if a plumber is in an accident while traveling for their job.

Cyber Insurance

Cyber insurance can help protect you from losses resulting from a data breach. For example, if your customers’ confidential information is compromised, you could be liable for damages. Cyber insurance can be especially valuable for companies that do a substantial proportion of their business online.

Business Owner's Policy

A business owner’s policy (BOP) typically combines property damage, liability, and business interruption, which simplifies the buying process – one policy instead of several – and is usually less expensive.

These policies are generally optional, though most states require commercial auto insurance, and some require other types of coverage. Insureon, a marketplace catering to small businesses, offers a state-specific tool that allows you to easily see what coverage – and how much – is required.

Why is Insurance Coverage Important?

Although the most obvious benefit of buying a good insurance policy is to help protect you from losses that you can’t easily sustain, there are other benefits too. 

Boost Your Business's Credibility

Business insurance can show everyone, from contractors and vendors to your landlord, that you are proactive in managing risks. Personal experience as a sole proprietor has shown me that having professional liability insurance is often enough to persuade potential clients that I have a “real” business.

Enable New Contracts

It’s virtually impossible to be in business without entering into contracts. Everything from securing work space to borrowing money may demand your signature on a formal contract. The fine print of many of those contracts requires various forms of business insurance. Be ready to present proof of your types of coverage.

Enhance your Qualifications

If you’re selling professional services, you may need proof of insurance to even bid on certain projects. That’s because the entity doing the hiring wants to be sure that it won’t be liable if something goes wrong.

Protect Your Employees

If an employee is hurt on the job, the resulting medical bills and loss of income could be financially devastating – enough to push the employee into bankruptcy or having to sell assets. Providing workers’ comp coverage can help spare employees that worry.

Protect Your Customers

The ways in which a customer could suffer a loss and hold your business liable are almost limitless. For example, imagine a customer falling in your store, getting food poisoning from something you served, or having their identity stolen through a data breach. Whatever the problem, insurance can help protect customers financially – and help protect your reputation. 

Rebuild After Natural Disasters

Whatever region you’re in, you’re likely vulnerable to some type of natural disaster: tornadoes, hurricanes, wildfires, earthquakes, and so on. Business insurance can help to quell your concerns for potentially devastating events that you can't control.

The Takeaway

Businesses face a wide range of potential risks. Without protection from business insurance, those threats may result in catastrophic losses that could destroy your business. Fortunately, insurance companies offer several options that can help protect businesses from these issues in advance.

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