Small Business Insurance: 8 Essential Types of Coverage

August 23, 2019
Posted in: Uncategorized

Table of Contents

 

You’ve got an idea for a service that you know will be well-received based on market research. You’ve almost obsessively pored over your business plan to ensure that all of the “I’s” have been dotted and all of the “T’s” crossed. You’re doing your best to ensure that nothing happens to derail your business’s success.

But just as life is unpredictable, there are unfortunate events that even the most astute business owner can’t foresee. These events could put your personal or business assets in peril or bring your entire operation to a screeching halt. Although you can’t predict the future, you can safeguard your business against these unfortunate events. How can you do that? Small business insurance.

 

business

 

What Is Small Business Insurance?

As a small business owner, you can purchase business insurance to protect your personal or business assets from risks inherent in running a business. Lawsuits claiming property damage, bodily harm or financial loss caused by your business could result in costs that bring your business to its knees. By getting the appropriate insurance coverage, you protect your assets by letting the insurance provider cover these costs. What is the appropriate coverage? That depends on the nature of your business.

 

shop owner

 

All Small Business Owners Need Business Insurance

Small business owners who operate out of their homes or through online channels may feel that their operations are too small to require business insurance. They may also feel that their home insurance policy is enough. However, the smallest of businesses can benefit from business insurance. Protecting assets and safeguarding against a disaster should be a concern for all businesses, regardless of how small.  And, home insurance policies may not provide the coverage needed.

Without adequate coverage, small business owners will have to personally cover the cost of repairs, medical bills, and other associated costs in the event of a lawsuit. In some cases, a business owner is required to carry business insurance: if the owner is seeking financing of equipment, inventory, or buildings. A small business that has larger companies as clients would be wise to invest in business insurance as these companies may view this as a sign of financial stability.

Again, the type of business insurance that you’ll need will depend on the nature of your business. Some businesses will be able to get by with the minimum amount of coverage, while others will require a policy or policies that provide more coverage.

 

Most Common Types of Small Business Insurance

When it comes to small business insurance policies, there are several types that address the risks that most business owners face. For example, a general liability policy is one that most business owners should invest in to protect their businesses from claims of bodily harm, property damage, and harm to reputation.

 

General Liability Insurance

A General Liability Insurance policy will protect your business from non-employee claims of bodily harm, property damage, and damage to reputation. Damage to reputation covers such things as defamation and copyright infringement. If a non-employee brings a lawsuit against your business claiming that your business is responsible for their damages, your general liability policy will cover the injured party’s medical bills, repairs to property, and your legal fees.

The average annual cost of general liability insurance, regardless of policy limits, is $741, with a median cost of $428. Brick and mortar businesses that have a fair amount of foot traffic can expect to pay more for their policies because they face a greater risk of physical injury lawsuits. 

General liability coverage will protect your business from some of the most common risks that business owners face. For this reason, it’s the minimum amount of insurance that your business should carry.

 

 

fire

Commercial Property Insurance

Commercial Property Insurance (CPI) protects your business’s physical assets such as buildings and their contents (fixtures, furniture, equipment). If these assets are damaged or lost in a fire, burglary or other event covered under the policy, the CPI policy will pay up to the insured amount less than any deductible.

If you operate a home-based business, have property that’s exclusively for business use, and worth more than $10,000, you would need CPI since your homeowner’s or renter’s policy is not likely to cover loss or damage to the property.

The average annual cost of commercial property insurance for most small businesses is between $500 and $1,000. The cost of a policy will vary depending on state, building size, construction materials and business use. Rates are generally based on the building’s replacement cost, and the value of the building’s contents.  Insurance providers often consider a building’s structure and location when giving a premium quote. If the building has a security or sprinkler system, a business owner may receive premium discounts. 

 

office

 

Business Owner’s Policy

A Business Owner’s Policy (BOP) is a hybrid of general liability and commercial property insurance. Insurers offer this bundled policy at a rate lower than what the policies might cost if purchased separately. Business interruption coverage is included in most BOPs and will pay for lost profits and continuing expenses if you have to pause business activity due to a covered property event (i.e. fire or natural disaster). The cost of operating out of a temporary location may also be included. In addition to standard coverage, most insurance providers offer the optional addition of other coverage that business owners can use to tailor a policy to their specific needs.

The average annual cost of a business owner’s policy is $1,190 with a median cost of $641. Cost will depend on the amount of coverage and whether additional policies are included. 

Professional Liability Insurance (Errors & Omissions)

Professional Liability Insurance, more commonly known as Errors & Omissions (E&O), is a type of liability insurance which protects advice- and service-providing professionals. Coverage focuses on the professionals’ alleged negligence in providing services which resulted in clients’ financial or other losses. A more general liability insurance policy would address more direct forms of harm so wouldn’t be adequate for this type of liability. In the event of a negligence lawsuit, professionals who carry E&O insurance wouldn’t have to bear the full cost of legal fees or awarded damages.

