You can protect your small business against common risks, such as liability claims, property damage, data breaches, and commercial car accidents, with the right small business insurance coverage. Many small businesses opt to bundle core coverages together into a discounted insurance package known as a business owner’s policy (BOP).
Certain types of commercial insurance (workers’ compensation and commercial auto insurance, for example) may be required by law, depending on your state and the nature of the work you perform. Even when coverage is optional, it’s critical that you maintain certain types of commercial insurance to avoid bearing the full financial burden when you experience a covered loss.
What is small business insurance?
The term “small business insurance” refers to a collection of insurance policies that can protect business owners against common commercial risks, from lawsuits to property damage to bodily injuries experienced by employees or customers. If the business doesn’t have insurance, it could be responsible for covering all of the costs out of pocket after a major loss—which could be devastating for a small business without significant assets or cash reserves.
Why small businesses need insurance
Your small business needs to maintain adequate commercial insurance to prevent unexpected accidents and events from turning into irrecoverable financial losses. You may also need to provide proof of insurance coverage in certain situations, such as when applying for a professional license, renting or leasing commercial property, or negotiating a contract with a prospective client.
How does small business insurance work?
By regularly paying your commercial insurance premiums, you’ve got the right to file a claim for reimbursement whenever you encounter a situation that your policy covers. Keep in mind that there’s generally a cap on the maximum amount your insurer will contribute toward a covered claim. Some policies have two types of coverage limits:
- A Per-occurrence limit for each individual claim
- An aggregate limit that applies across the entire coverage period
What does small business insurance cover?
The coverage offered by your commercial insurance policy may vary, depending on the types of small business insurance it includes. In general, business insurance may cover some or all of the following:
- Third-party medical treatments and repair bills
- Legal expenses, such as judgments, settlements, and legal defense costs
- Damage to buildings or items owned by your business
- Disruptions to ordinary commercial operations
- Accusations of errors and omissions in the performance of your professional duties
- Workplace illnesses or injuries
- Commercial vehicle accidents
- Data breaches and other cybercrimes
What isn’t covered by small business insurance?
What isn’t covered by your small business insurance policy also depends on the coverage types it includes, since each type of commercial insurance comes with its own set of exclusions. Here are some examples of situations that usually aren’t covered by small business insurance:
- Intentionally inflicted harm
- Illegal or fraudulent actions
- Preventable or progressive damage to property, such as wear and tear
- Pandemics
- Government-ordered shutdowns
- Employee dishonesty (unless you have a fidelity bond or commercial crime insurance)
- Property damage caused by flooding or earthquakes (unless you have commercial flood or earthquake insurance)
Types of small business insurance
Read below to learn about some of the best small business insurance types that you may need to consider for your company.
General liability insurance
General liability insurance can cover expenses like medical bills, property repairs, and legal fees if you’re held liable for injuring someone, damaging their property, harming their reputation, or violating copyright law. Every business is advised to consider general liability insurance coverage, making it a great starting point for any commercial insurance policy.
Below are some examples of situations a small business could encounter that would be covered by a standard general liability insurance policy:
- A customer at a grocery store slips on a wet spot and breaks their wrist
- A waiter at a cafe accidentally spills coffee on and ruins a customer’s laptop
- A technology company is accused of spreading false information about a competitor’s product in an online advertisement
- A social media manager includes copyrighted music in a promotional video without first obtaining permission from the artist
Commercial property insurance
If an unexpected peril damages or destroys your commercial buildings or the items your business owns, commercial property insurance can help pay for repairs or replacements. Depending on your insurance company, covered perils may include windstorms, fire and explosions, water damage from burst pipes, vandalism, and theft.
Business interruption insurance
You may sometimes need to temporarily stop your normal business operations because of covered damage to your property. In these cases, business interruption insurance may cover ongoing operational costs, like payroll, relocation expenses, or lost revenue. Business interruption coverage is often automatically included within commercial property insurance, so you may not be able to purchase it as a standalone policy.
Business owner’s policy (BOP)
You may be able to save more than 10% on your commercial insurance premiums by bundling general liability, commercial property, and business interruption coverage into a single package known as a business owner’s policy. BOPs are generally designed for small and midsize businesses with standard risk profiles, so you may not qualify if you have a large number of employees, high annual revenue, or exceptionally risky business operations.
