You probably don’t spend much time thinking about all the different types of small business insurance. After all, insurance is hardly something to get excited about, right? That is until you're in a bad situation; then—depending on your coverage—you’ll either be thrilled or kicking yourself. Be smart; don’t be one of those small business owners who assume that their risks don't warrant the cost of insurance policies. Pay attention and prepare now—before it’s too late.
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It doesn’t help matters that you can choose from so many different types of small business insurance. The lineup of choices and coverage options can be confusing. For example, many small business owners think their personal auto insurance will cover their vehicle on the job, too. But in many cases it doesn’t; and that leaves small business owners exposed to considerable risk.
To help you understand the various types of small business insurance and to get the right amount of coverage you need, we turned to insurance experts for guidance. Here are the top eight types of small business insurance you should consider. Read about each one, or click on the individual links to go directly to a particular topic.
- Mandated Insurance
- Personal Disability Insurance
- General Liability and BOP Insurance
- Professional Liability Insurance
- Employment Practices Liability (EPLI) Insurance
- Commercial Auto Insurance
- Cyber Liability Insurance
- Umbrella Insurance
- Small Business Insurance Tips
First up: mandated insurances. By that we mean insurance you must have to legally work in your field, as a business in general, or to compete effectively in your field. The top two types of mandated insurance are bonds and worker’s compensation.
Most small business owners learn whether a bond requirement applies to them when they go to get a business license. Many states, and some cities, require proof of surety bonds before a business license can be issued for some industries.
A surety bond guarantees that a company will complete project and follow any applicable regulations. If the company fails to deliver, the surety company must find another company to complete the project or compensate the customer for financial losses. There are four types of surety bonds:
- bid bonds (ensures that the business will enter contract and do the work if it wins the bid)
- payment bonds (ensures that suppliers get paid)
- performance bond (ensures that work performance will adhere to contract specifications)
- ancillary bond (ensures that the company will meet other non-performance related requirements)
"Surety bonds for licenses don’t work like most insurance products though," says Jason O’Leary, founder and vice president of technology at Surety Bonds Direct. "Essentially the bond protects customers from the new business. For that reason, small business owners should only ever purchase the exact amount required by the state."
In locales or industries that don’t legally require these bonds, customers may still insist on them. In that case, companies without bonds may find they can’t compete with companies that do carry them.
"The only surety bond that adds value to the small business is a Business Service Bond," says O’Leary. "These bonds protect the customers from theft, larceny, or fraud from people employed by the small business. If the business involves entering private homes, customers often request or require bonds. Providing surety bonds shows that your business is trustworthy. Fortunately, these bonds don’t cost very much."
Workers’ compensation insurance also falls in the mandated insurance category. It's required by state law to cover employees’ wage replacement and medical benefits if they get hurt on the job. Be sure to check state laws and federal laws for additional insurance requirements, because they can change over time and from state-to-state. Be sure to check requirements on health insurance for employees.
The success of a small business tends to hinge on one or two key people, and when it comes to protecting the actual business owner and his or her family, personal disability tops the list.
"Disability income protection for a long term disability will protect your family and provide steady income if you're disabled due to accident or sickness," says Mike Raines, owner of Raines Insurance Group.
But personal disability does more than insure your income; it also protects your business indirectly. "Without a continuing household income, all your other insurance coverage will be useless because you won’t be able to pay the premiums," says Raines.
You also want money to keep your business afloat and in the black—to cover expenses like store or office rent, loan payments, and quarterly tax payments. Personal liability can help you keep all those commitments. But be sure to tally those costs first to make sure you'll receive sufficient coverage payouts from the insurance if you ever have to make a claim. Recheck these amounts periodically to ensure the coverage amount meets your current needs.
General liability insurance on your business is like liability insurance on your car. If you have a wreck, auto liability insurance pays for the other guy’s damage but not yours. Similarly, general liability for your business covers third-party injuries and property damage—but not anything your company suffered. It covers things like product liability or if someone falls in your store and sues you.
Great, you might say, but what about damage to my property?
"A Business Owner Policy, which is often called BOP, provides general liability coverage but also adds coverage for property—such as your buildings, tools, and equipment," explains Mark Thompson, senior vice president of product excellence at Insureon, an online insurance brokerage.
