Which type of business insurance matters the most?

Dustin Johnson
By Dustin Johnson

If you’re a business owner, you probably wonder, “What business insurance do I need?” There are many types of business insurance. They are all designed to protect businesses and their assets from different financial risks. The coverage your business needs depends on your type of business, laws, and the amount of protection you desire.

Business insurance is important because it protects you from the unexpected legal costs of running a business. If you’re not protected, the out-of-pocket costs from damages and legal claims could run you out of business. Business insurance is a smart investment that provides peace of mind.

This article will review the most common types of business insurance, help you answer which types you may need, and answer other common business insurance questions.

Key Takeaways:

  • Every small business should consider investing in business insurance to protect them from financial loss, property loss, and lawsuits.
  • General liability insurance is the most popular business insurance type. However, it doesn’t cover everything. Business owners may consider other types like professional liability, hazard, and income insurance.
  • To pick the best insurance for your organization, consider your business type, customer base, liabilities, and most common risks.

Limited liability company vs liability insurance

“I have an LLC. Do I need insurance?” This is a great question, especially since the “limited liability” in LLC may give the impression that an LLC fully protects you AND your company from liability.

The truth is that an LLC only protects you and your personal finances if someone sues your business. If a lawsuit is brought against your company, your company is responsible for paying settlements and judgments. Professional liability insurance, on the other hand, protects your business in the case of a lawsuit. 

This level of liability protection is also true for some business structures. In a limited partnership, the limited partner will have limited liability. With corporations, the shareholders have limited liability. All business types should invest in general liability insurance and explore other types of insurance.

When should you purchase business insurance?

Making financial decisions that benefit you in the short term may be tempting. Starting a business can get expensive quickly, but don’t let the growing number of bills deter you from safeguarding your business’s future. All it takes is one mistake or accident to cost you your entire business.

When you may consider purchasing business insurance

  • The law requires you to carry specific insurance
  • You have employees
  • You do business in a region prone to natural disasters
  • You and your staff perform dangerous work
  • Your work leaves you vulnerable to legal damages
  • It helps recruit employees or potential clients
  • Your business has at least one physical location
  • You work with sensitive information and are susceptible to cyber crimes
  • You have expensive assets to protect
  • You provide a physical service or product
  • Your work requires contracts

Different types of business insurance

Business insurance covers a broad range of insurance types. Depending on your business, your insurance provider may give you a package, such as general liability, workers’ compensation, and commercial vehicle insurance. Some insurance providers also provide packages based on your industry, like real estate investing, auto repair, or financial services.

With the many types of business insurance available, it is challenging to know which one you need.

General liability insurance

General liability insurance protects a business against claims of bodily injury and property damage from customers and clients. These claims may result from your business’s operations, services, employees, or property. General liability insurance can cover the cost of property damage or medical expenses as well as administrative costs to handle the claims, court costs, and settlements.

General liability insurance is called “business liability insurance” or “commercial general liability insurance.” It’s essential to understand what your general liability insurance covers and not mistake it for other policies like professional liability or commercial property insurance.

Professional liability insurance

Professional liability insurance protects professionals against claims initiated by their clients, like negligence. Professionals with expertise in a specific area will carry this type of insurance because they require protection against claims not covered by general liability insurance. These claims can include negligence, malpractice, misrepresentation, or mistakes.

Who needs professional liability insurance?

  • Consultants
  • Doctors
  • Real estate agents
  • Architects
  • Graphic designers
  • Engineers
  • Insurance agents
  • Marketing agencies
  • IT consultants 
  • Photographers
  • Beauticians
  • Career coaches
  • Mental health counselors
  • Personal trainers

What Is typically covered

What Is not usually covered

  • Mistakes, errors, and oversights in services provided
  • Undelivered services
  • Missed deadlines
  • Copyright Infringement
  • Breach of contract
  • Negligence
  • Misrepresentation
  • Inaccurate advice
  • Personal injury, like libel or slander
  • Employee injuries
  • Employee discrimination lawsuits
  • Vehicle business use
  • Bodily injury
  • Property damage
  • Data breaches
  • Customer injuries or damages

The name of the insurance may change depending on the profession. For example, doctors have medical malpractice insurance covering errors and omissions. Lawyers carry malpractice insurance to cover the financial burden of defense against claims of errors when practicing law.