Professional liability insurance
Professional service providers—including consultants, accountants, and architects—need professional liability insurance to cover their legal fees if they’re sued for making a mistake in the performance of their professional duties that causes a client to experience some type of harm, such as a financial loss. Covered claims may include misrepresentation, negligence, inaccurate advice, and other errors or omissions.
Workers’ compensation insurance
Workers’ compensation insurance steps in if an employee is injured, gets sick, or dies while working or because of their work. Covered expenses may include medical care, reimbursement for lost wages, disability benefits, and funeral or burial expenses. Your workers’ comp policy may also include employers’ liability insurance, which covers your legal expenses if an employee sues you over a workplace injury.
Commercial auto insurance
Any enterprise that uses vehicles to conduct business activities needs commercial auto insurance to cover losses stemming from commercial vehicle accidents. Generally, commercial auto insurance can be customized to include several different coverages. Examples of losses and expenses that may be covered include:
- Medical expenses for your employees, their passengers, or others they injure in an accident
- Repairs to your vehicles or other vehicles your employees damage in an accident
- Losses triggered by an accident where the at-fault driver has little or no insurance coverage
- Funeral expenses for drivers or pedestrians killed in an accident
- Claims involving vehicles your business uses but does not own, such as rented vehicles or cars owned by your employees
- Damage to heavy-duty trucks and other vehicles from external perils, such as vandalism, collisions with animals, or natural disasters
Cyber liability insurance
Cyber insurance covers expenses that arise if your company is targeted by a cybercrime, such as a data breach. First-party cyber coverage takes care of your direct expenses, such as data recovery costs, ransom payments, forensic investigations, and public relations support. Meanwhile, your policy may also include third-party liability coverage, which takes care of legal fees and other costs if you’re sued by someone else after losing their data in a breach.
Additional business insurance coverage options
Numerous other types of commercial insurance coverage may be beneficial, depending on the type of work your business does. Here are several examples of optional coverage types that may be worth considering:
- Commercial umbrella: Commercial umbrella insurance provides extra liability coverage in case an especially costly claim exhausts the coverage limit of an underlying liability insurance policy. Umbrella insurance can extend the limits for multiple types of liability insurance at the same time, such as general, professional, and commercial auto liability coverage.
- Directors and officers: Companies that have executives tasked with making high-level decisions need to purchase directors and officers (D&O) liability insurance. D&O insurance can cover legal fees if an executive is sued for mismanagement, misuse of funds, breach of fiduciary duty, or failure to comply with legal requirements.
- Inland marine: Commercial property insurance generally doesn’t cover business personal property in transit, so you may need inland marine insurance to cover tools, equipment, and other items while you transport them. Trucking companies that haul products over long distances may need a specialized inland marine insurance policy known as cargo insurance.
- EPLI: Businesses with employees may benefit from maintaining employment practices liability insurance (EPLI). This policy can cover judgments, settlements, or other legal costs if you’re sued for an alleged violation of employee rights, such as discrimination, retaliation, or wrongful termination.
- EBL: Employee benefits liability (EBL) insurance is another policy that protects you from significant out-of-pocket legal fees due to an employee lawsuit. EBL steps in if an employee experiences some kind of loss due to a mistake in the administration of their benefits package—like if your human resources manager forgets to sign them up for health insurance or fails to make matching contributions to their retirement plan.
- Employee dishonesty coverage: If one of your employees commits a crime—such as embezzlement, fraud, or forgery—commercial crime insurance can cover the fallout to prevent devastating financial setbacks for your business.
- Commercial flood or earthquake: Basic commercial property insurance policies exclude coverage for floods and earthquakes, so you’ll need to purchase extra coverage to be fully protected if you live in a region that is prone to either or both of these natural disasters.
- Group health: Businesses that employ more than 50 people may face legal penalties if they don’t offer employer-sponsored health insurance benefits for their full-time employees. Even if you have fewer employees, you may still want to offer group health insurance through the Small Business Health Options Program (SHOP).
