Insuring for the Future for Small Businesses Part 1: What Is Commercial Business Insurance and What Insurance Do I Need for My Business?

By August 20, 2014Insurance, Startups

It is easy to get overwhelmed when starting up your own business. There are so many details—requirements to file with the state, bank accounts to set up, and real work to do. It is also easy to consider certain costs luxuries. However, insurance is one item small businesses cannot afford to do without.

As a small business owner, it is important not to rely on your business structure—be it a limited liability company or a corporation—as the sole mechanism to protect your personal assets. Certain risks can incur substantial loss to your business. You still need to select and implement the proper insurance to protect your business from the unexpected—both physical loss and legal liabilities.

The following outlines the key forms of insurance small businesses need to consider. A later post will cover state-required insurance if you have employees.

General Liability Insurance protects small businesses from the costs of defending claims resulting from accidents, injuries, or negligence. These policies protect small business from losses due to bodily injury, including medical expenses; property damage; personal injury, including slander and libel; and false or misleading advertising.  The policy will cover the cost of defending lawsuits and any required settlement bonds or judgments, and typically covers compensatory damages (the injured party’s financial losses), general damages (non-monetary losses), and punitive damages.

Commercial Property Insurance is a general policy that will protect your business assets in case of fire, smoke, severe weather, and vandalism. The term “property” is broadly defined, and can include lost income, business interruption, furniture, equipment, supplies, buildings, company papers, and money. To facilitate claims, keep careful documentation (receipts and photographs) of equipment, furniture, and other valuable items in a safe place. This type of policy generally covers up to a maximum amount, and it is important to understand your individual policy to know this limit of liability. If you lease space, it is important to understand your obligation to the landlord and to determine coverage if you lose property and equipment or if there is a lawsuit for damages caused by you or one of your employees. A related policy is Business Interruption/Continuation Insurance, whichcovers expenses due to the occurrence of certain covered events, such as a fire or theft, that interrupts business activities.

If you work from home or use your vehicle for work purpose, you will want to make sure to obtain riders to your Homeowner/Renter and Automobile Insurance. Do not assume that you are protected because personal automobile and homeowners or rental insurance policies do not generally cover business related losses.

In some instances, your particular business requires the acquisition of specific policies. If you manufacture, distribute, or otherwise sell products, you will need Product Liability Insurance. This insurance is important to protect against losses stemming from product defects, which incurs liability even to those businesses not responsible for the manufacture of the item. If you offer services to customers, you will want to carry Professional Liability Insurance, or Errors and Omissions Insurance. These policies may be mandatory for some professions (for example lawyers and healthcare professionals), and protect service providers from the costs associated with malpractice claims. It covers negligent service (errors) and failure to provide services (omissions).

The various forms of insurance can be purchased individually, but often a business owners’ policy (BOP), which packages many types together can result in a more affordable premium. Although there is variation, most BOPs provide insurance for property, general liability, and business interruption. Each business has unique considerations so make sure that you obtain adequate coverage for your particular circumstances.