Commercial Insurance Policies: So What Coverage Do Small Businesses Need?
Many small-business owners think they're too small to be sued, but the Institute for Legal Reform reports that small businesses are actually more likely to be hit with a lawsuit than larger ones.
After natural disasters, FEMA notes that 40 percent of small businesses never reopen.
And after a cyberattack? As many as 60 percent will close their doors, according to CNET.
[related] https://learn.infusionsoft.com/business-management/legal/malware-what-you-need-to-know-for-your-small-business [/related]
That's why small business insurance is so important. The appropriate policies can help pay for lawsuits, disasters, and other setbacks that would otherwise leave you scrambling. Here's a look at some of the most common policies, when your business may need them, and how they can help you thrive.
General liability insurance
General liability insurance can cover accidents that happen to business owners in any industry. For example, this is the policy you turn to if a customer trips and falls in your store and you have to pay their medical bills. That's no small change, either. According to the insurance company The Hartford, a single slip-and-fall accident costs small businesses $20,000 on average.
General liability can also cover:
- Damage you cause to someone's property while carrying out your services (think spilled coffee on a client's laptop)
- Legal expenses when you're sued over physical harm your products cause ("product liability")
- Legal expenses from advertising mistakes (privacy invasion, misuse of copyrighted materials, and more)
Because of the basic liability protection this policy offers, it's smart for businesses to have it as soon as they open their doors.
Landlords may also require you to have general liability coverage to sign a commercial lease. The logic is that if a small business owner has their own insurance, people who are injured on the property won't resort to suing the landlord to cover their medical expenses.
Depending on your industry, business partners or clients may also require you to have this coverage. That way, you can pay for the physical damage your work may cause.
Professional liability insurance
Consultants and experts (architects, IT consultants, marketing firms, etc.) often carry professional liability insurance (also called errors and omissions insurance) to cover work mistakes that cause someone a financial loss. For example, this policy can help cover legal expenses when a professional is sued over:
- Missing a deadline
- Going over budget on a project
- Overlooking a mistake in their work
- Failing to deliver work that conforms to industry standards
- Failing to complete a project
Even if you haven't done anything wrong, you can still get sued over the quality of your work, especially if your contract is vague or your client is fussy. Without an exact project scope to refer to in your contract, clients may assume you've agreed to do work you actually haven't. So in addition to carrying professional liability coverage, it's important to create strong contracts.
Don't be surprised if clients often require you to have this policy before they work with you. The policy provides assurance that clients won’t take a financial hit over mistakes you make while doing your work.
If you make a living selling advice or expertise, it's smart to have professional liability coverage as soon as you open your doors. Most of these policies are written on a claims-made basis. This means your policy must be active both when an alleged incident occurs and when the lawsuit is filed. If you buy a policy after the supposed mistake already happened, you may not be covered.
Workers’ compensation insurance
Workers' compensation insurance can help small business owners pay for their employees' work injuries. It may foot the bill for:
- Medical expenses
- Partial replacement wages while the employee recovers
- Funeral expenses and support payments to dependents if the employee dies
- Lawsuit costs if workers' comp doesn't cover the injury and the employee sues the business
Accidents can happen in any industry, not just high-risk fields like construction. For example, if an employee trips over a cord at the office, workers' comp may address the subsequent medical costs.
This coverage is regulated at the state level, but most states require businesses to carry workers' comp once they hire their first employee.
Cyber liability insurance
Cyber liability insurance (also called data breach insurance) can help small businesses handle the devastating cost of a data breach. Most states require businesses to notify affected parties about a breach, and depending on the size of the incident, those notification costs can add up quickly. That's just one expense this policy can help pay for.
Cyber insurance can also cover:
- Customer credit monitoring services
- Legal services to investigate the breach
- Reimbursement for cyber extortion costs
- Good-faith advertising to repair a business's reputation after a breach
You may want to carry this policy if your business accepts credit cards, stores or handles sensitive customer information, or conducts business online or in the cloud. If you work in IT, look for a policy that includes third-party defense coverage. It can address legal costs if you're sued for failing to prevent a breach for one of your clients.
[related] https://learn.infusionsoft.com/business-management/legal/cybersecurity-tips-for-small-business [/related]
Business interruption insurance
Business interruption insurance helps businesses avoid becoming a FEMA statistic. When a covered event (like a fire or windstorm) forces a business to temporarily close for repairs, this policy can help pay for ongoing expenses like payroll, rent, taxes, and loans.
Those costs can be significant. One insurance company notes that the average business interruption claim costs $1.36 million.
When a disaster happens, the last thing you want to worry about is how you're going to retain your staff and commercial space while you're struggling to repair your building, replace your damaged equipment, and get your business on its feet again. This policy alleviates the financial burden of those ongoing costs while you're not bringing in new revenue.
Because disasters can strike anywhere and without much notice, this is another policy that makes sense for most businesses to have, regardless of industry. It's often included in insurance packages like a business owner's policy, which bundles general liability, commercial property, and business interruption coverage at a reduced price.
To learn about the insurance your business might need, try this two-minute diagnostic tool. It shows which policies may be handy given your industry and how your business operates.
Ruth Awad is a content strategist and editor at Insureon, the nation’s leading online small business insurance agency. She regularly writes and thinks about risk management.
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