One of the most commonly asked questions from new business owners is when to acquire insurance for their company. There are several factors to consider when making this decision, including which types of insurance your company needs to acquire and the risks of running an uninsured or underinsured business.
This article will discuss all the details you’ll need to determine what policies your business will need and when you should acquire them for your new company.
Who Needs Business Insurance?
Nearly every business, regardless of industry, is going to require some form of insurance coverage in order to operate in a secure and compliant fashion. Some types of commercial insurance, such as workers’ compensation insurance, are required by your state government.
Others, like general liability insurance, while not necessarily required, are highly recommended for most businesses. Still other types of insurance will only be relevant to certain companies based on size and industry.
What Kinds of Business Insurance Are There?
There is no catch-all policy that covers all of a company’s business insurance needs. Instead, each individual business owner must consider several separate policy types to determine their company’s insurance requirements. The following are the most common types of business insurance.
- General Liability Insurance: While not required by law, general liability insurance is carried by the vast majority of American companies. This insurance policy covers some of the most common claims faced by companies across a range of industries. These include third-party bodily injury, third-party property damage, advertising liability, libel, slander, and copyright issues.
- Commercial Property Insurance: If you have a physical building for your business, it’s important to protect it with commercial property insurance. This form of coverage gives you protection in the event of damage caused by natural disasters, fires, burst pipes, and other perils. In addition to your building, commercial property insurance covers your signage, furnishings, equipment, inventory, fencing, landscaping, and any third-party assets located on your property.
- Business Owner’s Policy (BOP): This coverage combines the benefits of general liability and commercial property insurance into one package. If you acquire a BOP, you will also receive business interruption coverage, which covers lost income due to your business temporarily closing. BOPs are a good way to save a bit of money (and hassle) if you’d like to have both commercial property and general liability coverage.
- Professional Liability Insurance: Unlike other types of insurance, professional liability insurance is geared toward covering perils specific to your line of business. As such, specific policies will vary based on industry and business type. However, they generally cover negligence, legal defense, slander or libel, and copyright and trademark disputes. These policies are beneficial to any business that provides professional services or any type of expertise.
- Workers’ Compensation Insurance: Every state but Texas requires that all businesses with employees carry workers’ compensation insurance. Workers’ comp policies cover employees who suffer injuries or become ill while working. Workers’ compensation insurance covers immediate medical treatment, lost wages, ongoing care, and death benefits. It is a form of “no fault” insurance, meaning it will provide coverage whether or not you, the employer, are responsible for the illness or injury in question.
- Commercial Auto Insurance: If your business involves transporting people or goods, you will need to carry commercial auto insurance. These policies are essentially identical to personal auto insurance and cover liability, medical costs, collisions, and uninsured/underinsured motorists. The policy will also cover vehicles your business rents or owns, as well as employees who use their own cars for business purposes.
- Health/Life/Disability Insurance for Employees: If you plan to provide your employees with fringe benefits, health insurance will likely be your first stop. While not required for small businesses, the Affordable Care Act mandates that any company with more than 50 full-time employees offers health insurance. Noncompliant businesses will face a costly tax penalty.
- Directors and Officers Insurance: Larger companies may want to look into D&O coverage, which is a form of liability insurance that reimburses company shareholders for claims made against them. In essence, this covers your directors and officers if they are sued for the adverse consequences of their managerial decisions.
- Key Person Insurance: This is essentially a form of life/trauma insurance taken out by a business to compensate for the losses that would accompany the death or incapacity of the company’s most important member. Key person insurance is especially important for small businesses that rely on the contributions of one person to generate a large percentage of the company’s total revenue.
When Should I Get Insurance for My New Business?
For the vast majority of businesses, you’ll want to acquire at least general liability insurance, commercial property insurance, and workers’ compensation insurance right away. Operating your business without coverage for even a few days will leave you open to uncovered and potentially devastating claims.
Months or even years later, a claim from an uncovered period in your insurance life cycle could show up and severely damage your business. While some policies will seem expensive when you’re just starting out, the cost of remaining uninsured can be far greater.
Common Misconceptions About Business Insurance
There are quite a few common myths about commercial insurance policies. Clarifying these misconceptions will help you gain a better understanding of exactly what policies you need to protect your business.
- “My homeowner’s or renter’s insurance will cover my home business.” – Almost all home-based businesses will require an entirely separate commercial property insurance policy to cover the business-related property in their home. This includes computers, office furniture, and any other materials used in the course of your business operations. Just because your business assets are located in your personal residence does not mean they’re covered by your personal insurance policies.
- “My company’s corporation or LLC business structure will protect me from claims.” – While these business structures do offer personal asset protection, they do not protect you from business losses. While your personal finances may be shielded in the event of a lawsuit against your company, without proper insurance coverage you can easily lose your business.
- “I should buy as much coverage as I can afford.” – Acquiring too much coverage is a common mistake among new business owners. Purchasing extraneous insurance coverage can hinder your growth by adding unnecessary expenses. Understanding the specific risks your business faces and obtaining appropriate coverage is of vital importance to your success.
- “I don’t need to regularly review my policies.” – Many businesses set up their insurance policies and forget about them. However, it’s important to remember that as your business grows and evolves, your insurance requirements will likely do the same. It’s important to reevaluate your policies at least twice a year to make sure they still suit your company’s current needs.
If you’re starting a new business of any kind, you need to acquire the proper insurance coverage before opening your doors to customers. Failing to do so can have severe consequences, as even one claim against an uninsured or underinsured business can prove devastating.
As long as you take the time to select and maintain the correct policies for your business, your insurance portfolio will provide the protection you need without draining your resources.