E&O insurance may take on different forms and be known by other names depending on the profession (i.e. medical – malpractice insurance; legal — lawyers professional liability insurance). E&O insurance is required by law in some areas for certain kinds of professions.

The average annual cost of professional liability insurance is $1,735 with a median cost of $920. The price that professionals pay depends on the industry with higher premiums paid by architects and engineers. Employing sound risk management practices could help professionals negotiate lower premiums.

 

Commercial Auto Insurance

If you frequently drive your personal car for business purposes or if you have employees who drive company vehicles, Commercial Auto Insurance is highly recommended. In the event that you or your employees are involved in an accident, a commercial auto insurance policy will cover the cost of repairs, medical bills, and legal fees. This type of policy can also pay for repairs if your vehicle or company vehicles suffer non-accident damages such as theft, vandalism, severe weather events, and collision with an object. You may also want coverage for damage to vehicles that you rent or for medical expenses regardless of who is at fault.

If you have general liability insurance to protect your business from lawsuits, you still need commercial auto insurance to protect your business from lawsuits concerning car accidents.

Every business is different so the cost of a commercial auto insurance policy will vary based on a number of factors. Some of the factors that influence the cost include:

  • Vehicle(s) make, model and year
  • Cost when new
  • Gross vehicle weight, especially if the vehicle is a truck
  • Number of commercial autos being insured
  • Driving records for all drivers
  • Location (many states have minimum liability requirements)
  • Coverage options, including liability limits and deductibles
  • Claims history
  • How the vehicle(s) is being used (i.e. To commute to and from the office? To visit clients or job sites? To make deliveries to customers?)
  • Speedy delivery required (i.e. for restaurant deliveries promised within a certain time frame)

Although the actual cost will vary depending on the above factors, the average annual cost of commercial auto insurance is between $900 and $1,200 for each insured vehicle.

 

driving car

 

But, I Have Personal Auto Insurance. Do I Still Need a Commercial Policy?

 

If you already have a personal auto insurance policy, that may be enough coverage. If you use your personal vehicle infrequently for business purposes, a commercial policy generally isn’t warranted.

Commercial auto insurance is highly recommended if:

  • You use your personal vehicle frequently for business purposes.
  • You’ve registered a vehicle in your business name.
  • You have employees who drive company vehicles.

Depending on the state where the business vehicle is registered, a commercial auto policy may be required because personal auto policies don’t offer the liability limits that the state requires.

Most states require commercial auto insurance for:

  • Vehicles weighing more than 1 ton gross
  • Utility-style vehicles, such as trucks, vans, dump trucks, and other specialty utility vehicles
  • Any vehicle used to transport passengers for a fee, such as limousines, taxi cabs, and buses
  • Any vehicle that transports cargo, such as a semi-truck, cargo van, or box truck

Hired and Non-Owned Auto Insurance

What if your employees drive their personal vehicles for business? Your business can be held liable for accidents that occur while employees are conducting business on your behalf.  For example, if you regularly have employees make office supply runs in their own vehicles, your business would be responsible for any damages should an accident occur during one of these runs. 

Commercial auto insurance offers useful protection, but it doesn’t cover employees who drive their personal vehicles for business. Hired and Non-Owned Auto Insurance (HNOA) offers liability protection if your employees frequently use their personal vehicles to conduct company business.

If your business rents trucks or vans to haul goods or transport passengers, HNOA insurance will cover any liability expenses that result from an accident. Because an HNOA policy doesn’t cover such events as accidents that occur during commutes, accidents that happen when an employee runs personal errands during work, or physical damages to the non-owned vehicle, it is recommended that it be purchased as a rider to a commercial auto insurance policy instead of as a standalone policy.

Just as with standard commercial auto insurance policies, various factors will influence how much HNOA coverage will cost. Carriers will consider drivers’ ages, driving records, type of vehicles, the number of vehicles being insured, and the way in which the vehicles will be used, among other factors.

 

talking

Workers’ Compensation Insurance

If one of your employees suffers a work-related injury or illness, you’re responsible for paying the employee’s medical bills and lost wages even if the employee has health insurance. With Workers’ Compensation Insurance (WCI), these costs would be paid for you. There are also policies that will cover your legal fees should the employee claim that the injury/illness is a result of your negligence.

While unable to work, the employee is entitled to a percentage of his/her regular wages and if you don’t have WCI, you’ll have to pay for this out-of-pocket along with any medical bills. Your state could also impose fines and penalties for not carrying WCI. Every state except Texas requires that business owners carry WCI, sometimes as soon as they have one employee. Some states also require employers to purchase their WCIs through a state fund. Even though Texas business owners aren’t required to carry WCI, an estimated 65% do anyway.

If you’re a sole proprietor without employees, you may still need to carry WPI. Why would you need to if you don’t have employees? Contracts with prospective clients may require that you do so. This is common practice for construction professionals.

