What Types of Insurance Does Your Small Business Need?
Understanding what insurance you need is an essential part of your business.

From fires to personal injury lawsuits, unexpected disasters can hit a business at any time. While incorporating your business can keep your personal assets safe if anything happens to the company, insurance provides additional protection for you and the business itself. Some insurance is mandatory, while other types of insurance are optional, but recommended to help minimize the risk of catastrophe.

Types of Business Insurance

Depending on the type of business, you have many varieties of insurance to consider. Your options will depend on a number of factors, including :

if you have a physical location where customers can visit
whether or not you have employees
whether you have a company car
requirements for your profession, and
the laws of your state.

With these factors in mind, there a few basic types of insurance most businesses should consider.

General Liability Insurance: General liability insurance protects you if your business causes bodily injury or property damage. This includes injury that occurs at your location, but also injury that results from your goods or services.

Property Insurance: Property insurance protects the property of your business, including equipment, computers, and inventory, in case of events like theft, fire, or vandalism.

Commercial Auto Insurance: If you have a vehicle that is used in your business, your personal insurance may not cover commercial use. Commercial auto insurance will ensure you have coverage if you or any of your employees get in an accident.

Data Breach and Cyber Liability Insurance: In case there is a data security breach, this covers costs such as litigation and settlement fees if you are sued.

Disaster Insurance: Disaster insurance covers loss resulting from catastrophic natural disasters, such as tornados, earthquakes, and hurricanes. Note that property insurance may exclude specific natural disasters, and you must have this additional coverage for protection.

Business Owner’s Policy: This is a policy that bundles other types of insurance, such as property and general liability, into one policy for lower rates and your convenience.

Commercial Umbrella Insurance: Umbrella insurance provides additional coverage on top of your other insurance, in case you have to exceed your liability coverage.
Required Insurance When You Have Employees

If you have one or more employees, you may be required by state law to obtain additional coverage. In some states, you may not be required to have this insurance if you have fewer than three employees, while other states require insurance even if you have only one part-time employee. If you fail to have proper coverage, you may face penalties, including stiff fines.

The first to consider is workers’ compensation insurance, which pays for an employee’s medical bills, rehabilitation, and lost income should they get hurt while on the job. Depending on your state, you may be required to purchase this through the state, or you may obtain it from a private licensed insurance company.

The second requirement is unemployment insurance. This provides income to employees who are laid off through no fault of their own. Unemployment insurance typically works differently from other types of insurance, in that payments are often made to the state as a tax. The amount you must pay will likely be a percentage of gross wages paid, the number of current employees, and the number of claims by prior employees.
Professional Insurance

Certain professions require you to carry additional insurance in order to be licensed in the state. For example, attorneys and doctors may be required by state law to have malpractice insurance. If you fail to carry this type of insurance, you may be penalized by the state licensing agencies, or lose your license to practice in the state.

For other professionals, such as bookkeepers and consultants, professional insurance is not a legal requirement but still recommended. You may see this referred to as errors and omissions insurance. It protects your company against claims made by customers who relied on professional advice or services provided by you or any of your employees.
How Much Will Business Insurance Cost?

There are many factors that will go into calculating the cost of your insurance. For instance, you may be able to negotiate a lower monthly premium by having a larger deductible, which is the amount of money you must pay before the insurance kicks in. Similarly, having an overall lower policy limit will likely reduce your monthly premiums. It is important to take time to research the recommended coverage amounts for your profession, and the value of your business assets, to ensure you have proper coverage.

Insurance companies will likely look into a variety of factors when coming up with a quote. The location of your business, length of service, and whether or not you’ve had any prior claims may increase or reduce how much you will have to pay each month.

Remember that you can shop around and ask for quotes from different companies before committing to any policy. After you have insurance, it is important to review your coverage periodically as your business grows.

Insurance Defined

“Insurance” is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event [Ins. Code § 22]. This statutory definition reflects the common understanding of insurance, which has been further defined as an agreement by which one person, for consideration, promises to pay money or its equivalent or to perform some act of value to another on the destruction, death, loss, or injury of someone or something by specified perils [California Physicians’ Service v. Garrison (1946) 28 Cal. 2d 790, 803–804, 172 P.2d 4; see Fraser-Yamor Agency, Inc. v. County of Del Norte (1977) 68 Cal. App. 3d 201, 213, 137 Cal. Rptr. 118]. Two basic elements distinguish insurance contracts from other contracts. First, there must be a risk of loss to which one party may be subjected by contingent or future events, and second, there must be a legally binding arrangement by which another party assumes the risk [California Physicians’ Service v. Garrison (1946) 28 Cal. 2d 790, 804, 172 P.2d 4, quoting Jordan v. Group Health Ass’n (D.C. Cir. 1939) 107 F.2d 239, 245].

[1] Purpose of Insurance

The purpose of insurance is to reduce uncertainty by transferring the risk of a loss from the insured to the insurer [see California Physicians’ Service v. Garrison (1946) 28 Cal. 2d 790, 804, 172 P.2d 4]. The policyholder pays a premium (representing a proportional share of losses) in return for the insurer’s promise to pay the policyholder’s losses according to the terms of the policy [California Physicians’ Service v. Garrison (1946) 28 Cal. 2d 790, 803–804, 172 P.2d 4; see Fraser-Yamor Agency, Inc. v. County of Del Norte (1977) 68 Cal. App. 3d 201, 213, 137 Cal. Rptr. 118]. Based on experience with losses for given classes of risks, insurance companies establish appropriate rates per unit of exposure. Through these premiums they equitably redistribute the burden of losses among their policyholders. From the policyholder’s standpoint, this redistribution can be considered either as the transfer of risk to a professional risk bearer or, alternatively, as the substitution of a certain, but small, loss for an uncertain, but potentially large, loss.

[2] Categories of Insurance

Historically, insurers in the United States were limited by statute to writing insurance in only one of three categories: life insurance, fire and marine insurance, or casualty insurance. Although these restrictions have been abrogated by legislation in all states, so that any insurer (except a life insurer, title insurer, or mortgage guarantor or insurer) may now conduct business in all lines of insurance, these separate categories of insurance are preserved in the statutory and common law principles that apply uniquely to each category