Homeowners insurance, health insurance, auto insurance, life insurance—wanting to financially protect what’s most valuable to you from “what ifs” like fire, illness, or accident is important (and sometimes required by law).
It’s just as important to protect your small business from what ifs like a lawsuit, robbery, or data breach. Whether your business is just starting out or well into its growth, this guide will explain how to ensure it has adequate insurance protection to minimize risk.
What is business insurance?
Business insurance, also known as commercial insurance, includes a range of insurance policies that helps ensure your company doesn’t have to pay the entire cost associated with covered events—including accidents, natural disasters, and lawsuits—while also limiting your exposure.
A variety of policies fall under the umbrella of small business insurance. You can tailor your exact level of coverage depending on your budget and needs, with policies ranging from general liability insurance to crime insurance.
“There is no one-size-fits all option with business insurance,” says Lynne McChristian, senior instructor of finance at the University of Illinois Urbana–Champaign and the school’s director of the Office of Risk Management and Insurance Research. “It comes down to identifying and prioritizing your risks.”
Types of business insurance
- Workers’ compensation insurance
- Unemployment insurance
- Disability insurance
- Commercial general liability insurance
- Business interruption insurance
- Cyber liability insurance
- Crime insurance
- Employers’ liability insurance
- Key person insurance
- Product liability insurance
- Professional liability insurance
- Commercial property insurance
- Flood, wildfire, earthquake riders
- Commercial auto insurance
- Homeowners/renters insurance riders
- Business owner’s policy (BOP)
- Commercial umbrella insurance
There are many types of small business insurance, and you can mix and match policies to get exactly the coverage you need. Some are required by law, but most are optional. Here’s a breakdown of various business insurance policies and the risks they cover.
Workers’ compensation insurance
Workers’ compensation insurance covers your employees’ medical expenses from injuries that happen on the job. The policy also helps compensate for lost wages due to a disability from work injuries and provides other financial assistance to an injured worker’s family. Businesses with employees typically are required by law to have workers’ comp insurance.
Unemployment insurance
Unemployment insurance, which protects employees through a state-federal program that follows guidance under federal law, works differently than all other types of small business insurance. Instead of buying a policy, you pay a tax to the government on behalf of each employee. If an employee loses their job for a covered reason, unemployment insurance helps support them in the short term while they search for another one.
Disability insurance
Disability insurance temporarily compensates businesses for lost income if an employee is not able to work due to a disability, even when the disability is not caused by a work injury.
Commercial general liability insurance
Think of general liability insurance as a standard type of insurance that protects you from being responsible—within the limits of the policy—for harm your business might cause a third party. Liability risks that typically are covered include bodily injury, property damage, copyright infringement, and reputational harm like libel or slander. For example, if a customer slips and injures themselves in your store, general liability insurance helps cover the hospital bill.
Keep in mind: General liability insurance has some major exclusions (for instance, it doesn’t cover unemployment or workers’ compensation), so additional policies are necessary to fill in those gaps.
Business interruption insurance
Imagine you have a surfing apparel business in coastal Florida, and a hurricane knocks a tree into your storefront, damaging the building and some of your inventory. If the damage to the building prevents your business from functioning as usual, it may lead to delays that can cause you to lose income. While commercial property insurance might help cover the cost of the damaged inventory, business interruption service (also known as business income insurance) can repay you what you would have made, as long as the loss is covered by your policy.
Cyber liability insurance
Cyber liability insurance protects your business against claims involving cybercrimes, including phishing scams, non-payment or non-delivery scams, ransomware attacks, and data breaches.
If a small business is a victim of a cyberattack, the specialized repairs and legal fees can be expensive. According to the FBI, in 2021, the total cost of cybercrimes against small businesses was $2.4 billion. Cyber liability insurance helps mitigate losses from a variety of such cyber incidents.
Crime insurance
Crime insurance covers losses that arise from robbery, burglary, larceny, forgery, and embezzlement, as well as employee theft or dishonesty. If there is a break-in at your warehouse or store and some of your products or equipment are stolen, crime insurance covers eligible losses.
Employers’ liability insurance
Employers’ liability insurance protects you from claims from current or former employees involving employment-related issues like discrimination, sexual harassment, and wrongful termination.
Key person insurance
Key person insurance is a life insurance policy for your business’s important employees, including the owner, where the business is the beneficiary. When deciding who to cover under this policy, identify the people most critical for business operations. Will losing them impair the functioning of your business and result in lost revenue? How costly will it be to replace them?
If your lead designer, chief engineer, or operations manager keeps everything running smoothly, and that person dies, key person insurance can help the business recoup the costs of hiring and training a replacement. Or, if the company can no longer operate without that individual, key person insurance helps cover the expenses of shutting down the business, including paying off debt and providing severance to employees.
Product liability insurance
Product liability insurance covers your business in the case of lawsuits if you manufacture or sell products that cause property damage or bodily injury. If your product harms a customer—even if the injury is the result of improper use—your business could be held liable. Product liability insurance helps protect your company from the financial risk of a product liability claim and the related legal costs.
Professional liability insurance
If your product is not a physical item but a professional service, you potentially can face a legal claim for damages as a result of your errors, bad advice, malpractice, or negligence. Professional liability insurance, also called errors and omissions (E&O) insurance, addresses these types of risks.
Commercial property insurance
Commercial property insurance covers your business property in the same way homeowners or renters insurance covers your house. It protects physical assets like buildings, equipment, product inventory, furniture, and even personal property from the common risks of fire, smoke, storms, and vandalism. If you rent your business property, the landlord typically is responsible for insuring the building itself, but you’ll still need commercial property insurance for your equipment and inventory.
