What is business insurance?
Business insurance protects businesses and their owners in many different ways. It is similar to how a homeowners, renters, or auto insurance policy works. When something unexpected happens, the insurance carrier can step in to fix the problem or cover the financial losses if that event is covered by the insurance policy.
There are many types of business insurance policies, and each type covers a slightly different kind of loss. Businesses often need more than one type. Experienced insurance brokers, including our trusted partner Coverdash, can help you find the right policies and coverage. Generally, the goal is to protect the business from unexpected losses. Examples of items that business insurance will often cover include:
- Property damage.
- Lawsuits.
- Injuries caused by defective products.
- Natural disasters or severe weather that cause damage to your physical location or goods.
- Slip-and-fall injuries at the business.
- Employee injuries and auto accidents.
In general, businesses purchase insurance so that these types of unexpected expenses can be paid by the insurer. Businesses that operate on a tight budget may want to consider getting insurance for any losses that may impact business operations.
If a business does not have insurance, these losses are paid out of pocket, which can force a business into a negative cash flow situation. If legal action is required, it can be even more costly. Eventually, if a company cannot keep up with expenses after a loss, it may be forced to lay off staff, sell assets, sell the business, or close its doors.
What are the different types of business insurance and what do they cover?
Each type of business insurance provides slightly different types of coverage. The kind of coverage you may need depends on the risks for your business. For example, a business that provides services to its clients does not need product liability insurance because that type of coverage protects against losses caused by products produced or sold by a business.
Keep in mind that if you operate your business as a sole proprietorship (an unincorporated business with a single owner), you may be personally responsible, or personally liable, for any losses. Business insurance, however, can help pay for losses, which may help reduce or eliminate your personal liability. Sole proprietors may want to consider incorporating their business, in addition to maintaining insurance, so that they are not personally liable for losses. As an LLC or corporation, losses are limited to whatever assets the company may have, rather than extending to the owner's personal assets.
Review the types of business insurance below to find out which types of coverage might be right for your business.
General Liability Insurance
This coverage protects against general losses caused by your business. This covers almost everything from bodily injury to property damage to losses from libel and slander. If you or one of your employees damages a third party in some way, general liability insurance coverage may apply. Most policies have exclusions. Exclusions are things that are not covered under the policy. It is important to review the exclusions to any general liability policy, and secure additional coverage for those exclusions you believe may apply to your business.
Commercial Property Insurance
If you have commercial property that you own for your business, you may want to consider getting commercial property insurance. This type of coverage can address damage from natural disasters, severe weather, fires, floods, or vandalism (including rioting and looting in some cases). It may also protect your equipment, and provide some coverage to tenants within your building as well.
Business Income Insurance (Business Interruption Insurance)
If your business operation suddenly stops, that can result in huge losses for your company. Business income insurance provides replacement income if you suffer a loss that stops business altogether. It can help address ongoing expenses like payroll and utility bills.
Professional Liability Insurance (Errors and Omissions Insurance)
If you provide services as a professional, you might want to consider getting professional liability insurance. This coverage addresses any mistakes you make in providing these services. This type of coverage is a good idea for finance professionals, attorneys, engineers, doctors, and other professionals.
Disability Insurance
This coverage applies when someone becomes disabled and can no longer work, at least for a short period of time. Some states require that employers offer disability insurance to their employees.
Product Liability Insurance
Any business that produces or sells a product might benefit from product liability insurance. In addition, retailers and distributors might also want to consider getting product liability insurance. This type of coverage may apply if a product your business makes or sells causes damage or injury to a person. This can protect your business if a product is defective in quality, materials, or design. Certain product liability policies can also protect restaurants from claims of food-borne illness.
Home-Based Business Insurance
This coverage is geared towards business owners who operate out of their homes. It adds a rider, or an optional add-on, to their existing homeowners' insurance policy to cover certain types of business equipment. It may also provide an additional level of liability coverage that applies if clients or workers visit your home-based business.
Workers' Compensation Insurance
Workers' comp coverage is an employee benefit that provides income replacement and medical care if workers are injured on the job. Every state, except Texas, requires employers to carry workers' compensation coverage.
