Small Business Insurance Basics

Protecting your business with insurance is an important part of small business ownership. The proper insurance minimizes the risks associated with unexpected events, liabilities, and losses.

However, as with any choice you face as a business owner, knowing and finding the best insurance for your needs is not an easy task.

No matter that you are starting a business, taking on employees for the first time, or evolving your business structure, there are many variables that determine the right insurance for your small business, including your business structure, business activities, location, whether or not you hire employees, and many other variables.

There are two fundamental types of insurance – commercial business insurance, which is not necessarily required by law, and employer insurance, which is.

Here is a summary of the types of insurance you may wish to consider to protect the assets and investments of the business, as well as the insurance requirements you must comply with as an employer. First, we’ll cover the types of insurance policies available to you as a small business owner. Although not necessarily required by law, you would be wise to purchase enough business insurance to protect your assets against events such as the death of a partner, a natural disaster, or lawsuit to name a few.

It’s a misconception to think that structuring your business as a corporation or LLC limits the need for business insurance. While these business structures do protect the personal assets of the owner from business liabilities, relying on business structure alone to protect your assets is not a substitute for liability insurance, which covers your business from losses. It’s also important to know that, in some instances, state law may require that your particular business activity is covered by some form of insurance.

For example, if you use a car or truck for business purposes, your state may require that you purchase commercial auto insurance for its use.  You can consider a business owner’s policy, which covers both general liability and property insurance as one good example. It’s often cheaper than buying separate policies to cover each. You may also wish to purchase product liability insurance or professional liability insurance too.

Your state may require some form of employer insurance such as workers compensation insurance or disability insurance. Unemployment insurance is often required as well.  Talk about your business needs with a licensed commercial insurance agent.

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Insurance Every Business Owner Should Consider

General Liability Insurance: Every business, even if home-based, needs to have  liability insurance.

The policy provides both defense and damages if you, your employees or your products or services cause or claimed to have caused property damage or bodily injury to a third party.  Corporate structure does not protect your business, only personal assets. In some cases, the corporate structure can be pierced.

Property Insurance:  If you own the building or have business, personal property, including office equipment, computers, inventory or tools you should consider purchasing a policy that will protect you if you have a fire, vandalism, theft, etc. If you lease or rent space, you will still need this protection as most leases don’t cover your losses in the event of damage. You may also want to consider business interruption insurance added to the policy to protect your income if the business is unable to operate.

Worker’s Compensation: This type of insurance provides wage replacement and medical benefits to those who are injured while working. In exchange for these benefits, the employee gives up his rights to sue the employer. As a business owner, it is very important to have worker’s compensation insurance because it protects yourself and your company from legal complications. State laws vary, but most require you to have workers compensation if you have W2 employees.  Penalties for non-compliance can be extremely high.

Professional Liability Insurance: this type of insurance is also known as Errors and Omissions Insurance. The insurance provides defense and damages for failure to or claims of improperly performing professional services.  General liability insurance does not provide this protection, so it is important to understand the difference.   Professional liability insurance is applicable for any professional firm including lawyers, accountants, consultants, notaries, real estate agents, insurance agents, hair salons and tech firms to name a few.

Cyber insurance or Data Breach:  Should a business store sensitive or non-public information about employees or clients on their computers, servers or even in paper files they are responsible for protecting that information.  If a breach occurs either electronically or from a paper file this type policy will provide protection against the loss or claims of damages.

In addition, every business owner should protect their personal assets with homeowner’s or renter’s insurance, personal auto insurance, life insurance, health insurance, and disability insurance. It makes sense to have an umbrella policy in place as well to further protect your assets.

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What Is Product Liability Insurance?

What’s product liability insurance and does my business need it?

In general terms, product liability insurance protects a retail business against claims made from the sale of goods, products, medicines or foods sold to the public.  It covers the retail sellers liability for losses or injuries suffered as a result of purchasing a product by a buyer, user or bystander.  It covers defective products or product malfunction.

In some cases, it may also protect the seller from failure to warn.  Sometimes, this coverage is found within a general liability policy for a business as products completed operations insurance. If your selling or wholesaling goods for public consumption make sure you review this coverage with your commercial insurance professional.

