Purchasing insurance for your business can be complicated and time-consuming, but it is also critically important. Many entrepreneurs take the easy way out by signing up for an insurance policy without completely understanding what they are buying. While that method provides a temporary fix, it could lead to problems in the long run.
Ending up under-insured exposes you to a potential financial disaster. Or, on the other hand, you could end up paying for expensive insurance you don’t really need.
So, how can you ensure that your company is adequately insured? To start, you must understand the different types of insurance policies that your company requires.
Business insurance types
The nature of your business determines your insurance needs, but most businesses require all or some of the following types of insurance:
Property insurance
This is an essential requirement for most companies with a physical presence because it protects the building from fire and theft. Your business assets, which could include inventory, computers, furniture, and machinery, could also be covered.
A useful add-on to consider under property insurance coverage is business interruption/loss of income insurance. This insurance will protect you from the loss of business income after a disaster like a hurricane, fire or some other disaster. [Read our full property insurance guide.]
General liability insurance
General liability insurance is also known as business liability insurance. This will cover you against claims that involve bodily injuries and damage to property that results from your products, services or your place of business.
For example, a customer could slip and fall in your store. You may face a claim for medical costs or lost income that could cost a significant amount of money. A general liability insurance policy helps protect your business.
Don’t get misled by the term “general.” While this type of insurance covers against things that could potentially happen to your business or at your place of business, it does not cover employee injuries, nor does it pay you for auto accidents or professional mistakes made by you or your workers. [Read our full general liability insurance guide.]
Business vehicle insurance
A business vehicle insurance policy covers autos that are owned by the business and used to conduct business, and can also apply to the vehicles that your company hires or leases.
This type of coverage is also important if you use your personal car for business. If you get into an accident while performing business duties, your personal auto insurance policy may reject the claim.
Depending on your policy, the coverage can also include theft and damage from flooding and accidents as well as third-party injury. [Read our full business vehicle insurance guide.]
Workers' compensation insurance
Just as general liability insurance covers bodily injuries sustained by customers as a result from your products, services, or business in general, workers' compensation insurance protects you and your employees from any injuries sustained while on the job.
While workers' compensation regulations vary from state to state, most states do require employers to have an active policy in place. A typical policy includes coverage for the injured worker's healthcare—including hospital visits, physician appointments, medical testing and prescriptions—as well as wage reimbursement if the injury causes the employee to lose time from work. [Read our full workers' compensation guide.]
Product liability insurance
Certain liabilities like injuries and property damage are covered under general liability insurance. However, you may also need product liability insurance for the claims that a customer makes if your product malfunctions. This insurance is essential for businesses that produce, sell, or distribute a product. [Read our full product liability insurance guide.]
Professional liability insurance
Professional liability insurance is a must for businesses that offer a professional service. Doctors, IT consultants, and real estate agents, for example, can be accused of being professionally negligent. Professional liability insurance can help protect you if a client files a negligence claim against you specifically, or against your office in the event where an administrative or clerical error was made.
Whether you're found negligent or not, professional liability insurance can also reimburse you for the legal costs that you incur in protecting yourself against such claims. [Read our full professional liability insurance guide.]
Business owner’s policy (umbrella policy)
A business owner's policy, also known as an umbrella policy, is a combined policy that covers you against various types of risk. It may include property insurance, certain types of liability insurance, and business interruption insurance. These policies do not provide coverage for professional liability, auto insurance or insurance for your workforce.
Many small business owners prefer a business owner’s policy as it combines several types of insurance into one package. It makes the insurance-buying process much simpler, and the cost could be less than the amount that you would spend if you covered each risk separately. [Read our full business owners policy guide.]
Over-insurance could put a financial burden on your firm, but buying inadequate insurance coverage could be even more dangerous.
How much insurance do you need?
This can be a difficult question to answer. Over-insurance could put a financial burden on your company, but buying inadequate insurance coverage could be even more dangerous. In the event of bankruptcy, your company’s assets and even your personal wealth could be at stake.
So, how much insurance should you buy? Let’s address this separately for property and liability insurance.
Insuring property at an appropriate value
If you have purchased real estate with a bank loan, you must ensure, at the very least, that your insurance coverage meets the lender’s requirement. In many instances this is will be a requirement of the loan. This would also be considered minimal coverage, as any monies that you put into the property would not be covered.