Is small business insurance required by law?
Depending on where you operate and what your small business does, you may be required by law to carry certain types of business insurance coverage. For example, most states require commercial auto liability insurance for companies that use vehicles to conduct business activities and workers’ compensation insurance for companies that have multiple employees.
Other small business insurance requirements may only apply to businesses in specific industries. For example, some states require professional liability insurance for doctors and lawyers.
How much does small business insurance cost?
The average business can expect to pay between $250 and $1,000 per month for a business owner’s policy with commercial auto and workers’ compensation insurance—which covers some of the most basic commercial risks while also meeting the most common state-mandated insurance requirements. Here’s a breakdown of approximate average costs by coverage type:
Along with the coverage types included in your policy, the following factors will influence how much small business insurance costs for your company:
- Coverage limits
- Claims history
- Industry
- Size and scope of commercial operations
- Deductibles
- Location
- Public visibility
- Value of covered property
- Number of years in business
How to choose the right small business insurance policy
As you try to decide which commercial insurance policy would be the right fit for your small business, you need to do the following:
- Determine what coverage types you’re required to carry by state laws, rental agreements, or client contracts
- Evaluate what kinds of risks your business is most likely to face and what you could stand to lose in the event of a major peril or liability claim
- Set a budget that you can use to help you balance your premiums and deductibles
- Compare insurance companies based on their credentials, customer satisfaction reviews, and financial strength ratings
- Compare insurance policies based on their costs and the level of coverage they provide
Small business insurance at a glance
- Definition: Small business insurance isn’t a single type of insurance coverage, but instead a collection of coverage types that small business owners can purchase to protect themselves against common commercial risks.
- Benefits: Commercial insurance can keep you from bearing the full financial burden anytime you experience an unexpected peril or liability claim. In addition, you may need to show proof of coverage to obtain a professional license or meet the terms of a contract.
- Basic coverage: Many small businesses bundle basic coverages into a discounted insurance package called a business owner’s policy. Standard BOPs include general liability, commercial property, and business interruption insurance.
- Requirements: If you have employees or commercial vehicles, you may be required by law to carry workers’ compensation or commercial auto insurance. Other coverage types—such as professional liability—may be required only for certain industries.
- Other coverage options: Depending on your business operations, you may need to consider several other types of business insurance, such as cyber liability, commercial umbrella, D&O liability, or commercial crime insurance.
- Cost: It costs, on average, several thousand dollars per year to maintain a basic level of commercial insurance coverage. Your premiums may vary based on factors like your policy details, industry, location, size, and claims history.
How to shop for small business insurance
Shopping around is important because every insurance company has unique standards for determining how much to charge for commercial insurance. That means the cost of insurance for small businesses may be different from one insurer to another. To make sure you’re getting the lowest possible rate on the right level of coverage, you need to compare quotes from at least three to five separate insurance carriers.
The takeaway
Some form of business insurance is recommended—and often critical—for any small business. Whether your company requires multiple warehouses or you run a small operation out of your home, it’s well worth purchasing small business insurance to prevent a big financial setback that could set your business behind—or even shut its doors for good.
Frequently asked questions
What types of insurance should every small business consider?
Every small business owner should consider general liability coverage, which provides broad coverage for common losses and is recommended for any business. Depending on their commercial operations, businesses may also be required to carry certain coverage types, such as commercial auto or workers’ compensation insurance.
Can a home-based business benefit from having insurance?
Yes, home-based businesses generally need to maintain commercial insurance because homeowners insurance may provide little to no coverage for commercial property, business interruptions, or business-related liability claims.
How often should small businesses review their insurance coverage?
Small businesses should review their insurance coverage at least once per year—and potentially more often if they make major changes to their business operations, such as opening new locations, offering new services, or laying off several employees.
Do LLCs need business insurance?
Yes, limited liability company members need business insurance to have adequate protection for their commercial assets—plus their personal assets in the rare cases where they can be held personally liable for business-related claims.
What does insurance for small business owners not cover?
Exclusions may vary by policy, but small business insurance typically doesn’t cover fraud, disease outbreaks, or property damage from wear and tear or other preventable causes.