Small Business Insurance: The 9 Types of Coverage You Should Have

The 9 Essential Types of Small Business Insurance

1. Worker’s Compensation Insurance (Required)
2. Unemployment Compensation Insurance (Required)
3. Disability Insurance (Required in Some States)
4. General Liability Insurance
5. Commercial Property Insurance
6. Professional Liability Insurance Insurance
7. Product Liability Insurance
8. Employment Practices Liability Insurance
9. Key Person Insurance

As with health insurance or car insurance, small business insurance is hopefully something you never have to use. But when something unexpected happens, having business insurance can be the difference between your business’s continued success or failure.

Unfortunately, a lot of businesses aren’t covered. According to Next Insurance, 44% of small business owners have never purchased business insurance, even after operating for at least one year. By purchasing the right types of business insurance, you can protect your company’s assets against damage and legal claims.

Many small business owners give up on purchasing business insurance because of how confusing the process can be. Every business will need a slightly different insurance package depending on the size of the company, the location, and the industry—and the choices can be overwhelming. In this guide, we’ll break down the different types of business insurance coverage, how much they cost, and the purchasing process.

Why You Should Purchase Small Business Insurance

You don’t need us to tell you that starting a business entails a lot of risk. Nearly one-third of businesses fail before their second year. This could be due to any number of reasons, such as a poor economic climate, a bigger competitor’s entry into the market, or difficulty obtaining business financing.

Having business insurance won’t stem the market risks that come with owning a business, but it will safeguard your business (and your employees in some cases) against property damage and legal claims. Between 36% and 53% of small businesses face litigation in any given year. Most small business owners do not have the financial means to deal with such issues on their own, so the cost of not having insurance is often a lot higher than the cost of purchasing coverage.

Certain kinds of insurance are required by law. For instance, most states require businesses with employees to purchase workers’ compensation insurance and unemployment insurance. In some states disability insurance is required, as well.

Beyond this, you might be obligated to buy insurance coverage when raising money from investors or getting a business loan. Requirements also vary by industry. For instance, a real estate agent with a car will likely need to buy commercial auto insurance. And a company that handles sensitive data online should purchase cyber liability coverage.

Small Business Insurance: The 9 Essential Types

When you start shopping around for business insurance, one of the first things you’ll notice is that there are several different types. You might find the choices overwhelming. You don’t want to have too little coverage, but you also don’t want to overspend.

Small businesses should consider purchasing the following types of business insurance.

9 Essential Types of Small Business Insurance

Type of Insurance	Cost	What It Covers
Workers’ compensation (required)	$0.75 to $3 per month per $100 of payroll	Claims resulting from work-related injuries
Unemployment insurance (required)	Varies by state (0.6% federal tax rate for most businesses)	Guarantees a portion of employee’s wages after a job loss
Disability insurance (required)	0.25% to 0.5% of payroll	Guarantees a portion of employee’s wages after illness or injury
General liability insurance	$400 to $600 per year	Certain losses that your business causes to another company, client, or vendor
Commercial property insurance	$1,000 to $2,000 per year	Theft, fire, vandalism, and some weather-related property damage
Professional liability insurance	$900 to $1,800 per year	Financial losses arising from your business’s negligence or malpractice
Product liability insurance	25 cents per $100 of product sales	Design flaws, manufacturing flaws, or insufficient product instructions
Employment practices liability insurance	$800 to $3,000 per year	Wrongful termination or discrimination claims
Key person insurance	Less than $1,000 per year	Replaces lost income from an owner’s or key executive’s death or disability

1. Workers’ Compensation Insurance (Required)

States require most employers to carry workers’ compensation coverage in case employees are hurt on the job. This is definitely a requirement that you don’t want to take lightly. Failure to purchase the required amount of coverage can result in fines and, rarely, even in criminal penalties.

If an employee experiences a work-related injury, workers’ comp will cover their medical expenses and pay them with a portion of their wages while they recover. For example, workers’ comp would cover an employee’s back pain that stems from poor ergonomic desk setup. If an employee sues your company for work-related injuries, workers’ compensation insurance usually covers the cost of defending the lawsuit.

You can purchase workers’ compensation insurance through a broker or private carrier. The cost typically runs $0.75 to $3 per month per $100 in employee wages. Many states, such as New York, offer a state-run insurance fund that sells workers’ comp insurance at regulated rates. Larger businesses might even have the option to self-insure. You can learn more information by contacting your state’s insurance department or workers’ compensation board.

