2024 Beginner’s Guide to Small-Business Insurance

Edited by Akshat Biyani

Updated


Disclosure: Our content is reader-supported, which means we earn commissions from links on Digital. Commissions do not affect our editorial evaluations or opinions.

Business insurance helps companies protect themselves and their assets from risks such as lawsuits, theft, property damage, and employee injury or illness.

Without this type of insurance, your business risks having to pay for these types of losses, which can be costly. Without coverage, you are putting the future of your enterprise at risk.

What Are the Main Types of Business Insurance Coverage?

Consider the nature of your business, your needs, the common risks you face, and which types of coverage are required in the state where your business was founded.

Business insurance infographic with images of buildings, cars, and clipboards.

Some types of insurance, such as unemployment insurance, are required for nearly all businesses.

  1. General liability insurance: This covers liability claims against your company, such as slip and fall accidents or false advertising claims. Most businesses that have a physical location should carry this type of coverage.
  2. Workers’ compensation insurance: This type of coverage pays for medical care and a portion of lost wages when employees are injured on the job. It does not require establishing fault, and laws limit the amount that can be paid out. This policy is required in most states.
  3. Disability insurance: This covers a portion of lost income if an employee or business owner cannot work for some time. This type of policy is not required by law but can be critical for small business owners who handle much of their day-to-day operations. Short-term disability can function as maternity leave coverage.
  4. Unemployment insurance: This policy is required by federal law for employers who pay more than $1,500 in wages per quarter or have at least one employee for at least 20 weeks per year. It covers a portion of lost wages for employees who lose their jobs due to specific circumstances, such as being laid off.
  5. Directors and officers insurance: Often called D&O, this is liability insurance designed to protect the personal assets of directors and officers of a company or non-profit in the event they are sued by any party regarding their management of or advising to the organization for which they work or volunteer.
  6. Property, homeowners’, and renters’ insurance: These policies generally cover the structure of and items inside a building when damaged by theft, natural disasters, fire, or vandalism. While not legally required, it is important to protect items like inventory, electronic POS systems, and other items stored in your business.
  7. Professional liability insurance (E&O): Those who would benefit from this type of insurance include consultants, marketers, home services professionals, health professionals, tax preparers, lawyers, and wedding planners. It may also be referred to as errors and missions Insurance, or professional indemnity insurance (PII).
  8. Product liability insurance: This protects companies that make goods from claims involving bodily injury or property damage. For example, this would apply to a company that makes and sells an external battery that causes a fire that injures people and damages property. Businesses that make, design, or manufacture goods should consider carrying this type of coverage.

What Factors Should You Consider Before Choosing a Small-Business Insurance Policy?

We’ve covered the main types of business insurance you might need. However, before choosing, you need to weigh several factors.

What are the risk levels of your small business?

When insurance companies look at your application, they will assess the type and size of risk your small business faces. Before you meet an insurance agent, you must be aware of these. Some risks can be easily reduced by making a small investment.

For instance, if you have an office space, you can reduce the risk of a massive fire by installing smoke detectors on the premises. Similarly, you need to understand whether there are greater risks that can’t be prevented and for which you will need full coverage.

How high of an insurance premium can your small business afford?

While choosing the best coverage for your business is important, you need to be careful that the insurance premium doesn’t become a large additional expense. For this purpose, you should look at:

  • Maturity time
  • Flexible policy terms
  • Any discounts available

Opting for an inferior policy will cost you in the future, so choose one that adequately protects your business should a loss occur.

What are the insurance laws for employees in your state?

Each state has unique employment laws. As the owner of any business, you must be updated with the latest employment laws in the state it was founded. While some states require worker’s compensation insurance, others have more detailed laws for disability, medical, and wage loss coverage.

Do you need an expert small-business insurance agent?

Business insurance can be complicated, and finding the right policy can be tricky. A knowledgeable and expert insurance agent can help you find the appropriate policy. Once you purchase the policy, keep in touch with your agent.

Your enterprise is continuously changing, and you should keep your agent updated. For instance, if you purchase large machinery or invest in a bigger workforce, you must revise your existing plan to ensure everything is covered.

How Do You Buy a Business Insurance Policy Online?

The first step of buying business insurance online is to evaluate the risks you’re facing. As the owner of a small business, you can list all of your concerns about events or actions that could go wrong. These could include cybercrime, customer injury, machinery failure, or damage to your commercial property. Once your list is ready, look for policies that cover these risks.

As mentioned above, there are several types of insurance. Understand them and decide which one suits your business the best. You may want to opt for one or more types of coverage.