Professional liability insurance goes by different names according to the industry it serves. For example, medical malpractice insurance for physicians and healthcare providers is a type of professional liability insurance.
But other professionals—including real estate and insurance agents, dentists, lawyers, architects, and business consultants—need this type of insurance, too. Why? In case a customer blames you for bad advice in your advice or actions. This type of insurance is also called "errors and omissions" insurance.
"If you make a living from your expertise you need this coverage. It includes legal costs if you're sued and costs for damages, too," says Thompson.
This insurance protects you from your own employees. Yes, an employee can put your company—and income—at risk. That’s where Employment practices liability (EPLI) insurance comes in.
"EPLI covers employee lawsuits for issues such as wrongful termination or sexual harassment," says Thompson.
As the business owner you are held legally accountable—even if you aren’t the offender. For example: if one employee sexually harasses another employee, or if a manager wrongly fires an employee. It simply isn’t enough to conduct yourself properly and to encourage your employees to do the same. Get the insurance to protect yourself from the financial impact if something goes awry with employees.
If you think your private insurance will cover your vehicle if you use it for work as well, you're in for an unpleasant surprise.
"Personal auto insurance usually excludes commercial use," says Thompson. "This is a very gray area, say, for a handyman who uses his personal truck for work. If he has an accident, his personal auto insurance may not pay anything."
It can be financially devastating to be without a vehicle for work. So before you encounter such a scenario, look into commercial insurance for your vehicle. Typically, commercial insurance pays more for damages, too, although that varies between policies. It also typically offers coverage for things like professional tools, equipment, and trailers that may have been damaged along with the vehicle.
One other thing: if your employees deliver goods or if you have an employee working as a pizza delivery person, their private auto insurance usually won’t cover accidents during their delivery work. Ask your insurer about extending commercial auto insurance to cover these vehicles to reduce your risks as a business owner.
Be sure to read the fine print and compare coverages and exclusions before signing up for a policy.
Many small business owners don't think that hackers are interested in their data. But that’s not so. Small businesses are a prime target for hackers because the data is often easier to get than it is from a large company with lots of IT security in place. And hacking a small business vendor is a good way to access a large business’ data. That's exactly what happened in the infamous Target data breach.
"Small business owners should consider cyber liability insurance to cover the losses arising from a data breach," says Donna Childs, founder of Prisere and author of Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses. Cyber liability insurance can pay for "credit monitoring services for affected customers, customer notification, crisis and reputation management, investigation into the vulnerability that gave rise to the breach and measures to ensure the breach won’t be repeated," says Childs.
Look carefully at your general liability policy or options before buying this coverage. "Many times you can purchase cyber liability as an add-on or a rider to your general liability or BOP policy," says Thompson.
This type of insurance isn’t a policy that covers everything as many tend to think. Rather, it's an extension of insurance policies you already purchased.
"It adds additional money on top of another policy and thus extends the coverage of that policy," says Thompson. "It’s mainly used for third-party claims to make sure a lawsuit doesn't put you out of business."
One tip: compare costs between umbrella insurance policies and extending the amount of coverage on the existing insurance to determine which provides a better deal. For example, is it cheaper to buy an umbrella policy or to simply buy more coverage on, say, your cyber insurance or commercial auto policy?
Another important point that applies to all types of small business insurance: always conduct a yearly review to ensure the coverage you have matches any new risks and company growth. Conversely, you may find that business changes reduce your risks in some areas, and you can reduce or drop some policies.
Don't just buy a policy and pay for it forever without ever looking at it again. The coverage could be too little for the risks you incur over time or the insurer may change the coverage without your noticing. Make a point to review all your insurance policies at least once a year.
If you hit sudden growth, such as going from no employees to hiring employees, check to see if you have the right insurance and the right amount in place to cover the new risks. And if you’re ever tempted to forego insurance or let a policy lapse because budget is tight, remember that accidents and tragedies are always unexpected and almost always happen at some point. It’s better to pay less now than pay more later.
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Pam Baker has written for numerous leading publications including, Institutional Investor magazine, CIO.com, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine, NPTech News (nonprofits), MedTech Journal, I Six Sigma magazine, Computer Sweden, the NY Times, and Knight-Ridder/McClatchy newspapers.
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