Business Insurance 101: Your Questions Answered
Business insurance is a bewildering concept for many founders and business owners. Do you really need insurance? What type do you need? How much should be covered? What happens if you purchase the wrong type?
No one likes to think about the possibility of a lawsuit. But if you own your business, you face the risk of experiencing a lawsuit from a customer or business partner. It’s important to ensure your business is protected in these circumstances; without protection, you risk expensive long-term consequences.
In this guide, we’ll cover the main types of business insurance. We’ll look at each type’s weaknesses and strengths, evaluate their usefulness in different industries, and guide you in selecting the best choice for your business.
By way of disclaimer: This is simply a guide. Your business is unique, and this guide may not address situations your business will encounter. It’s always best to talk to a professional about your specific business before purchasing (or not purchasing) any type of insurance.
What is covered under business insurance?
Unsurprisingly, “what is covered” depends on the type of insurance you hold. Some policies will cover your expenses for almost any incident, while others only pay partial expenses in special cases (such as injury or natural disaster).
Every business carries its own risks; every business requires its own risk insurance. Don’t simply buy the first policy you hear about from a well-meaning fellow business owner. Their business needs may be different from yours. Ultimately, you are the only one responsible for knowing the available types of protection and purchasing the right insurance.
Below, we’ve outlined the major types of business insurance available:
General liability insurance is generally the first type of insurance business owners encounter. It covers most situations in which someone is injured at your business location or by your business’s products.
For example, if you own a hairstyling business, you may occasionally have puddles or hair on your salon floor. These can be slippery and dangerous. If a client slips on your floor and suffers injury, they can sue you for medical cost, income during the time they took off work to heal, and more. Alternatively, if you sell children’s toys, a child might injure themselves with your toy. General liability could cover the cost of a personal injury lawsuit issued by the child’s parents.
General liability policies generally don’t cover everything that could happen at your business. It’s important to read your policy’s paperwork to understand whether it covers what you require.
Professional (“Errors and Omissions”) Liability
If someone suffers because of you or your employees’ mistakes, you might not be covered under General Liability. You could, however, receive funds and support through a professional liability plan. Professional liability will pay for your legal costs if a customer sues you for making a mistake.
Even meticulous business owners are vulnerable to mistakes. For example, let’s imagine you run a bakery. You would need to keep up-to-date with kitchen safety, packaging, and labeling laws in your area. If one of the laws changed without your knowledge, a customer could sue you for noncompliance.
Professional liability lawsuits can occur even when the business owner has done nothing wrong: A customer might claim you’ve made a mistake when you haven’t. In these cases, you’ll still need to go to court. Professional liability insurance can help cover your costs for these expensive legal battles.
Umbrella liability is meant to cover you when the cost of a lawsuit exceeds your other policies’ maximums, or when a lawsuit deals with a particular aspect of your business not addressed by other policies.
Umbrella liability insurance can support you in cases of vandalism and slander. It can also provide funds to help you defend your business in a lawsuit involving a customer’s property damage or mental anguish. These situations aren’t usually covered in general liability, but they’re significant risks for some businesses.
For example, let’s imagine you’re a dog breeder. You sell a puppy to a kind family; then, a few weeks later, the family sues you because your puppy chewed up their antique furniture. Would the customer be correct in suing you? Probably not. Would you still need to pay to fight the lawsuit, or settle out-of-court? Absolutely – also, because this lawsuit involved customer property damage, it would not be covered under some general liability plans. Paying for a lawsuit like this out-of-pocket can drain your savings and hurt your business. That’s why it’s important to plan for every contingency.
Not all general liability plans will insure your place of business. Property liability guards your location in case of a natural disaster, vandalism, or other damage.
Property liability is especially helpful if you’re a landlord. Suppose your apartment building’s basement floods. You’ll appreciate help from insurance in repairing the water damage, and covering the cost of replacing anything ruined. If you own a storage facility, and a careless tenant breaks your security gate or damages one of your units, property liability can cover the repair costs. If you own your business location and you’re concerned about repair or damage costs, property liability may be a good investment.
Directors’ and Officers’ Liability
Is your business larger than most, with a board of directors or officers? Do you run a nonprofit?
In these instances, directors and officers should carry an extra level of insurance. Your board members are the public face of your organization. When the organization fails, the board makes a poor decision, or scandalous accusations surface, your employees and customers could be significantly affected. These disgruntled individuals may sue the board for mishandling the company. In these types of lawsuits, directors’ and officers’ liability can defer some of the legal costs of fighting for a company’s reputation.
One often-overlooked category of business insurance: vehicle insurance. If your business uses a dedicated vehicle for anything (food trucks, funeral homes, delivery services, and transport services would all apply) it’s important to make sure your vehicle is covered in case of an accident.
If you have multiple employees who drive the vehicle, don’t forget to purchase an insurance plan that allows for several drivers.
Business Owner’s Policy
This isn’t necessarily its own type of liability. Instead, it’s a combination of several types of insurance, bundled into a single convenient package. Insurance companies will offer this type of protection to business owners who aren’t sure what insurance they need, or to individuals who would benefit from the included insurance (sometimes offered at a discount).
If you’re just starting your business, a business owner’s policy may be a good first step. Liability insurance can be expensive and confusing. You might easily overlook protection for a vital part of your business when deciding on your policy. With a business owner’s policy, your damage and legal costs will be covered for most “normal” situations.
At what point should I invest in insurance for my business?
Most people would like to hear, “You don’t need insurance today; your business is too small and low-risk. Apply for insurance in a few years, when you’re larger or have more risk attached to your activities.”
This, however, is poor advice.
The reality is that a business of any size can face a lawsuit. The smaller your business is, the more difficult it will be to pay for legal costs involved in a trial or repairs from an accident.
Business insurance is expensive, but it’s crucial for the long-term health of your organization. If you’re serious about your business and you don’t want to face extreme legal costs, talk to a professional about business insurance.
What’s my best next step?
Not all insurance companies are created equal. If you’re considering business insurance, the next step is calling a few different companies for a consultation. Find out what insurance is available for your business, what types of coverage each company offers, and what rates they charge.
You might also want to consider meeting with a lawyer. A lawyer can look over your waivers, releases, advertised claims, and policies to understand where your risk areas lie. You may not realize your injury waiver or rental paperwork carry major loopholes. When you’re evaluating your business’s risk, it’s crucial to look at all the factors before committing to an insurance plan.
Whether you’ve just started your business or you’re a seasoned professional, you need business insurance. Insuring your assets and protecting your reputation will keep you from going into bankruptcy after one unhappy customer or natural disaster. If you haven’t purchased business insurance yet – why not start now?