Commercial Auto Insurance
A personal auto insurance policy is unlikely to cover work activities if your car is used for business purposes. Instead, you may be required to get additional coverage specific to your commercial activities. This type of insurance will often extend to other employees you have driving for you.
Data Breach Insurance (Cyber Insurance)
This type of coverage addresses situations where a third party, or hacker, accesses your information, or private data is lost or stolen. Cyber insurance is vital for those who have highly sensitive information, such as bookkeepers, tax preparers, and attorneys. Any business, however, that collects and stores customers' personal or payment information may want to consider this.
Landlord Liability Insurance
Landlord liability coverage protects losses specific to those who own rental property businesses. Typical losses that are covered include damage caused by tenants, as well as injuries to guests or tenants. Some policies may provide coverage in case a tenant or disaster damages a unit so that it is uninhabitable. Essentially, this coverage is more than just an extended version of a traditional homeowners' policy.
Unemployment Insurance
Unemployment insurance is sometimes overlooked as business insurance because it is paid to the state in which you operate your business rather than through a private company. The money goes into a general fund to pay out unemployment claims. This type of insurance applies when an employee loses their job through no fault of their own and has to apply for unemployment benefits with the state.
With any of the above types of policies, reviewing the terms, exclusions, limitations, and just generally understanding your coverage is essential. If you need help reviewing an insurance policy, you may want to ask a lawyer for help.
Is business insurance a legal requirement?
Most types of business insurance are not legally required—they are just a good idea. However, in almost every state, there are a few exceptions to this general rule for employers and commercial drivers. Additionally, Commercial Lease Agreements may require business tenants to maintain certain levels and types of coverage.
First, nearly every state requires that businesses have unemployment insurance and workers' compensation coverage if they have employees. If you have commercial vehicles, you may also be required to have auto insurance for each car and driver.
Second, each state has its own requirements for insurance. For example, some states specifically require disability insurance coverage if you have employees. Below are a few specific state requirements as quick examples.
California
In California, there is no general business insurance required, but, if you have employees, or you or your workers drive vehicles, you must carry auto liability insurance and workers' compensation insurance. If you do not have workers' comp to address workplace injuries, it is a criminal offense. Employers may face penalties of up to a year in jail or as much as $10,000 in fines.
Texas
Texas does not require employers to carry workers' compensation coverage. However, most private employers choose to have this coverage as it saves on significant expenses if an employee is injured. Texas law requires that you have commercial auto insurance as well.
New York
New York requires that businesses carry both workers' compensation insurance and disability insurance to cover their employees. Commercial auto coverage is also required.
It is a good idea to consult with an insurance professional in your state or an experienced attorney to help you meet your minimum legal requirements and get the right coverage for your business.
How much does business insurance cost?
The cost of business insurance varies a great deal. You might be surprised to learn that business insurance is more affordable than you initially thought. Ask Coverdash for a free, online quote to find out just how affordable it can be. The following factors may affect the cost:
- The industry in which you operate.
- Where your business is located.
- The type and amount of coverage you need.
- The number of employees you need to cover.
- The value of the property you want to cover.
- Whether you have more than one layer of coverage.
Getting the right form of coverage to address the areas where you really need it is the key to keeping costs down.
Keep in mind that your personal liability insurance, including umbrella insurance, auto insurance, and homeowners' insurance, may not cover liabilities incurred through your business. Some personal policies may provide some limited protection for certain personal assets of business owners and sole proprietors if there is excess liability. Business policies, however, are separate from personal policies.
Do business insurance policies pay for my lawyer if I get sued?
Most business policies, and liability insurance policies in general, are required to provide you with a legal defense if you get sued, which includes retaining and paying for an attorney, if necessary. Business owners may still want to consider retaining their own attorney to make sure their interests are protected.
Some policies, called declining limits policies, take the fees that an insurer pays your lawyer out of the total amount of coverage provided. These policies may have less expensive premiums, but may end up costing you more money if you are sued.
Rocket Lawyer understands how important it is to go to a trusted provider for your insurance needs, which is why we have partnered with Coverdash. With Coverdash, you will be guided to the right insurance for what you need, quickly and easily.
If you have legal questions about your existing insurance policy, or would like an attorney to review your insurance needs, reaching out to a Rocket Legal Pro™ is an easy and reliable way to get affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
