Small business insurance basics

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Small business owners usually learn early to expect the unexpected. That surprise could come in the form of an employee accident, a customer lawsuit or a natural disaster that damages the business.  

Small business insurance protects a company’s assets and income when such events occur.

There are several different types of policies; what you need depends on the size and type of your business.

The federal government says every company with employees must have workers’ compensation, unemployment insurance and disability insurance. But there are other policies – such as general liability insurance, property insurance and business interruption insurance –  that experts say small businesses also shouldn’t go without.

A small business, as defined by the U.S. Small Business Administration (SBA), is a company with fewer than 500 workers. As of March 2023, according to the SBA, a federal agency set up to serve and protect the interests of these enterprises, there were more than 33 million operating in the U.S

And their numbers are growing, with a record 5.5 million new business applications filed in 2023.

However, a survey of 500 business owners conducted last year by Next Insurance, found that just 10% of small businesses are “completely confident” that their companies have adequate insurance.

Part of the problem may be that the small business insurance landscape isn’t the easiest to navigate.

Among the questions owners usually have: What type of insurance is right for my particular business? How much do I need? What does my state require? Who sells this type of insurance? And, of course, how much is it going to cost?

“Unlike large businesses that have risk managers, small businesses have to be their own risk managers,” says Loretta L. Worters, a representative of the Insurance Information Institute (Triple-I), an industry association that works to educate consumers about insurance. “They need to assess their risks and then purchase the insurance that is right for them. For example, a dry cleaner will have very different needs and risks than, say, a restaurant.” 

Triple-I notes a business owner’s policy (BOP) can cover much of what a small business needs. A BOP includes liability, property damage and business interruption insurance.

The different types of small business insurance

There are more than a dozen types of policies.

According to the SBA, six of the more common include BOP, general liability insurance, product liability insurance, professional liability insurance, commercial property insurance and home-based business insurance.

The U.S. Chamber of Commerce lists commercial auto insurance, workers’ compensation and cyber liability insurance as other common types.

Here’s a quick rundown of what the most popular small business policies cover:

• General liability insurance. This covers financial losses from bodily injury and property damage claims and associated medical expenses. It also can protect an owner from losses tied to slander or copyright infringement lawsuits.
• Business property insurance, also known as hazard insurance. This covers damages to commercial property, including buildings, machinery, furniture, tools, electronics, signs and other items due to fire, storms, vandalism or other events.
• Business interruption insurance, also known as business income insurance. This covers losses related to the temporary closure of a business due to a fire or other covered event. It also helps pay bills, cover payroll and replace lost income.
• Business owner’s policy, or BOP. This is a package policy consisting of liability, property and business interruption insurance.
• Product liability. This covers injury claims that result from a company’s products harming someone or something.
• Professional liability, also called errors and omissions (E&O) insurance. This covers legal and damage expenses due to employee malpractice, negligence or other mistakes.
• Commercial, or business, auto insurance. This covers damage caused by a driver of a business vehicle and, depending on the policy, may pay for certain damages to the company’s vehicle.
• Workers’ compensation insurance. This covers injuries and lost wages to workers if they get hurt on the job. Workers’ comp is mandatory in every state but Texas, where, according to the Texas Department of Insurance, in most cases, it’s not. Workers’ comp requirements and benefits vary by state. In Florida, some businesses that don’t employ a certain number of employees, aren’t required to have workers’ comp. In non-construction companies, for instance, only those with four or more employees need it. 
• Cyber liability insurance. This protects companies from lawsuits stemming from data breaches of sensitive customer information and other cybersecurity issues.

Other types of small business insurance

In addition to the policies listed above, there’s home-based business insurance, which can be added to your homeowners insurance. It covers property, such as business equipment and liability for third-party injuries.

There’s also directors and officers (D&O) liability insurance, which protects the assets of a company’s directors and top officers if they’re sued by customers, employees or others for wrongful decisions and actions. Another is key employee insurance, a life insurance policy that compensates a business if a critical employee dies or is disabled.

“While coverages vary among insurance providers, businesses can [also] often opt in for additional coverage, such as crime, spoilage of merchandise, forgery, fidelity, and more,” Triple-I’s Worters says.

