Business insurance keeps your business protected from the unexpected, whether that’s a lawsuit or a natural disaster. It also limits the liability you have for contingencies, such as someone slipping and falling on your business property. But, different types of business insurance protect your company in different ways.
Keep reading to learn more on how business insurance can protect your company, different types of business insurance, how to choose the right business insurance for your business, and how to pay for business insurance.
Key Points
• Business insurance safeguards against financial losses from unexpected events like accidents, lawsuits, or property damage, ensuring continuity.
• The six types of business insurance include workers’ compensation, liability insurance, commercial vehicle insurance, property insurance, errors and omissions insurance, and data breach insurance.
• Certain types of insurance, such as workers’ compensation or liability insurance, are legally required for businesses in many regions.
• Having insurance boosts client trust, as it demonstrates that your business is prepared to handle risks, making you a more reliable partner.
• Ways to pay for business insurance include business savings, small business loans, credit cards, payment plans, and revenue from sales.
What Is Business Insurance?
While there are different types of business insurance, they all generally do one thing: protect your company. Paying a monthly or yearly premium for insurance can provide you with peace of mind, knowing that if your business property should experience loss or damage, those expenses will be covered by your insurance policy.
6 Types of Business Insurance for Companies to Consider
While there are many types of business insurance, we’re going to take an in-depth look at the following six types:
• Workers’ compensation
• Liability insurance
• Commercial vehicle insurance
• Property insurance
• Errors and omissions
• Data breach insurance
Workers’ Compensation
If you have employees, you may be required to have workers’ compensation coverage. If you have an employee who is injured in a work-related accident, this policy will cover medical expenses, rehab and retraining costs, and disability payments while your injured employee isn’t at work.
Depending on how many workers you employ, workers’ compensation coverage is required in every state except Texas. Check your state’s requirements for more details.
Costs also vary depending on your payroll and state, but as a point of reference, many businesses spend an average of $540 annually.
Pros and Cons of Workers’ Compensation
The main pro of having workers’ compensation coverage is that you won’t have to pay out of pocket for on-the-job injuries. And if your business is in a physically active industry, such as manufacturing, the risk for these types of injuries may be high.
The major drawback applies to businesses that aren’t in physically demanding industries, because they’ll likely still be required to carry it for each employee, and this can add to payroll costs.
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Liability Insurance
The next kind of insurance to consider is liability. There are several types of liability insurance, including workers’ compensation. Two other types of liability insurance include:
• General liability insurance: General liability insurance, also called public liability insurance, protects you in the event of someone being injured on your commercial property. If a customer fell and broke her hand in your store, your general liability insurance would cover any legal fees if she sued you, as well as her medical expenses. The average cost of general liability coverage is about $500 a year for small businesses.
• Product liability coverage: If you sell products, you might want to consider product liability coverage, which will protect you from paying out of pocket for any legal fees related to issues with your product, such as defects or malfunctions. Product liability may be included in general liability coverage. Bought separately, if you break out the cost, the rule of thumb is $0.25 per every $100 of product sales.
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Pros and Cons of Liability Insurance
Some companies require their vendors to have liability insurance. If you work with companies that do (or want to), having liability coverage can ensure you have more business opportunities.
On the other side of the equation, costs for liability coverage can vary widely depending on the kind of coverage you’re seeking, how long you’ve been in business, your industry, and other factors. That can make it difficult to budget for the insurance ahead of time.
Commercial Vehicle Insurance
If you use a vehicle for your business, you’re required to have commercial vehicle insurance, just the way you need to have auto insurance for your personal car or truck. This will cover not only you, but also any employees you have who will drive the company vehicles.
It’s important to note that having a personal car insurance policy will not cover your commercial vehicles.
While the costs for commercial vehicle insurance vary depending on your coverage and how many vehicles you need to insure, for a policy limit of $1 million, the average cost is about $1,700 a year.
Pros and Cons of Commercial Vehicle Insurance
If you have commercial vehicles, commercial vehicle insurance is required. The main benefit is having peace of mind should you or an employee get into an accident. You’ll have coverage for medical expenses incurred from the accident, as well as for repair costs for the vehicle.
The main drawback is the expense. And if you or an employee does get into an accident, your premium could rise, cutting even deeper into your profits.
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Property Insurance
Whether you run a business located in commercial real estate or out of your home, having property insurance can cover damages to your property or loss of your property. This may include damage or loss caused by theft or natural disasters (but note that earthquake or flood coverage typically needs to be purchased as a separate policy).
Even if you run your business out of your home, you may want to consider property insurance, possibly through a homeowner’s policy.