Flood, wildfire, earthquake riders
If your business is located in an area prone to natural disasters like floods, wildfires, or earthquakes, you may need to get add-on coverage (also known as a rider) for your existing policy. This extra coverage helps protect your business from property damage caused by those events.
Commercial auto insurance
If you use any kind of a car, van, truck, or bus for your business, commercial auto insurance covers both medical expenses that may occur from an accident and the damage to the vehicle itself. Make sure to get the policy issued in the name of your business and not just in your name if using the vehicle for business purposes. If you’re using your personal vehicle for business purposes, check with the insurance agent for policy conditions to make sure you have the right coverage for your needs.
Homeowners/renters insurance riders
Many people work from home, including small business owners. If you use your home as your place of business, adding a rider to your homeowners or renters insurance policy helps cover your work equipment and some liability risks, like if you have a business visitor and they fall and injure themselves in your home.
Business owner’s policy (BOP)
If your business faces the typical set of risks—like property damage, legal liability for damages to non-employees, and business interruption—an insurance package deal known as a business owner’s policy bundles the common coverage options to save you time and money.
Commercial umbrella insurance
Commercial umbrella insurance is an add-on that covers the excess if you have a claim that goes over the coverage limit of your primary business insurance, commercial auto insurance, and/or workers’ compensation insurance (but not your commercial property insurance). It can be especially beneficial in a worst-case scenario.
Say a delivery driver gets injured picking up a shipment from your warehouse and they also damage a weight-bearing pillar, causing part of the roof to collapse and injuring customers. The cumulative claims from that incident might exceed your general liability insurance maximum. Commercial umbrella insurance would cover the overage, up to the policy’s limit. This type of insurance can appeal to brick-and-mortar businesses that are open to the public, businesses that rely on delivery drivers, and businesses that do work on client property.
How to choose the right insurance for your business
- Assess and identify risks
- Find a trusted insurance agent or broker
- Check what business insurance is required by law
- Shop around
- Check exclusions and fill insurance gaps
- Deduct premiums from taxes
You can determine the types of business insurance policies you need based on the individual characteristics of your business. Select the ideal combination of insurance policies by following these steps:
1. Assess and identify risks
To assess and identify business risks, the University of Illinois Urbana’s Lynne McChristian advises asking yourself a few key questions:
- What is my personal liability?
- What are the business loss trends for my industry?
- How can I best protect my family, business, and employees with the proper protection?
- What are the top risks that I’m facing in what I do?
Lynne says identifying your risks can be as simple and low-cost as walking through your warehouse and seeing if the inventory is piled too high or if products are stored on the floor. “Do I have sprinkler systems? Do I have a flood risk? Knowing the answers to things like that can reduce your risks,” she says.
Additional questions to ask to help determine what types of risks your business may face include:
- Does your business have employees?
- Does your business have storefronts, offices, or manufacturing facilities?
- Do you produce products or provide services?
- How reliant is your business on various suppliers?
- What is your vulnerability to cyber threats?
- Are you using any vehicles?
Based on your responses, put together a list of types of coverage you want based on your business insurance needs, then calculate the anticipated amount. With this information you can better assess which types of policies to consider.
2. Find a trusted insurance agent or broker
Licensed insurance agents and brokers can help you choose the best business insurance policies and providers. Not only can they advise you on the types of insurance that are suitable for your business, they can pull quotes from multiple insurance providers and walk you through the business owner’s policy bundles.
“You are not on your own. A trusted insurance agent or insurance broker educates you versus just trying to sell you,” says Lynne. “Find an independent agent who represents a couple of different insurance companies and they can help you with shopping and price comparison for policies.”
When choosing an insurance agent, also consider enlisting your network, asking for referrals, talking to neighboring businesses, looking up ratings online, and checking professional associations to vet the agent before you commit.
3. Check what business insurance is required by law
Federal and state laws may require certain types of coverage for specific types of businesses, so start by checking with your local Small Business Administration office and local chamber of commerce. If you are using an attorney to help you form your business entity, ask about what insurance is required by law. HR advisers can also help you find the right insurance policies as your business evolves in size and scope.
4. Shop around
Compare quotes from different small business insurance providers to get the best cost/value ratio. Carefully consider policy rates and the deductibles—the amount you’ll have to pay out of pocket if you file a claim—when assessing business insurance costs. Typically, higher deductibles pair with lower premiums.
“You should never buy insurance on price alone,” McChristian cautions. “The best insurance is comprehensive and covers all your risks and gives you peace of mind that your personal finances and business are financially protected.”
5. Check exclusions and fill insurance gaps
Pay attention to the risks that are excluded from a policy so you’re not caught off guard if a non-covered event happens. Consider purchasing umbrella insurance, an additional policy, or a rider to cover any events excluded or not fully covered by your other policies.
6. Deduct premiums from taxes
Whether you run a sole proprietorship, LLC, or S corporation, your ecommerce business may be able to deduct eligible business insurance premiums. Business deductions lower a business’s taxable income. According to the IRS, you can generally deduct the cost of most types of insurance. You can check which specific premiums are tax-deductible.
Business insurance FAQs
Can I get insurance just for certain aspects of my business?
Yes. Small business insurance is customizable, and you can get specific coverage tailored to the needs of your unique business. Remember, some business insurance policies are mandated by state or federal law, so start by checking what coverage you must have and then add on from there.
How does business insurance protect against financial losses?
If your business incurs a financial loss from a covered event, you can file a claim with your insurance company. Once your claim is processed, you get reimbursed (or otherwise compensated, according to your policy) for the approved amount.
Is business insurance coverage required by law?
Most states require businesses with employees to have workers’ compensation and unemployment insurance. Your state may require additional coverage for specific types of businesses. Check with your local Small Business Administration office or chamber of commerce, or ask your business’s lawyer or HR adviser what insurance is mandatory.