Where to buy small business insurance

Most major insurance companies sell small business insurance. But which policies a company sells depends on the offering and location. Some of the major players include:

• AIG
• Allstate
• American Family
• Chubb
• Cincinnati Insurance
• CNA
• Erie
• Farmers
• Geico
• The Hartford
• Hiscox
• Liberty Mutual
• Nationwide
• Next
• Progressive
• State Farm
• Travelers
• USAA

Which insurers provide the best service

J.D. Power in August 2023 released the results of a small business insurance customer satisfaction survey. The consumer insights and advisory service polled almost 2,500 small commercial insurance customers. The average score was 847, but nine companies exceeded that:

• Nationwide scored 883 
• State Farm scored 877
• Cincinnati Insurance scored 870
• Farmers scored 864
• Allstate scored 860
• Liberty Mutual scored 857
• American Family scored 855
• Erie scored 853
• Chubb scored 852

It’s also a good idea to check the financial stability of any company you might be thinking of going with. Rating agencies such as AM Best keep track of credit ratings. And seek out company reviews and peer recommendations.

How to buy small business insurance

When shopping for small business insurance, Triple-I and the U.S. Chamber of Commerce offer a number of tips:

• Assess your risks. What accidents, natural disasters or lawsuits could you face? Is your business based in an area that could be affected by seasonal events?  What do you need to protect?
• Cover your legal bases. Determine what insurance you’re legally required to have, says the Chamber of Commerce. Federal and state governments may have separate requirements.  
• Comparison shop. Insurers offer different benefits and prices. Triple-I recommends comparing several rates, terms and benefits.
• Do an annual reassessment. As the company grows, so do the liabilities, Triple-I says.  

Many experts say the best way to buy small business insurance is to work with a licensed agent or broker. A commercial insurance agent can research policies and determine your business needs.  

But, Triple-I notes, agents receive commissions when they sell policies. So research the agents you’re doing business with to ensure they won’t put your interests ahead of their own.

How much insurance does a small business need?

As mentioned earlier, businesses with employees generally need workers’ compensation, unemployment insurance, and disability insurance. General liability, according to multiple sources, is one of the most common small business insurance products. 

And many companies buy a BPO, which includes business interruption and property insurance.

Insurance company Chubb offers this rule of thumb for business interruption insurance: Use the business’s gross earnings and projections to estimate future profits and figure out the amount of coverage you need.

When it comes to property insurance, Triple-I advises small business owners to first list their company’s assets, including property, equipment, and inventory. The group says owners can then purchase property insurance based on the property’s actual value (the replacement cost minus depreciation) or its replacement value (the cost of replacing the item without deducting for depreciation). 

How much does small business insurance cost?

The cost of business insurance varies depending on the type of policy, the type of business, the number of employees, the amount of revenue generated, the location of the company and other factors.

Listed below are some of the general prices various insurers promote on their websites to provide a sense of what some of the most common policies cost.

How to save on small business insurance

Triple-I offers several ways small business owners can cut down their insurance bills:

• Shop around. As previously mentioned, different insurers price various policies differently. Triple-I recommends getting several quotes before deciding on a carrier. 
• Increase your deductible. A deductible is the amount you pay out of pocket when you file a claim. For business insurance policies, the deductible could be $500. But if you increase your deductible, your insurer is likely to offer a lower rate. But be careful – you want to make sure you have the deductible amount handy in case something goes wrong.
• Package policies. Just like bundling personal auto and home insurance with the same company can often save you money, packaging business insurance can also result in a price that is less than buying standalone policies. A BOP, for instance, will often cost less than liability, property and business interruption insurance bought separately.
• Work with an agent. With so many different types of businesses, so many different policies and so many companies to choose from, it’s advisable to work with an insurance agent with knowledge of the risks surrounding your particular business when deciding how much property and liability coverage to buy.
• Take action to prevent losses. Your insurer may offer suggestions to reduce your risk and earn a lower rate. For example, installing an alarm and a sprinkler system can mitigate the risk of theft and fire damage.
•  Avoid losses. Triple-I notes that costs are lower for businesses that don’t file many claims. Companies that file claims often pay higher rates and could even be dropped by their insurer.

“Businesses can take proactive steps to minimize their exposure to risk and, in turn, reduce their need for insurance coverage and rate increases. For example, implementing a safety training program,” Triple-I’s Worters says. “Reducing claims is the best way to save money.  Other ways include bundling different insurance packages, increasing deductibles – though keep in mind whatever that deductible is, will come out of the business owner’s own pocket.” 

John McCormick

 

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John was a deputy editor at The Wall Street Journal and had been an editor and reporter at a number of other media outlets where he covered insurance, personal finance, and technology.