Expect to pay around $800 a year for commercial property insurance.
Pros and Cons of Property Insurance
What would happen if your office caught fire and you lost all of your computer equipment? Without insurance, you would be stuck paying to replace the equipment. Property insurance means that, should the worst happen, you probably won’t have to go into debt to get back up and running after a disaster.
The drawback is that property insurance doesn’t cover everything. If, for example, an employee trips and drops his laptop and breaks it, this may not be covered. And if you live in areas prone to earthquakes, you may not be able to file a claim for earthquake damages with a standard policy.
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Errors and Omissions Insurance
If you’re in certain industries, like medicine, consulting, real estate, or law, one of the types of business insurance you may be required to carry is errors and omissions (E&O) insurance, also called professional liability insurance.
This coverage can protect you in the event that you’re sued for malpractice, even if you weren’t negligent. Here’s an example: Let’s say you’re a project management consultant and your client misinterpreted the project plan, and as a result incurred extra costs and delayed the project. The client sues you for those costs, but with E&O coverage, those costs would be covered.
Costs may vary, but some policies can be found for under $800 a year.
Pros and Cons of Errors and Omissions
The major benefit of E&O insurance is protecting yourself. If a client or patient sues you, having E&O coverage will help ensure that you don’t go broke trying to cover legal expenses.
On the other hand, it can be confusing to know what you’re getting with an errors and omissions policy. That’s why it’s imperative to read your policy documents carefully to make sure you understand exactly what’s covered.
Data Breach Insurance
How much thought have you given to data breaches at your company? You may assume that only large corporations suffer from problems like these, but in fact, 43% of data breaches happen in small businesses. If you store sensitive data on the cloud or on any kind of electronic device, this might be a type of insurance to consider.
Data breach insurance (or cyber insurance, which may be a little more inclusive and expensive) may lower your risk of experiencing a breach by offering credit card monitoring services. If you experience a breach, some insurance policies will send a notification to your customers to alert them, cover costs to find the cause of the data breach, pay for a public relations consultant to restore your reputation, and/or cover legal costs if you’re sued as a result of the breach.
Policies can vary quite a bit in what services they provide and what they pay for, so it’s important to read the fine print of any insurance policy you’re contemplating buying.
Cyber insurance costs average $1,740 a year.
Pros and Cons of Data Breach Insurance
Recovering from a data breach could take months, if not years, and many companies have suffered from negative reputations as a result. Should you be the victim of a breach, you need to ensure that things can go back to business as usual as soon as possible, and data breach insurance can help you get there.
The downside of data breach insurance is that your company might never experience a breach, and you might feel like the investment is wasted money. But then again, the purpose of insurance is to cover an accidental and to provide reassurance that if it happens, you’re going to be okay.
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How to Pay for Business Insurance
Paying for business insurance can be managed through various methods depending on your financial situation and business needs. Here are some options:
• Business savings: Using funds from your company’s savings is a straightforward way to pay for insurance premiums. This avoids debt but requires careful cash flow management.
• Small business loan: Many business loans allow you to use funds for operational expenses like insurance. This helps cover costs upfront but requires repayment with interest.
• Credit card: Some businesses use credit cards for short-term payment of insurance premiums. While convenient, it can be costly due to high interest rates if balances aren’t paid off quickly.
• Payment plans: Some insurance providers offer monthly or quarterly payment plans. This spreads the cost over time, making premiums more manageable for businesses with tighter cash flow.
• Revenue from sales: Using revenue from day-to-day operations can cover insurance premiums, ensuring you’re funding insurance from your business’s ongoing earnings.
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The Takeaway
Six major types of business insurance include workers’ compensation, liability insurance, commercial vehicle insurance, property insurance, errors and omissions insurance, and data breach insurance. Start with the policies that you’re required to have for your business, then consider whether you might need any of the others as protection against a worst-case scenario.
You can pay for your insurance policy with funds from the company or external financing, such as credit cards or a small business loan.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What is the best insurance for a small business?
The best insurance for a small business is typically general liability insurance, which covers legal claims related to accidents and property damage. Additional options like professional liability or workers’ compensation may be important depending on the business type.
Can you use a small business loan to pay for business insurance?
Yes, you may use a small business loan to pay for business insurance. Loans for general working capital typically cover various operational expenses, including insurance premiums. However, it’s important to review the loan terms to ensure that insurance payments are an approved use of the funds.
How much is a million dollar insurance policy for a small business?
A $1 million general liability insurance policy for a small business typically costs between $300 to $1,000 annually, depending on factors like industry, location, business size, and risk level.
Photo credit: iStock/courtneyk
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