The cost of workers’ compensation insurance varies greatly from state to state. This is due to the fact that WCI is governed by state law. So, your business’s location, number of employees, and the types of risks employees are subject to are all factors that will ultimately affect the WCI policy’s cost.   

 

Employment Practices Liability Insurance

If a former, current, or prospective employee files a lawsuit against your business claiming that his/her civil rights were violated, Employment Practices Liability Insurance (EPLI) will cover your legal fees and any awarded damages. Although EPLI is a type of Errors & Omissions (E&O) insurance, it’s usually excluded from standard professional liability insurance policies. You can, however, add EPLI to the E&O policy.

The wrongful acts that trigger a lawsuit may occur when an employer is interviewing and evaluating candidates and after candidates have been hired. Some of the acts covered by EPLI include:

  • Sexual harassment
  • Discrimination based on age, gender, race, religion, or sexual orientation
  • Wrongful termination of employment
  • Wrongful discipline or demotion
  • Retaliation
  • Failure to promote or employ
  • Invasion of privacy
  • Deprivation of career opportunity
  • Mismanagement of employee benefits
  • Slander or libel
  • Breach of an employment contract

Any business with employees can be exposed to employment-related lawsuits. Considering the litigious nature of today’s work environments and the fact that EPLI lawsuits are among the most expensive claims that a business can encounter (average claim costs $160,000 for legal fees and settlement), investing in coverage is essential.

The average annual premium for employment practices liability insurance is between $800 and $5,000. Most small businesses are able to find coverage for approximately $1,200 but EPLI coverage can be added to a Business Owner’s Policy (BOP) for a few hundred dollars per year.

 

woman pen

 

Captive Insurance: Alternative to Commercial Insurance Marketplace

Small business insurance policies available in the commercial insurance marketplace have been covered above. But, what if you, as a business owner, can’t find a policy that meets your risk mitigation needs? Captive insurance may be the answer.

A Captive Insurance company is similar to a mutual insurance company. However, unlike in a mutual insurance company, the policyholders/owners place their own capital at risk. They’re willing to do so in anticipation of the financial rewards to be realized with better control over their insurance program.

Captive insurance is the preference of those who choose to:

  • Create their own insurance company by putting their own capital at risk. The policyholder in a captive not only has ownership and control but also benefits from its profitability.
  • Work outside of the traditional commercial insurance marketplace. They make this choice believing that captive insurance offers something superior to commercial insurance. And commercial insurance that meets their needs isn’t always available.
  • Achieve their risk financing objectives. When the policies offered by commercial insurers don’t meet a company’s risk financing needs, the best option might be to form a captive insurance company. Companies who opt for creating a captive are seeking a more cost-efficient risk financing mechanism.

Benefits of Captive Insurance

Companies that find the captive insurance model appealing are drawn to the prospect of:

  • Broader Coverage. A captive insurer can adequately provide coverage for difficult risks that’s tailored to meet the specific needs of the policyholder.
  • Stability in Pricing and Availability. Pricing stability is achieved over time as a captive matures and expands its own risk retention capability. As more capital is accumulated, the captive is better able to insulate itself from changes in the commercial insurance marketplace and provide stability in the availability of coverage.
  • Improved Cash Flow. The underwriting profits and gains from the invested premiums that would otherwise be held by a commercial insurer are retained by the captive. Cash flow is improved by reducing the expenses generally associated with commercial insurance.
  • Increased Control over the Program. Ownership and control by its policyholders distinguish a captive insurer from a commercial insurer. Policyholders in a captive insurance company have ownership in the company’s strategic business purpose.

 

talking on phone

 

Selecting a Small Business Insurance Carrier

Now that you know which risks your business is likely to face, you should start shopping for the policy that offers the best protection against them. An online search will lead you to a plethora of carriers, many of whom may specialize in your industry. The benefit of searching online for carriers is the availability of online reviews.

Before purchasing a policy, check out the carrier’s financial strength rating provided by companies like A.M. Best and Moody’s. Ratings of “A” or better indicate that the carrier has the available resources needed to pay claims. If you choose to work with a small business insurance broker to access multiple carriers, choose a broker who only works with carriers that have an A-rating or better.

 

Getting Business Insurance Quotes

To ensure that you receive accurate quotes, provide small business insurance carriers with accurate information about your business.  Inaccurate information could also result in the carrier denying a claim should you file one. If necessary, gather pertinent documents that contain:

  • Building address, age, materials, and square footage
  • Date of establishment
  • Revenue for the past 12 months
  • Estimated revenue for next 12 months
  • Details about business operations
  • Business-owned vehicle information
  • Value of  business-owned property
  • Claims history

 

Final Thoughts

Risk is an inherent part of operating a business, regardless of the industry. Small business insurance is the best way to insulate a business from risks that could close its doors permanently. You’ve worked too hard to leave the health of your business to chance. Protect its health by purchasing a policy that covers the perils that threaten it.

All rights reserved @ Personal Loans 2019