One recent example in the headlines that can show how product liability insurance works is tainted pet food manufactured in China.  The pet food was then imported into Canada and then distributed to two U.S. locations which supplied the tainted pet food to Wal-Mart which sold it to customers.

A number of pets died and barrage of law suits began.  The Chinese and Canadian were insulated from suits, and even if judgments were levied, claiming restitution was impossible from foreign businesses. Lawsuits like this can name numerous parties liable to claims of damage and responsibility.  The retail outlet, in this case, Wal-Mart, ended up facing the numerous suits filed by unhappy cat owners.

Here is an example of how product liability insurance can easily save a business of any size, even Wal-Mart from financial disaster.

Product liability insurance is a necessity for any size business which is distributing or selling products in the United States.  One lawsuit to a small mom and pop store can result in financial ruin for the business.  Examine your general liability policy and determine if more coverage is needed to protect your business from this type of risk.

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Business Interruption Insurance: Yes or No?

Should you add business interruption insurance?

Being a business owner means you understand that to pay the bills and make a profit, your business needs to be functioning.  If your business shuts down, so does the cash flow and ability to pay bills and generate a profit.

What could possibly cause your business to close? Fire is the first culprit that should be top of mind.  Even a contained fire could cause closure due to smoke damage and repairs.

Mother Nature can cause wind damage, hail, lightning strikes which could cause damage requiring a shut down for repairs.  Vandalism and theft could cause your business to close until repairs or equipment is sourced and replaced.

Do you have the financial resources to weather a shut down? For how long? Don’t forget payroll and vendor invoices. What are you willing to risk?

Once you have business interruption coverage in place, should your business close due to a covered loss, you’ll be reimbursed for the revenue that you would earn during the closure. The insurance carrier uses your financial records so make sure they’re accurate and up to date to receive full compensation. This is especially important for growing businesses whose revenue increases each year.

Another bonus that comes with business interruption insurance is coverage of fixed expenses like rent or electricity. More than 20 percent of all revenue goes toward operating costs and even though your business is closed, you’ll still owe monthly bills.

This coverage offers that peace of mind and will protect your business from financial duress during an unexpected situation.  Talk to your commercial agent about business interruption insurance.

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How Your Liability Insurance Works

It is essential that you know your liability coverage and how it works for your business.

As a business owner, you need to be keenly aware that a minor incident could result in a big legal problem. Today, a spilled cup of coffee or an implied injury from your product can result in a lawsuit.   General liability insurance, property insurance, and worker’s compensation insurance are a must to be in business.  Your liability insurance will protect the assets of your business in the event it is sued for something it was perceived (right or wrong) to have done to injure or cause damage.

General liability insurance covers legal fees and damages in a covered claim and/or lawsuit.  Bodily injury, property damage, personal injury, and general damages are normally covered in this policy.  Punitive damages are usually not covered as they are awarded when it is determined the act was intentional.

In addition, your policy will spell out maximum coverage and limits during the policy period.   It may make sense to purchase a commercial umbrella policy to cover additional risk.  Review the limits and work with your commercial agent to determine what is best for your business.  You can also check with your state department of insurance to check for past cases and outcomes in helping to determine your company’s coverage limits.

General liability coverage can be purchased as part of a business owner’s policy or separately.  A business owner’s policy will package the liability with the property insurance.  Normally, when part of a business owner’s policy, the liability limits are fairly low.  You should review and assess risk with your commercial insurance agent.  Things to keep in mind are your perceived risk, like operating a lot of heavy machinery or have a fleet of vehicles on the road than say a signage business.

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Commercial Insurance 101

The success of any business depends on a vision, work ethic, and building a dream; commercial insurance makes sure that all the effort and money you have invested in your business is covered in case a natural or financial disaster strikes. Most businesses need to purchase at least the following four types of insurance:

Property Insurance covers you if the property you use in your business is lost or damaged by common perils such as fire or theft. Property insurance covers not just a building or structure, but also what insurers call business personal property, like furnishings.

