Small Business Insurance Dos and Don'ts

Date: May 13, 2016 Last Edit: June 08, 2016

Learn about business insurance requirements, insurance laws, and how to save big on business insurance.

As a small business owner, you’re responsible for securing several different types of insurance for your company. Protecting your business assets, your property, and your employees’ health and well-being are a few of the reasons why business insurance is important – and, in many cases, mandatory.

NFIB has compiled a list of the different types of business insurance every entrepreneur should have. Plus, learn how small business owners can access business insurance products – and save on business insurance costs – through NFIB!

Mandatory Business Insurance for Employers

There are several types of business insurance that are mandated by law to protect yourself, your business, and your employees. Your state government determines insurance requirements for business. Most states require businesses with employees to pay for workers’ compensation insurance, unemployment insurance and state disability insurance.  Your state may also require insurance for specific business activities.  Check with your state’s Department of Insurance or contact your local city government offices to learn more about your state’s mandatory insurance requirements for small business. 

Failure to obtain the proper insurance may mean you’re not able to launch a new business. If your business is already operating and you don’t obtain or maintain appropriate insurance coverage, you risk facing hefty fines or losing your business license.

In general, the following types of business insurance are required for all employers:

Workers’ Compensation

Obtaining workers’ compensation for full-time and part-time staff is crucial in most states, and failing to comply with state laws can result in serious penalties for business owners. Workers’ compensation insurance  supplements salaries or wages for employees who are injured on the job and cannot return to work, provides temporary and permanent disability awards to injured workers, and protects employers from potential lawsuits.

It’s critical to understand the difference between W2 employees and freelance workers with regards to providing workers’ compensation coverage. Some business owners require independent contractors to provide proof of insurance, or clarify in their work contract that workers’ compensation is not provided. To be safe, talk to your state’s Department of Insurance or a licensed insurance agent familiar with your state laws and ensure you have adequate coverage before working with any freelancers or contractors.

Unemployment Insurance

A joint state-federal program that provides cash benefits to eligible workers, unemployment insurance is administered by each state, but states follow the guidelines that are established by federal law. Each state’s unemployment insurance program is funded by the taxes paid by companies operating in that state. Your business pays for unemployment insurance with money that is submitted through payroll taxes. Companies who lay off more workers and have larger payrolls pay more into the state employment trust fund than those that don’t.

Disability Insurance

Disability Insurance coverage allows employers to provide partial wage replacement insurance coverage to their eligible employees for non-work related sickness or insurance.  Employers located in California, Hawaii, New Jersey, New York , Puerto Rico, and Rhode Island are required to purchase disability insurance.  Check with your state’s Department of Insurance to determine if this coverage is required by your state.

Other Business Insurance Coverages to Consider

Insurance coverage is available for virtually every conceivable risk your business could face.  Depending on your state and local laws, your industry, and the type of equipment and products you work with, there are additional types of business insurance coverage you may need to consider.  Discuss your specific business risks with a licensed insurance agent or broker for advice on the types of coverage you should consider purchasing.  Some recommendations include:

Commercial Property Insurance

Commercial property insurance protects your small business’ physical assets: buildings, equipment, and inventory. It could (but does not necessarily) also include business interruption coverage in the event of an emergency, such as a fire or natural disaster. If your business is unable to operate because of an emergency, business interruption insurance ensures you’ll be protected for lost profits, continued operating expenses, and some extra expenses for that time period.  Whether you own or rent your business space, you should obtain commercial property insurance on your building’s contents.  

Homeowners /Renter’s Insurance Business Rider

If you work from home, your personal homeowner’s (or renter’s) insurance policy may not cover home-based business losses.  Depending on your business, you may want to add riders to your personal policy to cover normal business risks such as property damage.

Liability Insurance

Liability insurance protects you from lawsuits from customers, suppliers, or others with whom your business interacts and who claim you’ve caused them bodily injury, property damage, or other personal injuries or damages. Your insurance agent will be able to make a recommendation about the level of liability protection your small business needs. 

For most small business owners who provide services to others, professional liability insurance is important. Professional liability insurance will protect your business against  third-party damages related to malpractice, errors or omissions arising from your professional services. In some states and some industries, professional liability insurance is a government requirement. It’s also known as errors and omissions insurance.

Your insurance agent will almost always recommend purchasing general liability insurance to provide additional coverage for your small business. General liability insurance protects your business against claims for physical injury or property damage caused by your business premises, operations, or products.

Commercial Auto Insurance

If you have company vehicles, commercial auto insurance will protect them in the case of damage or an accident. Commercial auto insurance can be obtained for company-owned vehicles that are used to transport employees, products, or equipment. If you or your employees drive their own cars for business purposes – not for commuting to work, but for deliveries or client meetings, for example – look into non-owned auto liability coverage.

Data Breach/Cyber Liability Insurance

Virtually every small business collects and stores sensitive or personal information about customers or employees, so you should consider obtaining data breach coverage.  Businesses that  collect credit card information, health info, or other potentially sensitive client or employee information should make every effort to protect this information from hackers. But in the event that a data breach occurs – either electronically or on paper – your business will be protected if you have this coverage.

Directors and Officers Insurance

This type of insurance is usually associated with larger companies, but depending upon how your small business is set up, it may be appropriate for you. Directors and officers insurance protect your company in the event that the actions of a director or officer jeopardize your business or your profitability. 

Tips for making business insurance easier and cheaper

Get a BOP.

A BOP, or Business Owner’s Policy, is an insurance package that covers all the various policies you need for your small business. Rather than seeking separate policies for different coverage areas, you can work with your insurance agent to create and customize a BOP that’s appropriate for your own business needs. In general, you can also save money by purchasing a BOP instead of individual policies. Talk to your insurance agent to find out if bundling insurance policies is the best approach for you.

Review your coverage regularly.

Business insurance coverage requirements change for many reasons. That’s why it’s important to do an annual review of your coverage with your insurance agent. He or she will be able to confirm you have adequate coverage,  eliminate any extras you no longer need, and identify any new risks or exposures that may be new for your business. And because insurance agents value your business (after all, it’s much easier to maintain a happy client than to win over a new one!) they’ll look for ways to save you money at each review.

Become an NFIB member!

NFIB members can access commercial insurance products designed for small business, including workers’ compensation, commercial auto insurance, BOPs, cyber liability, and more. Become an NFIB member today to enjoy member-exclusive benefits on business insurance each year!  

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