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6 Min. Read

What Is Business Insurance? A Complete Guide to Insurance Coverage for Small Businesses

What Is Business Insurance? A Complete Guide to Insurance Coverage for Small Businesses

Business insurance helps companies protect their financial assets, physical property and intellectual ideas. It shields businesses from losses related to their business activities. There are various types of business insurance available to companies, including general liability insurance, property insurance and product liability insurance. Businesses need to invest in insurance policies tailored to their specific coverage requirements.

Explore these topics to learn what business insurance is and what coverage small businesses need to be protected:

What is Business Insurance?

What Does Business Insurance Cover?

How Does Business Insurance Work?

Why is Business Insurance Important?

What is Business Insurance?

Business insurance refers to a wide variety of insurance policy options created specifically to protect businesses against financial loss. Every business model and industry has its own unique risks, so companies need to tailor their insurance coverage to serve their specific needs. When choosing business insurance policies, business owners should evaluate all the factors at play for their company, including:

  • The size of the company
  • The number of employees working
  • The nature of the products made or services offered
  • The types of work vehicles used
  • The types of materials handled
  • Working conditions at the company

What Does Business Insurance Cover?

There are several business insurance policy options that offer different types of coverage. Some of the most common types of business insurance cover the following risks:

General Liability Insurance

General liability insurance covers your business for any claims that involve bodily injury, property damage or medical expenses resulting from your products, services or general business operations. All businesses should invest in general liability insurance to protect themselves from common risks.

Property Insurance

Property insurance covers the loss, damage or theft of your commercial property and its contents (such as furniture and equipment) as a result of natural disaster, fire, storms, accidents and vandalism.

Product Liability Insurance

Product liability insurance covers businesses that manufacture and sell goods against losses stemming from a defective product that causes injury or harm. Coverage can be tailored to the specific products sold by your company.

Professional Liability Insurance

Professional liability insurance, also called errors and omissions insurance, protects a business against mistakes, negligence and malpractice related to the services it provides to clients. This type of insurance is most often used by professional service providers, including lawyers, accountants and physicians.

Workers Compensation

Workers compensation insurance covers a business’s employees if they become sick or are injured while working on the job. Most states require that businesses provide workers compensation if they employ a certain number of workers. It’s a good idea to look into the specific workers compensation requirements in your state before hiring any employees.

Commercial Vehicle Insurance

Commercial vehicle insurance provides coverage to company cars and trucks. It covers the vehicles and their drivers for collisions, liability, personal injury and damage to property. Any vehicle used in the operations of your business should be covered by commercial vehicle insurance, as personal policies don’t typically extend to work vehicles.

Loss of Income Insurance

Loss of income insurance covers a business in the event that an emergency causes the company to lose revenue. Loss of income insurance reimburses businesses for specific ongoing expenses listed on the policy, such as mortgage payments, payroll and business taxes.

Home-Based Business Insurance

If you run your business from a home office, your homeowner policy won’t cover certain assets related to your business. You need a specific home-based business insurance policy to cover your business equipment, supplies and other work property kept in your home office. If clients and customers visit your home office, you may need to add additional coverage to your policy.

How Does Business Insurance Work?

Business insurance creates a contract between a business and an insurance company. The contract confirms that the insurance company agrees to share the business’s risks in exchange for regular insurance premium payments. If the business then experiences a loss that’s covered by its insurance policy, the insurance company will cover the financial losses up to the maximum policy limit. The business will likely need to pay for a deductible before the insurance coverage kicks in and it can seek reimbursement.

To recoup a financial loss covered by your insurance policy, you need to file a claim with your insurance provider. For example, if your work vehicle is damaged in an accident, you would file a claim against your commercial vehicle policy requesting money to cover the cost of the repairs. Your insurer will then assess the claim and process a payment to compensate for the damages.

Why is Business Insurance Important?

Business insurance is important because it protects your assets and can keep your business operational in the case of lawsuits or emergencies. Here are some of the top reasons why small business insurance is important:

It’s Legally Required

The first -- and most crucial -- reason you should invest in insurance for your business is that’s it’s required by law in the US. All businesses with employees need to have at least the following insurance coverage, according to the Small Business Administration:

  • Workers compensation
  • Unemployment insurance
  • Disability insurance

Certain states have other legal requirements for business insurance, so look into your local guidelines. Failure to properly insure your business can lead to fines and even civil or criminal charges.

It Protects Against Lawsuits

Without the right business insurance coverage, your company could easily be sued by customers for a faulty product, clients for a breach of contract, or employees for a workplace injury. The cost associated with just one lawsuit is often all it takes to bankrupt a small business. Be sure to get the right liability insurance to protect your business in the case of lawsuits brought against your company.

It Keeps Your Business Running in Emergencies

In the case of an emergency such as a fire or a flood, your business may lose a lot of money while it’s closed for repairs or rebuilding. Loss of income insurance can protect you in the case of business interruption by ensuring that you’re still able to cover your costs while you’re closed, such as paying your employees their wages, covering your rent or paying your mortgage.

It Protects Your Employees

Employees are a business’s most important asset and it’s critical that you have insurance to protect them. Insurance including workers compensation, health coverage and disability insurance can help your employees in times of emergency and can also protect your business from lawsuits.

It Makes You More Credible

When your business is insured, it makes you look more credible in the eyes of your clients, vendors and employees. Insurance shows prospective clients, partners and workers that they’ll be fairly compensated and protected in the event of a loss or emergency.