Liability Insurance covers you in the event that someone claims your business caused them harm. Your liability insurance pays damages to third parties resulting from bodily injury or property damage for which your business is legally liable, up to the policy limits, as well as legal fees associated with the claim. It also covers any medical bills for any people injured by your business.

Commercial Vehicle Insurance provides coverage for autos owned by the business. This insurance pays any costs to third parties resulting from bodily injury or property damage for which your business or employees are found legally liable, up to the policy limits. Depending on what kind of coverage you buy, the insurance may pay to repair or replace your vehicle because of damage resulting from accidents, theft, flooding, and other events.

Workers Compensation Insurance or workers comp, as this coverage is commonly known, pays for medical care and replaces a portion of lost wages for an employee who is injured in the course of employment, regardless of who was at fault for the injury. It also helps protect the business from a lawsuit from the injured employee.

There is additional coverage to be considered in addition to the basics highlighted above, there are various other policies needed by some businesses, including the following:

Business Catastrophe Liability or Umbrella policies provide coverage over and above your other liability coverage limits. They are designed to protect against unusually high losses. For the typical business, the umbrella policy would provide protection over and above general liability and auto liability policies.

Professional Liability Insurance policies are designed to meet specific needs of individual businesses specialized for liability policies needed by some businesses. They include Errors and Omissions Insurance (E&O)/Professional Liability Insurance, Employment Practices Liability Insurance (EPLI) and Directors and Officers Liability Insurance (D&O).

Terrorism Insurance is offered to owners of commercial property as mandated by the Terrorism Risk Insurance Act, enacted by Congress in 2002. Insurance losses attributed to terrorist acts under these commercial policies are insured by private insurers and reinsured by the federal government.

Navigating the world of commercial insurance and determining your businesses’s needs can be tricky. Be sure that you engage a reliable insurance professional when the time comes to purchase or re-evaluate your commercial insurance policies.

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Different Business, Different Insurance?

Is engineers’ insurance the same as architect’s insurance and is, say, a Landscaper’s insurance all the same thing?  The answer is simply, no, and yes.  Let’s explore what that means in more detail.
Every business needs at least one general liability policy which we have discussed in prior articles and blogs.  A quick summary is that a general liability policy will cover injuries caused to a third party.  Depending on the business, the size, the assets, and corporate structure will determine the type(s) of liability policy for that business.

For example, a doctor will carry malpractice insurance like an engineer or architect, but the limits may (or may not) be higher.  The architect and engineer may carry errors and omissions insurance where the Landscaper may not.  Each will have a general liability policy, but the professional services may add a professional liability policy in addition.

A business should carry a Property and Casualty policy to insure for losses against real or personal property.  It might make sense to look at a business owner’s policy depending on the size and assets of the business.  We will examine business owners’ policies in the in greater detail down the road. In simple terms, a Business Owner’s policy will usually combine the general liability and the property and casualty coverage. Additional riders can often be added to this type of policy.

In every situation, a business owner, whether a medical professional, an accountant, an architect, or a landscaping service, should examine everything that is of value and put together the business insurance plan based on that information.

In addition to a commercial insurance agent, don’t be afraid to seek guidance and input from your banker, your accountant, your trade association and others who have an understanding of your industry segment.  You also must consider the revenue stream and how an interruption due to a loss would impact your business how much risk of this type your business faces.

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Understanding Commercial Liability Insurance

This is what you need to understand regarding commercial liability insurance:

Along with property and workers compensation insurance, general liability insurance is a must have for almost all companies. Liability insurance protects the assets of a business when it is sued by a third party for alleged injury or property damage.

Liability insurance can be purchased separately or as part of a Business Owners Package, which bundles property and liability insurance into one policy. When liability insurance is purchased as part of a B.O.P., the coverage limits are generally lower, so higher risk companies that need more coverage may choose to purchase liability insurance as a separate policy, or, add a commercial liability umbrella policy on top of the B.O.P. for additional protection.

The coverage a business needs depends on several factors. Business owners should consider the amount of risk associated with their type business. For example, a business that manufactures heavy machinery is likely at a greater risk of being sued than a company that manufactures linens, and would, therefore, need more liability insurance.

