What Type of Insurance Does Your Business Need?
Setting up a business sound exciting but can come with a lot of risk. When you opt to step out of corporate culture and start working on your own venture, you need to keep an eye out for a number of factors necessary for your success. This includes location (if you have a physical business), markets risks and unexpected events that could negatively impact your business..
Not all of these things can always be accounted for, but insurance on your business can at least help you prepare for unexpected events that could impact your business.
Once you’ve started your business, ensuring that you are covered from unexpected loss is very important. Small businesses and fledgling start-ups can usually not absorb catastrophic events and end up closing. That’s why, before jumping into a business, it is important to make sure that you understand the insurance options available to you and which ones you want to have for your business.
First, the basics – an insurance policy meant to pass off the risk associated with an unplanned mishap. A good insurance policy can save a business from closing permanently due to a catastrophic loss. But it’s important to understand the details of insurance policy options before you go to start a business, to make certain you have the coverage you need (and make sure you don’t buy coverage you won’t need) and understand what’s actually covered and what’s not.
In the US, insurance is bought through a broker, who is trained and licensed by each individual state and can suggest the right specific provisions for you business. These brokers have a legal obligation to talk you through the types of insurance your specific business might need and only offer you insurance that fits your company. Use these brokers as a resource to evaluate different plans, and don’t hesitate to ask them questions. Do keep an eye out though, some brokers are more helpful, diligent and honest than others, so it may make sense to compare policies from more than one broker to make sure you get the right information and the best deal for your coverage.
Not all businesses need every type of insurance policy, but all businesses likely need some of the options to be adequately covered. Choosing the correct insurance products to suit your company’s needs is actually quite straightforward and largely depends on what type of business you operate, how large it is and what sort of assets you need to protect.
Let’s review some of the most common types of insurance that might apply to your business:
General Liability Insurance
General liability insurance is the most common type of insurance and the insurance that almost all businesses should get. For businesses, it can be referred to as “Commercial General Liability Insurance” and covers the risk of being sued by third parties for negligence. That means specifically that it covers harm that comes out of carelessness; i.e. if you don’t exercise “reasonable care” in your actions and someone gets hurt, they may sue you. General Liability Insurance will help pay for legal coverage and damages that may come out of the lawsuit.General Liability Insurance generally has broad provisions that apply to most businesses but also have specific provisions that should fit your business and the product or service that you’re selling.
General Liability insurance generally covers a broad range of risks that can occur on during your business operations, from someone getting injured on your property, to advertising injury (i.e. if you get sued for false advertising and slander/libel) among other types of cover. It is usually combined with property insurance as well (property insurance covers your business property – like the physical location of your business).
General Liability Insurance generally covers third-party lawsuits, including those triggered by the following events:
- Any accident or bodily injury in your business space. For example: A client slipping and falling in your office and breaking a bone
- Property damage (if you have property insurance). For example: When the owner of the corporate space or landlord holds you responsible for a fire incident occurred at your office. The lawsuit might cover charges like damage to the overall structure of the building due to an incident in your office.
- Copyright infringement. For example: When a rival files a lawsuit over creatives or content that might look like theirs.
- Reputation and brand image damage. For example: If you’re too agressive in describing your competitor’s flawsin your advertisement or social media content and you slander or libel them. They can file a lawsuit for damaging their brand image.
As small business or startup, you need some type of coverage under business liability insurance to protect your company from uninvited damage. Often the costs associated with a lawsuits get more out of hand than the incident itself and they might damage you in multiple ways or end up with unimaginable fines that can leave your business bankrupt.
There is no such thing as a “standard” policy – while there are some standards on what’s generally covered, different companies will interpret different claims based on their own policies. Don’t be afraid to ASK your broker what’s covered and pepper them with questions to make sure you really understand what you’re paying for.
A few types of insurance that General Liability Insurance doesn’t cover but you might consider getting includes:
Professional Liability Insurance
Professional Liability Insurance, more commonly known as errors and omissions insurance (E&O) protects businesses against the risk associated with providing professional advice and services. Specifically, it helps pay the legal costs with defending a negligence claim made by a client or customer and any damages awarded in a civil lawsuit tied to a service that you provided. Specifically, it’s targeted to cover “failure to perform” (i.e. not doing what you are supposed to be doing as a service provider), financial loss caused by negligence, and errors or omissions in a service or product sold (i.e. you represented that a service was fully complete, but you made a mistake in the description or filing).
It’s different from general liability insurance because general liability deals with physical mishaps that might happen at your company (e.g. someone slipping and falling), professional liability deals with damages not related to actual physical damages.
Some examples of when Professional Liability Insurance would get triggered included:
- A customer that hired you to develop a piece of software for them. They give you specifications for the piece of software and you sign a contract to build it for them. You deliver the software and they use it for a month. You misrepresented what the software can do and they suffer major financial losses. Because there was no physical damage or advertising damages, this loss could not be covered by general liability insurance. But if the customer sues you, professional liability insurance will help pay your legal expenses and any damages that need to be paid out. This could save your business.