Hazard insurance

Commercial property is at risk of the same hazards as homes. Business hazard insurance protects owned and rented business property against fire, theft, and natural disasters. In addition to business property, equipment, inventory, and electronics are usually covered.

Property typically covered

Events often covered

  • Personal property
  • Tools and equipment
  • Inventory
  • Furniture
  • Computers
  • Accounts receivable
  • Valuable documents
  • Outdoor landscaping, like fences
  • Fire
  • Theft
  • Lightning
  • Wind
  • Natural disasters, like blizzards or hailstorms
  • Explosions
  • Damage caused by vehicles
  • Water damage from sprinkler systems

Another name for this business insurance policy type is business property insurance.

If you’re seeking an SBA loan, you’ll need proof of this type of insurance. This is how they verify that the assets they’re funding are protected. If you do business at home, you should check with your homeowner’s insurance provider to see if you get the protection you need.

Business income insurance

Business income insurance helps cover the loss of business income if an event forces you out of business. The covered causes of loss depend on your policy, but they can include events like fire, theft, and natural disasters. Your policy may start from the beginning of the business income loss and extend to help protect your business from the slowdown after you reopen. Between that, you’re protected from losses while you purchase and install new equipment and repair your property.

Businesses have many bills, so they need help to survive. This insurance can help business owners pay key employees, other insurance, rent, power, and benefits, and themselves. Insurance companies usually pay all lost profits and ongoing costs for up to 12 months while you’re entirely or partially out of business.

Commercial property insurance

Commercial property insurance protects owned and rented property, plus the equipment and inventory used to operate a business. This insurance covers business assets from fire, explosions, storms, theft, and vandalism.

The cost of commercial property insurance will depend on your property's value, business assets' value, and risk. Insurance providers will assess the risk of natural disasters, the materials handled on the property, and the protection systems on the property. You may have heard this insurance referred to as commercial building or business personal property insurance.

Workers’ compensation insurance

Workers’ compensation insurance is one of the most common insurance policies because all states mandate that employers carry it. This insurance provides medical and wage benefits to injured or ill employees from work-related causes. Workers’ compensation also pays death benefits to families of employees killed on the job. Again, if you have employees, you won’t have the option of choosing this insurance.

This insurance gives employees peace of mind knowing they’re protected from the risks of their jobs. It also gives business owners the peace of mind of knowing they don’t have to worry about costly lawsuits from injured employees. 

Commercial auto insurance

If you or your employees use a vehicle/s as part of doing business, you should consider a commercial auto insurance policy. Businesses like electricians, plumbers, painters, food trucks, and private security do a lot of driving. If damage is done to your vehicle or your vehicle damages someone else’s property, this insurance will cover the physical damage and liability coverages for amounts, situations, and usage.

What Insurance do I need to start my own business?

If you’re starting a business, you likely won’t need all the insurance we mentioned. Depending on your business type, the best place to start is with general and/or professional liability insurance. As you plan your business expansion, you should factor in the insurance cost when you budget for employee payroll and purchasing/renting property. 

Do solopreneurs and freelancers need insurance?

Most business owners start as solo operations or freelancers. If you’re a sole proprietor, you can also benefit from the coverage provided by general liability insurance to protect personal and business assets. If you’re a service-based provider like a landscaper, dog walker, or barber, you should consider protecting yourself and your clients.

Is business insurance tax deductible?

The IRS considers business insurance a cost of doing business, so your policy and premiums should be tax deductible.

The bottom line of business insurance

The bottom line is that you should do your research to be sure your business receives the maximum amount of protection. You also want to follow the laws in your state by carrying the required insurance policies.

Dustin Johnson
By Dustin Johnson
Dustin Johnson is a Senior Tax Research Specialist at ComplYant. Prior to joining ComplYant, he spent over eleven years performing tax research at the world’s largest tax preparation company. Dustin holds a Bachelor of Business Administration and a Juris Doctor. Outside of work, Dustin enjoys biking and spending time with his family.

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