When Do You Really Need Insurance for Your Business?
As an entrepreneur, you know that not every part of the job is glamorous.
Buying insurance can feel like a hassle, but if you invest in finding the right policies now, you'll save yourself from potential legal headaches and unexpected costs down the road. You probably have a lot of questions surrounding what specific risks different types of coverage actually protect against, and whether or not they apply to your business.
When it comes to insuring your business, factors like your location, industry, and the number of employees can all affect what coverages are applicable. To ensure your new business is protected in any scenario, here's a list of common business insurance policies that may apply, and how they actually work for you.
Commercial property insurance
If your business has a physical storefront or operates out of offices, particularly if they contain valuable equipment, commercial property insurance is one of the first types of insurance you should consider as it protects the property that your business utilizes.
Commercial property insurance covers incidents like theft, vandalism, fire, and weather-related damages. It also can protect many types of supplies and equipment (think computers, printers, and other large devices used in the course of work).
However, one thing to keep in mind is that this policy usually won't cover damages due to earthquakes or flooding, so if you operate in areas in which these incidents are likely to occur, you'll want to look into supplementary coverage.
General liability insurance
General liability insurance is another common type of insurance that you should consider right away as a new business owner.
This policy offers protection in the case of third party property damage and injury claims. For example, if you own an office space where clients visit, you could be held liable for any injuries that occur to the client on the premises, or to their property on the premises. That could be anything from a slip-and-fall to one of your employees accidentally spilling coffee on their laptop.
The business could also be held liable for resulting injuries, which means a third party (such as the aforementioned client) could seek damages to cover the cost of replacing damaged property or medical bills. And even if you're not found at fault, the legal costs associated with such a claim could be financially significant to a small business. If you have general liability insurance, your policy will cover these types of situations and you won't be left scrambling to pay for an unexpected lawsuit out of pocket.
General liability insurance applies to a wide variety of businesses. If you have frequent in-person interactions with clients, customers, or partners, it's a smart policy to have.
It applies even if you don't meet with third parties on your own property. If you visit a client's site, for example, you're at risk for a third-party claim (for example, a contractor could potentially damage a client's home in the course of their work). Depending on the industry, it's often common for customers to require proof of general liability coverage before signing a contract or entering into a business arrangement.
If you need coverage for both property and to protect against third-party claims, you may be able to reduce the cost and complexity of your insurance by purchasing a Business Owner's Policy, or BOP. A BOP bundles coverages from commercial property and general liability insurance policies together in one package.
Cyber liability insurance
Many small business owners don't believe they need cyber insurance, but the risk of a data breach is bigger than you think. Something as simple as an employee clicking on a phishing email could end up revealing confidential information to a hostile outsider.
According to First Data, a whopping 90 percent of data breaches impact small businesses. If you store data such as personally identifiable information or payment details from customers (or employees) electronically, cyber liability insurance should be considered for your business.
A data breach can be extremely costly to a small business due to both business interruption as well as regulatory requirements. If your business was the victim of a breach, you would be responsible for both defending yourself legally in addition to the process of notifying all affected parties, which can be particularly expensive (over $100 per record). Without insurance, these costs can add up quickly.
Workers’ compensation insurance
Do you have employees? If you answered yes, then you probably need workers’ compensation insurance.
In most states, workers’ compensation is mandatory if you have more than three people on staff, though depending on your state you may need coverage with fewer employees. There are some exceptions for certain types of businesses, but even if it's not required, you may want to consider a policy. If you employ even one person, you face the risk of a potential lawsuit—especially if your industry is known for work-related illnesses or occupational hazards.
Workers’ compensation insurance protects both the employee and the employer. If an employee becomes ill on the job or sustains an injury, workers’ compensation covers medical costs, such as physical therapy, and lost wages while they are out. In return, your business is protected in the case of a potential lawsuit that could have resulted from the incident.
Directors and officers (D&O) insurance
D&O insurance policies are typically a must-have for large, publicly traded companies that are at risk from shareholder lawsuits. But small businesses shouldn't dismiss this insurance without consideration.
D&O insurance works in a few different capacities, but a simple way to look at it is this coverage protects the company's board of directors and officers in the case of lawsuits regarding decisions they've made in the course of their role for the business.
For example, if an executive is fired, they could bring a wrongful termination suit against the CEO of your company. Additionally, your board members could be held personally liable and risk loss of financial assets. Another scenario where this type of insurance could be necessary would be bankruptcy. If your business declares bankruptcy, shareholders, vendors, or other third parties could sue directors and officers in an attempt to collect investments or debts.
As you can see, this is pretty serious business. Board members and executives don't want to face these types of risks, and a lack of a comprehensive D&O policy can make recruiting top talent challenging. If you want to recruit experienced directors or expand your pool of shareholders, D&O insurance can be quite advantageous.
Errors and omissions (E&O) insurance
If your business provides advice to clients, E&O insurance—sometimes referred to as professional liability insurance—can be quite valuable. E&O protects the business if you or an employee makes a mistake or error while providing advice or services in the course of business.
For example, if you are a consultant, an unhappy client could sue for an error that they believe caused them a financial loss. Your E&O policy will cover legal costs and any settlements in this scenario.
Many small business owners mistakenly believe that general liability insurance covers incidents that would actually be considered as E&O claims. According to a Chubb survey, 52 percent of businesses without an E&O policy think this to be true. Unfortunately, it's not, and if you lack the appropriate coverage, your business could be at risk.
Every industry is different, but whether you own a marketing agency or work as a software consultant, if you're servicing or advising clients, you are at risk for E&O claims.
Take the time to determine the best way to protect your business
As a small business owner, it's clear that whether you're looking to expand your operations or simply protect your investments, taking the time to determine appropriate coverage can make all the difference.
By understanding when insurance policies are applicable to your business, you are better prepared to make sure your venture survives and thrives over time. Taking advantage of the benefits of insurance can help to make sure both you and your business are financially protected.
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