- All doctors and lawyers have specialized Professional Liability Insurance for their medical and law practices. These policies are specialized for their professions, but are necessary because of the high liability claims that often come in these professions.
The reason why many business owners prefer picking up errors and omissoins insurance is that this policy can vary in a great way as per needs of your business and its overall insurance policy. The exceptions that aren’t covered in some cases are temporary employees, claims against work done prior to the contract of insurance, etc. It is to be noticed that Errors and omissions insurance policies are different for each company depending on their nature and business type. As with General Liability Insurance, a licensed broker will help you create a policy that is right for your business. A good licensed broker will take the time to understand your business and the risks associated with it to put together a policy that will fit your business. If they don’t, find another broker.
Directors and Officers Liability Insurance
This is a type of liability insurance (referred to as D&O insurance) that covers the upper management your company (i.e. you as the owner of the company!). These include your board of directors and executive management and other officers of your company. It protects them against loss associated with legal actions brought against them while they were a director or officer of the company. It can (but not always) also cover defense costs associated with criminal investigations and legal claims. It does NOT cover illegal acts that are intentional. For public companies, companies buy directors and officers liability insurance to make sure that their management is not liable in lawsuits brought by shareholders (usually happens when a company does not do well financially). In private companies, this insurance generally covers management in case they are sued personally for business decisions they make (usually by an investor). Even though, in most cases, your personal assets are safe, there are still costs to defending yourself – D&O insurance covers this.
As the name suggests, this type of insurance protects the company against any financial reimbursement to the landlord of your office space. It might also include other contents and facilities that came along with the rental contract. Usually, these lawsuits are filed by the owner of office space. They may also include damages to the property due to a natural catastrophe (though not all natural catastrophes are covered, make sure to know what’s covered and what isn’t). When a lawsuit is filed, the insurance policy will reimburse any damages. Almost every single landlord will require that you have this type of insurance when you rent office space from them. This is probably one of the most basic and common types of insurance available and is often bundled with Commercial General Liability insurance covered above.
Examples of incidents covered by a property insurance policy:
- Damages caused by a fire incident or a short circuit.
- Damages caused by any kind of smoke eruption.
- Damages caused by weather conditions, such as heavy snowfall, rain or thunderstorms.
- Damages caused in a robbery or theft.
It covers the property renter (business owner) against any possible lawsuit pertaining to space or area to use. However, it doesn’t include water damages caused by drained pipelines, leakages, boilers, ground seepage, standing water and related reasons. It also doesn’t include the damages caused by molds since they are also a consequence of a possible leakage.
Workers Compensation Insurance
Workers compensation insurance covers your team and the key players associated with your business. They render you their services and knowledge while you offer them a good salary package and protection in return. This policy comes into action when something unexpected happens to one of your employees.
Worker’s compensation insurance can help if:
- An employee is injured in an auto accident while running errands for the company
- An associate develops carpal tunnel syndrome from working on the computer
- An employee gets hurt while restocking the supply room
Workers compensation insurance \can:
- Pay for an injured employee’s medical treatment
- Replace part of lost wages if a job-related injury requires time off work
- Protect your business and assets
Business Interruption Insurance
This policy comes into action when your ability to do business stopped by an unforeseen reason.. Mostly the reason behind this can be a catastrophe that completely terminates the operations of the business. This type of insurance is mostly fused for businesses that require a physical location and inventory function such as a super markets a packaging company. While your revenue stream and manufacturing are halted, this policy covers for your basic expenditure like salaries of your staff. The intent of the policy is to put the business in the same financial position as if the loss had not occurred.
This type of insurance is usually not offered as a stand alone, policy, you have to add it to your property insurance as an add-on.
Home-Based Businesses Insurance
Many people start their companies by working from home. Wether that means you use your garage as a storage space for inventory, or your kitchen to make your world famous cookies that you sell, you may need insurance to cover your home based business. Typical home owners insurance policies specifically exclude business inventory and other business related coverage, so this type of insurance may make sense. Home-based business insurance policies are not very common and like many insurance policies, there’s not real standard. Your broker will help design a custom plan that fits your home business, but make sure to understand the coverage so that you’re not underinsured or you’re not paying for types of insurance that doesn’t apply for your business.
Commercial Auto Insurance
This policy, as the name suggests, is for vehicles and means of transport that the business owns and that is specifically used for business. If there is a vehicle or transport medium used regularly in a business process, it can be insured under the commercial auto insurance policy. It covers any bodily or property damage during commuting in those vehicles. For example, in case of any accident, it covers your medical costs as well as damages to the vehicle or to other physical objects. If you don’t have a business vehicle, this insurance does not apply to you.
An umbrella policy covers anything that doesn’t fall under any other category of insurance opted by the company or exceed their limits or contracts. These policies are flexible and can be designed as per the needs of the business. The price is highly variable depending on what you want insured.
There are many types of insurance policies available. Most businesses have General liability insurance and property insurance. Service businesses, generally also have errors and omissions Insurance (aka professional liability insurance). Find a broker that can help you figure out what the right coverage is for your business.