Choosing the best small business insurance coverage protects your livelihood against the unexpected. It must meet federal, state, and local requirements while addressing industry risks. Many factors impact coverage and costs, making insuring a business a complex task.
But how do you determine the coverage, limits, and kind of insurance needed for small business owners? This guide explores these topics and discusses the average costs and limits for optional and required business insurance. It also covers advisory options for entrepreneurs needing assistance understanding regulations and choosing insurance products.
How to choose business insurance in 5 steps
Whether you work from home, rent an office building, or meet clients off-site, certain regulations may apply to your company, necessitating small business insurance coverage. Before discussing the types and costs in detail, let's review the basics that small- and midsized businesses should consider.
To choose the right business insurance, owners should:
- Review laws to determine your small business insurance requirements. Federal regulations require employers to have unemployment, workers' compensation, and disability insurance. States may impose additional rules.
- Assess your risks, liabilities, and assets. Insurance covers losses you can't pay out of pocket, which vary by company. Evaluate value and costs related to property, inventory, accidents, and professional errors.
- Consider fund availability to put toward deductibles. Insurance costs add up quickly, but cash on hand to cover higher deductibles can reduce monthly or annual fees. Choose a reasonable amount that doesn’t overextend your account.
- Decide which small business insurance types are most important. To stick to a budget, prioritize coverage based on your risk analysis. You can add or remove policies as your needs change.
- Determine how to find the best small business insurance. Comparing coverage limitations, insurance terms, and policy comparisons can be challenging. Insurance agents, brokers, and professional employer organizations (PEOs) can help.
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What is small business insurance?
Small business insurance is a broad term for commercial policies that financially protect companies from various risks. The business (policyholder) pays a premium, and the insurer covers claims that meet the plan's conditions and terms.
Many experts recommend general liability insurance, known as commercial general liability. But your company's unique needs may require additional coverage, like professional liability or a bundled solution called a business owner's policy (BOP).
What are the different types of small business insurance?
Small business insurance providers offer commercial coverage for most risks that companies face. Many carriers provide several insurance options, allowing companies to bundle policies for additional savings.
Home-based businesses may prefer a BOP, whereas high-risk and medium-sized companies might select a commercial package policy. Both solutions bundle multiple policies for cost savings.
While choosing the right amount of coverage is vital, there's no point in buying insurance you don't need. When in doubt, an impartial, third-party adviser can help your company sort through your choices.
Here are the most common types of insurance for small businesses:
- Commercial liability insurance: This general business coverage pays for bodily harm, property damage, or advertising injury claims.
- Errors and omissions insurance: E&O coverage or professional liability insurance covers claims that your services or advice caused financial harm because of actual or alleged errors or a failure to complete a service.
- Commercial property insurance: Like home insurance, this plan protects financial losses to physical assets from natural disasters, fires, vandalism, and theft.
- Cyber liability insurance: Business cyber policies cover liabilities from claims due to a data breach involving sensitive customer data.
- Business owner's policy: A BOP is a bundled solution that combines commercial and property liability insurance into one plan. Some also include business interruption and continuation coverage. Options and eligibility vary by provider.
- Commercial auto insurance: Small businesses that use trucks, vans, and cars can get coverage to meet state requirements and endorsements for extra services.
[Read more: How to File an Insurance Claim for Your Business]
To narrow your list of insurers, ask for recommendations from your professional network, check out customer reviews, and read guides on the best small business insurance providers.
Who needs small business insurance?
Although the government doesn't require some types of commercial business insurance, most companies, including startups and freelancers, benefit from coverage that protects them against lawsuits and natural disasters. Yet, according to surveys by NEXT Insurance and Hiscox, around 29% to 35% of small business owners with one to 50 employees don't carry general liability insurance or any coverage.
Requirements vary by industry. Certain companies must show a certificate of insurance. It proves you have business insurance and liability protection against workplace injuries or accidents. Most states require restaurants and bars that serve alcohol to have dram shop insurance, whereas construction firms may consider inland marine insurance to cover tools and equipment during transit.
How much does small business insurance cost?
General liability insurance coverage for small business owners ranges from $25 to $115 monthly for companies with fewer than 50 employees based on research by Buy Side from the Wall Street Journal (WSJ). According to Insureon, the average cost is $42 per month, or around $500 yearly. However, monthly rates vary by industry, from $28 to $80.
Here are the average small business insurance costs based on data from Insureon and Buy Side from the WSJ:
- Business owner's policy: The average monthly BOP premium is $57 or $684 yearly. Companies with fewer than 50 employees pay $40 to $115 monthly.