Another factor to consider when you are purchasing property insurance is the value of the property. There could be a big difference between your acquisition cost and the replacement value of your property. If the property plays a vital role in your business operations, it’s a good idea to have enough insurance to cover the cost to replace the property itself.
Buying adequate liability insurance
The product that you manufacture or sell could harm someone or cause damage to property. In this situation, liability insurance will help protect your company.
If your business is structured as a limited liability company (LLC), you can likely opt for a lower amount of liability insurance, as the maximum amount that you will have to bear will usually not exceed the assets owned by your company.
If you run a sole proprietorship, your personal assets could be seized to pay the claimant. In this situation, it is advisable to buy a greater amount of liability coverage. As part of an insurance program, it’s also recommended that you have some kind of legal structure that will protect your personal assets should something occur when you are conducting your business. Limited liability company or corporate structures will help protect your personal assets.
If your business is structured as a limited liability company, there are some situations where you could be personally liable for claims against your business. Limited liability will not apply if you have acted negligently or if you have carried out an illegal act.
How to save on insurance premiums
Like all insurance, the premium that an insurance company charges is based on several factors. Familiarizing yourself with these can help you to keep your insurance costs in check.
- Location of your business. Does your area have a high crime rate? Is your office building well maintained? The answers to these questions could determine your insurance premium. You will have to pay more if your building’s electrical system is old or if it has poor safety standards.
- Claim history. A company that has repeated claims against it could find itself paying more in insurance premiums over time. It may be advisable to absorb small losses rather than have constantly increasing costs for insurance.
- Driving history. If you or your employees have an unsatisfactory driving record, it is likely to lead to a higher premium on your business vehicle insurances. Limit yourself to only drivers with a good driving history. Also, wherever possible, limit claims that could increase your premiums and consider paying for minor damages out of pocket.
Other factors could influence how much the insurer will charge you. The first is a poor credit score. Although this does not have a direct bearing on the policy, the company could hold the view that your financial position is weak and that you could be more likely to make a claim. Second, a break in your coverage due to non-payment could make it difficult to get coverage from another insurer, or your current insurer could increase premiums prohibitively.
Points to keep in mind before you buy insurance
When you are finalizing your insurance plan, you should seek the advice of a professional. An insurance agent will be able to help you select the most appropriate policies for your business. This individual’s input may lead to a reduction in your insurance costs and, most importantly, help determine the right amount of insurance to suit your needs.
As the business owner, it is important that you play an active role in the selection of the policies for your business as well as the perpetual monitoring of the policies you have.
Here are several points that may help you in the process:
- Consider buying an umbrella policy. This insurance policy could provide additional coverage on things that are not specifically covered in your singular policies, including false arrest, libel, and slander. An umbrella policy can also provide these additional coverages at a reduced rate.
- Don’t forget disaster insurance. Also referred to as catastrophic insurance, this coverage protects you from 'acts of god,' such as earthquakes, floods, hurricanes and man-made disasters, like terrorist attacks. Standard insurance policies often exclude these risks.
While the probability of these events is low, a disaster could lead to significant losses or possibly even wipe out your business.
- Errors and omissions insurance. This is essentially professional liability insurance that protects you from lawsuits based on negligence or inadequate work. When you buy this policy, check whether it covers all your employees. Some insurers do not provide coverage for temporary workers.
- Protect yourself from cyber security risks. This protects you from internet-based risks. Depending upon the specific policy that you buy, you could get coverage that pays for a forensic investigation into the breach. The cyber insurance could also cover business losses that arise from the theft of your data and the costs associated with the damage to your reputation.
- Saving costs by purchasing a low-cost online policy. If you are lucky, you may manage to reduce your insurance expenses by opting for the cheapest option that is available on the internet. But this strategy could backfire if the policy contains some terms and conditions that you don’t understand and which lead to your claim being refused. If you are going to go this route, make sure that you have as much understanding about what you are covering as possible.
Review your coverage periodically
The most common mistake that many business owners make is to blindly renew their insurance policies without taking their changing needs into account.
For example, you should enhance the coverage of a policy that protects against loss of income if your business volumes have increased. When you acquire new assets like vehicles or machinery, you may need to increase the coverage amount. You should periodically review the needs of your business as well as your current coverage, just like you would when you purchase your first policy. Keeping a fresh eye on your coverage will provide both the required coverage but will also help you manage the cost of your insurance.
Finally, remember that every company’s insurance requirements are different. It’s vital that you devote sufficient time and energy to this subject and buy the policies that best protect you from the risks that your business faces.
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