2. Unemployment Insurance (Required)

Unemployment insurance is another government-required type of insurance coverage. This insurance covers your employees in case of a job loss or termination. Unlike workers’ comp or general property insurance, unemployment insurance is not something that you purchase from an insurance carrier.

Instead, along with other payroll taxes, employers pay federal unemployment taxes (FUTA) and state unemployment taxes (SUTA). The state administers the program for employers and employees. Your tax burden depends on the number of employees you have, your employee turnover, and whether you’re a new or established business. While an individual is out of work, they can apply to receive unemployment benefits.

Employers can calculate and make FUTA and SUTA payments on their own, but it’s often easier to let your HR software or payroll service take care of the calculations for you. Just don’t forget to contact your state’s unemployment agency and sign up for an employer account when you hire your first employee.

3. Disability Insurance (Required)

Disability insurance provides guaranteed payments to employees at a percentage of their income if they’re unable to work due to an illness or injury. Unlike with workers’ compensation, the illness or injury does not have to be work-related. For instance, a pregnant employee can receive disability benefits after giving birth.

Currently, five states—New York, California, Hawaii, New Jersey, and Rhode Island—require employers to provide some level of short-term disability insurance (SDI). SDI covers employees for three to six months after they’ve been injured or fallen ill.

Even if you’re not in one of those five states, short-disability coverage can provide peace of mind to your employees and make you a more competitive employer. Long-term disability coverage, which is more rarely provided, lasts until the expiration date stated in the policy or until the employee is able to return to work. The typical cost of disability insurance is 0.25% to 0.50% of your payroll.

4. General Liability Insurance

Businesses are not legally required to purchase general liability insurance, but there’s very good reason to. General liability insurance protects your business if a third party—such as a client, vendor, or customers—get injured from your business’s property, products, or services.

The following specific types of losses are covered:

• Physical injuries on business property
• Property damage to another individual or business while carrying out your work
• Advertising injuries (libel, slander, misappropriation, etc.)

This is a must-have type of coverage, particularly if you’re in an industry where accidents are more likely to occur. Examples include landscaping businesses, manufacturing companies, and construction companies. The cost of a general liability policy typically ranges between $400 to $600 per year, though that could vary significantly based on the level of risk in your industry.

5. Commercial Property Insurance

Commercial property coverage insures your business’s inventory, equipment, office space, and other property against loss or damage. This is a must-have for many types of businesses, especially those with a brick and mortar location.

This includes incidents of small business theft, fires, vandalism, and some weather-related damage. Most commercial property policies will cover flooding damage and damage from accidents, like a burst pipe. However, not all will cover natural disasters like earthquakes or tornadoes. Depending on where your business is located and the specific likelihood of different types of disasters there, you might have to add on specific coverage for these at an additional cost.

Look for business interruption insurance as a rider or add-on to your commercial property policy. This insures against lost income when you experience property damage or an accident. For instance, if your shop burns down from a fire, you’ll lose a lot of income while rebuilding it. Business interruption insurance will cover that loss of income. Cyber insurance coverage is also an important add-on to any online business that handles customer data.

6. Professional Liability Insurance

Professional liability insurance, also known as errors and omissions insurance or malpractice insurance, is something that people normally associate with doctors, lawyers, and other professional service providers. For example, if a doctor makes a mistake during surgery, their malpractice insurance will cover the costs associated with an ensuing lawsuit.

But doctors and lawyers aren’t the only ones who should have errors and omissions coverage. It’s possible for many types of business owners to commit professional negligence. For instance, a designer could fail to have a website ready to go for a client’s launch date. As a result, they lose thousands of dollars in sales and sue for the damages. The designer will be protected if they had purchased professional liability coverage.

If you offer professional services of any kind, you should plan on purchasing professional liability coverage. Don’t get rid of your general liability policy though—these cover two different things. The general liability policy covers physical injury, property damage, and advertising injury. The professional policy covers a client or other third party’s financial losses. Professional liability cover tends to cost around $900 to $1,800 per year.

7. Product Liability Insurance

Any small business owner who sells a tangible product should consider purchasing product liability insurance. You can purchase product liability insurance as a stand-alone policy or as an add-on to your general liability policy.

