Insurance for Your Small Business: What do You Really Need
April 8, 2014
Getting some level of insurance is pretty much the norm these days, whether it’s to protect against the unexpected with our homes, cars, health (at least for those of us in the US), and more. But what about insurance for your business? It’s well understood that a doctor needs insurance in order to practice, but what about other service professionals like accountants, PR pros, and freelance developers?
Here we’ll break down some of the basics surrounding insurance and your business, so you can make the best decisions to protect your company and livelihood without spending money on unnecessary coverage.
Liability and your business structure
Before we delve into the details of insurance, it’s important to realize that the way you have structured your business will impact your liability. That’s because when your business is a sole proprietorship or partnership, there’s no separation between you and your business. If your business is sued, then you’re personally on the hook for any payments.
Once you create a formal business structure—for example when you incorporate a business, form an LLC (limited liability company) or an LLP (limited liability partnership)—you are separating the business from any of your personal finances. You can read more about this here.
The ins and outs of insurance
A formal business structure is critical to protecting your personal assets from business liabilities, but it’s not going to protect the business itself from losses, such as stolen computers or a breach of your clients’ sensitive data. That’s where insurance comes in.
Your specific insurance needs are going to depend on your business type and risk tolerance, but here are some of the common insurance types:
1. General liability insurance: This is a basic kind of insurance that broadly covers your business against accidents, injuries, and negligence claims. For example, it can help cover medical expenses, attorney fees, and damages if someone gets hurt on your property or when there are damages caused by you or your employee. It can also cover claims of false advertising, slander, or copyright infringement.
The amount of coverage you need obviously depends on the type of business you’re in. A homebuilder will need more coverage than a web designer. However, I’d recommend every business gets some level of liability insurance…just because things can happen and we do live in a litigious society. For example, a delivery person could slip on an unstable step and injure himself while delivering a package to your business.
You can get a premium ranging from $750-$2000/year depending on your coverage needs. Your general liability plan will outline the maximum the insurance company will pay against a claim. Just make sure this amount is in line with the level of risk for your type of business (again, a copywriter or designer won’t need the same level of coverage as a contractor).
2. Professional liability insurance: Professional liability insurance typically applies to service providers like lawyers, accountants, notaries, real estate agents, insurance agents, hair salons, consultants, etc. If you provide a service to a customer, this insurance protects you against claims of malpractice and negligence. It’s important to realize that in most cases, your general liability policy isn’t going to protect you against these types of claims.
3. Product liability insurance: If you make, distribute or sell a product, this type of insurance is going to protect you from any losses related to a product defect. If you’re not involved in creating or selling a product, then you don’t need to worry about product liability.
4. Commercial property insurance:If your business owns any kind of property, such as a building, office, expensive tools and equipment, you will need property insurance to cover any losses or damage as a result of events like fire, smoke, vandalism, etc. In addition to property insurance, you should also consider adding business interruption coverage to this policy if you’re worried that damage to the property (i.e. a building fire) will mean you can’t operate the business for an extended period.
5. Home-owners insurance: What if you run your business out of your home? It’s important to realize that your standard homeowners insurance policy typically doesn’t cover a home-based business. For example, if there’s a robbery at your home and several of your work computers are stolen, your general policy might not cover the loss. And your insurance company may even choose to cancel your policy because you failed to disclose a home-based business.
The easiest and most affordable way to protect your home-based business is to get an add-on (or rider) to your existing policy to cover your business. These types of policies generally provide about $2500 of additional coverage, which might be enough for a solo business without a lot of valuable equipment and doesn’t have a lot of people visiting the home for business matters. If you need more coverage, consider an in-home business policy that usually covers equipment and liability of people coming in and out.
6. Data breach insurance: If you are dealing with sensitive information about employees or clients, then you should consider a data breach policy that will protect you from either an electronic or physical breach. Think about this if you deal with client’s financial data or product/company information that’s covered by an NDA.
7. Insurance for employers:If you have any full-time employees, then you have specific insurance requirements including Workers Compensation Insurance and Disability Insurance. For example, what happens if your employee gets injured on the job and sues you for medical and disability costs, plus damages? Workers comp will protect you in these circumstances. If you’re in the U.S., contact your state’s insurance commissioner’s office to learn what exactly you need as an employer.
8. Business Owner’s Policy (BOP): Business owners who need extensive coverage (i.e. more than $10,000), should consider a business owner’s policy. This type of insurance usually covers things like damages to business equipment, liability for customer injuries, malpractice claims, loss from business interruptions, and protection when driving a personal vehicle for business.
For example, a wedding videographer may want the coverage for his expensive equipment, driving to event sites, and any losses that occur to clients’ photos. In many cases, packaging all this coverage into a BOP can be more affordable than looking for separate coverage for each.
If all these insurance policy types are causing your head to spin, make an appointment to speak with a reputable small business insurance advisor to go over your specific situation. You should take a realistic look at all the potential risks to your business, family, and personal assets. Don’t feel forced to pay for more than you think you need. Most small businesses will never be sued or experience a huge loss, but it’s best to take some small steps to protect against those worst-case scenarios.
More great ideas to grow your business
Check out contract 101 when hiring freelancers.