Another factor to consider is where your business is located. The volume and success of litigation varies dramatically from state to state. If a business is in a state that seems to favor high damage awards to plaintiffs, that business will need more liability protection.  This information is often available from your state department of insurance.

With a liability insurance policy, the insurer is obligated to pay the defense and legal fees of a covered claim or lawsuit. Covered liability claims normally include bodily injury, property damage, personal injury and advertising injury. The insurance company would also pay any compensatory or general damages that the business becomes legally obligated to pay.  It’s important to remember that punitive damages are not covered under general liability insurance policies because they are considered punishment for intentional acts.

General liability insurance policies always state a maximum amount that the insurer will pay during the policy period. Usually these policies also list the maximum amount the insurer will pay per “occurrence”.

For example, if a company has a $1 million “occurrence” cap in their liability policy and they are sued and receive a $1.5 million judgment against them, the insurer would pay $1 million and the business would be responsible for the additional half-million dollars. To cover these types of situations, most companies can purchase Umbrella Liability Insurance, which would cover payments in excess of the policy limits and provide coverage for liabilities not covered in a standard liability insurance policy as noted earlier.

Today, lawsuits are often brought for the most minor claims. For this reason, most insurance companies require their policyholders to report any accidents that could lead to a liability claim as soon as possible. The insurer may then require the business owner to document the situation, forward all summons and legal notices and cooperate fully in any investigations.  This allows the maximum protection for your business and the insurer to prepare adequately for the claim.

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Selecting a Commercial Insurance Agent

Selecting your commercial insurance agent can be as important as the insurance.

You may be just starting out, or have been in business for some time. It’s time to put all the pieces in place.  You’ve heard about agents and brokers and aren’t sure which you should use for your business.  Let’s break it down.

An agent will represent an insurance company as an intermediary.  They may be captive, meaning they represent just one insurance company, or an independent, representing a number of insurance companies.  In broad terms, the agent’s liability to the customer is administrative in scope.  Since many agents are captive, make sure to interview and review what they have to offer.

Insurance brokers work as independents with a broad scope of products to offer.  Brokers hold a different license which often indicates a higher level of education and certifications than those of an agent.  Brokers in most cases have a higher standard of accountability to the customer.  They have a duty to analyze and determine the scope of coverage required by your business.  Often, a broker will charge administrative fees or higher premiums to help pay this increased level of expertise.

Generally speaking, the larger your business is, the more important you should consider using a broker. Large can be both revenue and or the amount employees  If you have a large number of employees, a large number of vehicles and drivers on the road, or work in a high risk business segment, it probably makes sense to use a broker.  Brokers often have industry expertise and more resources to put together a comprehensive plan. If you have a small business, just a few employees, a couple of vehicles, and in a standard or low risk business segment, it can be fine to use an agent.

As always, before deciding whether you will deal with an agent or broker, get as much information to make your decision.  Other or similar businesses can offer insight, as can you trade organization or association and your state department of insurance.

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Do Consultants Need Professional Liability Insurance?

Small business owners, especially one or two person consulting firms often overlook professional liability insurance.  Sometimes, it’s a matter of cost and budget; more often it’s a lack of understanding their general liability coverage.

Consultants without professional liability insurance run the risk of being sued if their project or scope of work goes awry. This insurance, also called errors and omissions insurance, may be necessary, in addition to any general liability policy you may have, to protect you in the event that clients sue, claiming that you caused them financial loss or interruption of services.  General liability insurance doesn’t cover this type of claim against your business.

Here are just a couple of examples of potential risk for your firm.  Let’s say your firm recommends a new software pack and the install runs amuck. The company is offline for a week or more and sues you for loss of revenue and performance due to missed deadlines and critical data loss.  You could be sued for lack of results and failure to meet goals and objectives.  In either case, there is a good chance you don’t have the financial resources to fight these charges.

Take a look at the work you do, the clients you serve and determine if your firm is at risk.  Many companies also now require their vendors and professional services to carry professional liability insurance.  Work with your commercial insurance agent to determine if this coverage is right for your business.

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