Next, you can find numerous insurance agents online who provide free online application forms. You can fill in the basic details like the location of your business and its approximate annual revenue, number of workers, and assets. These details will help the agent calculate a quote for a plan that meets your needs.

You can compare the quotes and options offered by the agent or the insurance company and select the best policy.

How Much Should You Pay for Business Insurance?

As general guidance, small businesses should aim to budget between $30 to $80 per month. The primary factors that determine these costs are the number of employees, your business’s location, and your industry’s exposure to risk.

High-risk industries (in insurance terms) are typically determined by chances of damage to employees and civilians, construction being one of them. Other specifics like first-time owners or prior claims, or higher coverage limits may also result in a higher liability premium.

Frequently Asked Questions About Business Insurance

What business insurance is required by law?

The specific type of insurance you need for your business by law varies based on the state or country where you are located. You can generally expect to pay for:

  • Workers’ compensation insurance.
  • Unemployment insurance.
  • State disability insurance.

Depending on what types of services you offer, you may be mandated to purchase additional types of policies. Check with the Small Business Administration chapter in your state for more info.

What kind of insurance do you need for a small business?

Most small businesses need to hold general liability and property insurance, alongside coverage for worker’s compensation, unemployment, and your state’s disability requirements. You may also need professional liability insurance, which helps cover the costs resulting from any mistakes you might make.

Additional policy needs will depend on the nature of your business and its day-to-day activities.

What is covered under a commercial general liability policy?

A commercial general liability policy protects you if you’re found liable for property damage or personal injury. It covers negligent acts that are non-professional (e.g., your housekeeping staff leaves a client’s bathroom sink running, causing major water damage to the client’s home).

The insurance company will typically cover the legal costs and damages required by the court if they find you liable for the situation.

What is the difference between professional and general liability insurance?


Professional liability insurance covers negligence related to your business operations (e.g., poor advice leading to adverse outcomes for the client) that doesn’t result in injuries or physical damages. On the other hand, general liability insurance protects against physical injury or damage to commercial property.

Although both types of policies protect you against any business liability resulting from lawsuits, they differ in the type of risk they cover.

What is covered under a business owner’s policy?

Business owners’ policies offer protection against various liabilities, including natural disasters (fire, tornadoes, earthquakes), theft, and anything arising from day-to-day business operations. You can think of a business owner’s policy as a combination of property and liability insurance in one comprehensive package.

What are the benefits of workers’ compensation insurance?

Workers’ compensation covers medical treatment, lost wages, and compensation payments for any permanent disability that results from an employee being injured on the job. It may also cover rehabilitation, death benefits, and legal fees.

Regardless of what the policy covers (individual states set the specific requirements), you, as the employer, are required to cover the premiums.

Do I need product liability insurance for my business?

Product liability insurance (PLI) isn’t required by law. However, if you sell a defective product that causes bodily injury or property damage, PLI helps you cover the resulting legal costs and liability, which can be substantial.

If you sell physical goods, you should have product liability insurance. Note that the further you are down the manufacturing line, the cheaper your premiums — e.g., the store owner pays less than the manufacturer.

Does an LLC need business insurance?

In most states, LLCs are not legally required to have insurance. Though an LLC provides some protection over a sole proprietorship (since it creates a divide between your personal and business assets), you still want to consider insurance to protect your business assets.

Without adequate coverage, the cost of defending yourself legally and paying out damages might bankrupt your company, despite shielding your personal assets.

What is home-based business insurance?

Home-based business insurance is designed to protect those who work out of their homes against third-party liability claims, property damage claims, and more. It covers things not covered by a homeowner’s policy, including your business technology holdings, files, and equipment.

Such a policy is necessary for those who host client visitations, keep inventory on hand, or provide office space to employees.

How are general liability premiums calculated?

Many insurance companies calculate your general liability premiums using the Insurance Services Office’s (ISO) classification and rating system that factors in:

  • The business classification that applies to your industry and type of operation.
  • The rate, which reflects the limits you have chosen for your policy’s coverage.
  • The exposure base, which factors in things like your sales volume, size of physical location, and more

Is business insurance tax deductible?

Per the IRS, the costs you incur to conduct business are deductible from your federal income taxes. These costs can include the premiums you pay for business insurance (the specific language says “ordinary and necessary cost of insurance”). Be sure to consult your accountant.

Additional Resources for Business Insurance

Looking to learn more? Here are a few official online resources and books to educate you on all your insurance options.

Online Resources:

Books:

The following books are from the National Underwriter Resource Center and cover a range of business insurance-related topics.

Scroll to Top