One of the best reasons to purchase product liability insurance is that it covers the full product lifecycle. For instance, if your manufacturer defectively makes the product, or your packager defectively packages the product, a customer could still sue you since you since it’s your brand on the label. You’ll be protected if you have product liability insurance.

In the grand scheme, product liability insurance is quite affordable, costing 25 cents for every $100 of retail sales. That means, for example, if you sell $50,000 worth of goods in one year, your annual premium for products liability insurance will be approximately $125.

8. Employment Practices Liability Insurance

Employment practices liability insurance (EPLI) covers your business against a variety of employment discrimination or wrongful termination claims brought by employees. For example, the policy would insure against the cost of defending a claim of sexual harassment or racial discrimination.

The annual cost of EPLI coverage generally ranges from $800 to $3,000, but the expense ultimately depends on the size of your work force, the level of turnover, industry, and whether you’ve been sued for wrongful termination in the past.

Of course, every small business owner tries to maintain a fair and equitable working environment, but that doesn’t make this coverage any less important. The average out-of-pocket cost to resolve an employee lawsuit without insurance was $110,000 in 2017. Small businesses are typically the most vulnerable to wrongful termination suits because they don’t have a full scale HR team or legal department. EPLI can save your business thousands of dollars.

9. Key Person Insurance

Key person insurance is designed to ensure that a business can survive its owner. If an owner, or another key executive in the business, dies or becomes disabled, the ensuing toll on the business can be heavy. The business will lose income during the transition, as well as clients that the key person brought into the fold.

To stem these losses, small business owners can purchase key person insurance. With key person insurance, the business will receive a payout that helps the business stay on its feet after the owner or other key person passes away or becomes disabled. Key person insurance makes your business more durable, and less dependent on the skills or charisma of a few people.

The company can use the proceeds of key person insurance to hire and train a replacement for the key person, pay employees, pay off debts, or take other steps to weather the blow of the loss. In order to figure out how much coverage you need, figure out who’s essential to your business, how much money they bring into the business, and how long it would take to replace and train the key person. Another rule of thumb is to purchase eight to 10 times the key member’s salary.

How to Purchase Small Business Insurance

Most small businesses don’t need to buy every single type of insurance listed above. Ideally, you should sit down with a broker or business attorney and figure out which of these types of insurance you really need. If the odds of a particular event happening are so low or don’t apply to you, it obviously doesn’t make sense to purchase that coverage.

Follow these steps to purchasing business insurance:

1. Create a game plan – Review this guide, talk to other business owners in your industry, and get the lay of the land on what coverage is required and customary in your industry. Take an informal “audit” of your business in terms of the property you own, disasters that affect your location, and characteristics of your workforce.
2. Hire a broker – The next step is to hire a broker to help you get quotes that will meet your budget and provide the coverage you need. If you outsource some of your HR work to a professional employer organization (PEO), then check in with them. Some PEOs already provide business insurance that will cover your company.
3. Compare quotes – Once your broker comes to you with business insurance quotes, ask questions and review the details, including coverage limits and the monthly premium. Most business policies have a deductible that you must pay before the carrier will begin insuring your losses. In general, the higher the deductible, the lower the monthly premium.
4. Stay current – Once you purchase your insurance policies, you need to keep them up to date. Your broker will help in these efforts, but you should also keep insurance in mind any time you make an important business decision. For example, if you launch a new product line, it’s time to expand your product liability coverage.

As a small business owner, you might be able to save money by bundling multiple types of insurance together into a single business owner’s policy. A home-based business owner can add on basic coverage to an existing homeowner’s insurance policy.

Throughout this process, keep in mind that most business policies have a one-year expiration date. You can either renew at the end of that period, or if you prefer, you can can switch to a different insurance company. Most companies allow you upgrade coverage and pay any premium difference mid-year. Just make sure you don’t let your insurance coverage lapse. Your business should be protected 100% of the time.

Purchase Small Business Insurance: Don’t Become a Statistic

Running a small business comes with a lot of unknowns. As an entrepreneur, you must take risks on a regular basis that might or might not pan out for your business, but your company’s best interests drive every decision. You should use that same mindset when purchasing small business insurance.

It might seem like wasted time and resources now, but if something unexpected happens, you’ll be thankful you have business insurance. With business insurance coverage, you’re more in control of your company’s future. And that makes you a smart business owner.

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