- Commercial auto insurance: Small businesses pay about $147 monthly or $1,762 annually, and firms with fewer than 50 employees pay $125 to $575 monthly.
- Cyber insurance: These premiums vary widely by industry, ranging from $56 to $149 monthly. Insureon said small businesses pay an average of $145 monthly, whereas Buy Side from the WSJ found that firms with fewer than 50 employees pay $40 to $145 monthly.
- Professional liability plan: The average monthly premium is $61 or $735 yearly. Prices for firms with fewer than 50 employees range from $45 to $165 monthly.
- Commercial property insurance: Small businesses pay about $67 monthly or $800 annually. Companies with fewer than 50 employees have monthly premiums ranging from $60 to $190.
So, how do insurance companies calculate prices? Agents consider your industry, number of employees, and annual revenue. Higher-valued properties, operating costs, or expenses increase liability insurance rates. Your claims history, business location, and coverage options also impact insurance costs.
[Read more: Offering Employee Benefits? Here's How to Afford Them]
How much coverage does a small business need?
The U.S. Small Business Administration said, "You should insure against things you wouldn't be able to pay for on your own." In most cases, a small business owner doesn't have enough savings to cover a million-dollar lawsuit or rebuild their store after a natural disaster. Your insurance limits should align with your risk; an umbrella policy can provide additional coverage.
However, 80% of business owners told the insurance brokerage, risk management, and consulting firm Gallagher that they were "worried their business insurance [would] not cover a specific event or loss." Determining your small business insurance needs is challenging, and a professional adviser can provide insights for better decision-making.
Small business brokers, agents, and PEO services assess your risks and value to determine how much insurance your business needs. After all, a retailer has different liabilities than a personal coach or construction firm, and most companies should insure the total value of their property.
To give you an idea of average coverage amounts, here are popular options for small businesses based on data from Insureon:
- General liability insurance: Most small businesses choose $1 million per occurrence and $2 million aggregate limits. This coverage allows up to $1 million per claim and $2 million during the plan’s lifetime, which is typically one year.
- Professional liability coverage: Policy limits vary substantially by industry, from $250,000 to $2 million. The average small business coverage is $1 million per occurrence and a $1 million aggregate limit.
- Business owner's policy: Many small businesses select $1 million per occurrence and a $2 million aggregate limit. The next popular option is $2 million and $4 million limits.
- Cyber liability insurance coverage: Industry, business type, amount, and type of customer data handled determine how much cyber insurance businesses need. Per occurrence and aggregate limits range from $1 million to $5 million.
How can small businesses get insurance?
You can buy commercial coverage from a provider once you determine your small business insurance needs. However, over half of Next Insurance survey respondents said their greatest obstacle was figuring out what type of insurance plan their business needs, whereas 70% told Hiscox they don't "understand what business insurance covers."
Indeed, "Four in 10 business owners said it's more stressful to understand insurance than taxes," according to Next Insurance. This complexity results in some companies being underinsured while others don't understand what their policies cover, meaning they might have overlapping coverage.
In addition to insurance representatives, you can work with brokers or PEOs to choose plans. Before buying a policy, consider your advisory options to ensure you get the coverage your business needs at an affordable rate.
[Read more: 5 Things You Need to Know About Choosing a PEO]
Get quotes from top small business insurance companies
Commercial insurance agents can walk you through the options their company offers. But you must meet with several providers to get quotes and then navigate the terms and limits independently. Comparing small business insurance companies and policies is time-consuming, especially with unfamiliar terminology.
To narrow your list of insurers, ask for recommendations from your professional network, check out customer reviews, and read guides on the best small business insurance providers.
Expert reviewers often suggest the following insurance companies for small businesses:
Work with an insurance broker
On the other hand, an independent broker handles the research on your behalf. They request quotes from the best small business insurance companies and explain the differences between policies and providers to ensure you understand your coverage, limits, and costs.
The best way to find a broker is to ask your colleagues for referrals. Remember to check your state website. Most have a licensing section for the department of insurance so you can verify that brokers are licensed in your state.
Partner with a PEO
Alternatively, you can outsource human resources, including payroll and benefits administration, by partnering with a PEO. This organization becomes a co-employer and insurance plan sponsor, allowing your company to offer high-quality, lower-priced PEO health insurance. However, you maintain control over day-to-day operations.
Here are a few PEO solutions offering insurance for small businesses:
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