How to find the best insurance for your small business
Small Business Guides
8 min read
It’s a wise decision to make insurance part of your business plan. If you plan for unexpected events you’ll always have a safety net. Without insurance, a simple lawsuit could wipe out your company. So how can you protect your business from disastrous events?
Insurance gives you peace of mind
Insurance may seem like an unnecessary additional expense. But the right small business policy can mean the difference between the survival or demise of your business in the event of something catastrophic happening.
Insurance can provide coverage against accidents in the workplace, harm to clients through oversight or error, medical expenses, fire, malpractice, data breaches and much more.
The risk of anything like this happening to your business might seem small, but the consequences if it did happen could be severe. You could find yourself on the wrong end of costly legal action and you might lose all your assets.
Insurance offsets that risk. In exchange for a small fee, you are covered for much larger pay-outs if the worst should happen. There are many considerations when deciding which type of coverage is best for your small business. Here are some points to bear in mind.
It’s important to be aware that policies will vary from state to state. This guide provides a general overview and you should read all documents carefully before buying.
What are the legal requirements?
If you're an employer, there are some types of small business insurance that you are required to have, by federal law.
The US Small Business Association states that, “Businesses with employees are required by law to pay for certain types of insurance: workers' compensation, unemployment, and depending on where the business is located, disability.”
Other requirements vary from one state to another. Those are just the basics, though. The actual types of coverage you'll need will depend on the type of business you want to insure.
What type of business do you run?
What's suitable for one company won't be suitable for another. If you make a living as a self-employed computer programmer for multiple financial institutions, you'll need a different policy than someone who employs five people to make craft beer. So make a list of your business operations:
- Where do you conduct business?
Where is your head office, where are your other offices, which states and countries do you operate in? Different locations have different insurance needs.
- How many people do you employ?
The number of employees at your company will affect your premium: larger businesses pay more, though not always on a per-employee basis.
- What do you own?
Which assets are yours outright, which ones are leased, which ones have other debts outstanding on them? This will affect your policy cover.
- Who do you do business with?
The size of your clients and their areas of operation may have an effect on how much you are charged for insurance.
- What type of work do you do?
This is an important one. Different areas of work have different risks associated with them and different levels of pay-out in the event of a claim. Insurance companies need this information so they can analyze the risk and charge you the right premium.
It pays to shop around
Talk to a few brokers to get a feel for the type of coverage available to you and how much it's likely to cost. If you don't know which brokers to choose, ask for recommendations from friends and business associates. Make sure you give the brokers all necessary information, including:
- Your business operations (as described above)
- Name and address of your company
- How long you have been in business
- Corporate structure (such as S-Corp or LLC)
- Annual sales
- Number of employees
- What property belongs to you and what belongs to your employees.
Some companies, particularly smaller brokerages, specialize in different market sectors. This can be useful when shopping around. For example, if you're running a farm you will want to talk to someone about coverage that's specific to your needs and not general small business insurance.
If you don't know which brokers to choose, ask for recommendations from friends and business associates.
Decide whether you want a Business Owners Policy (BOP)
This will come up in your discussion with brokers. A BOP meets the needs of small offices, retail stores and small service businesses. But it doesn't cover professional liability (claims arising from wrongful practice by professionals), auto, worker’s compensation, health or disability. These would all need to be purchased separately.
Discuss with your broker whether a BOP is suitable for you. If your budget is tight you could perhaps insure just a few vital aspects of your business and save money. But a policy that's tailored specifically to your own business might be a wiser choice.
Consider the different types of coverage available
There's a wide range from which to choose. Some of the more common forms of policy include:
Many businesses start from home, and different states handle this in different ways. So check if your Homeowner (HO) insurance would be void if you were running a business from home. If so, upgrade your policy to home and business. HO usually provides coverage for fire or flood, but not for computer data loss or other business risks.
- General liability (also known as slip and fall)
This is important because of potential accidents or claims of negligence. It will protect you against claims relating to injury, property damage, defending yourself in a lawsuit and medical expenses.
- Product liability
Important if you sell products where safety could be an issue, such as where a product defect could lead to bodily harm or injury. That might include electrical equipment, food production or almost any kind of manufacturing.
- Professional liability
Also known as errors and omissions insurance, this protects the business against malpractice or issues occurring from the level of service you provide to your customers.
- Commercial property
This covers loss or damage related to your property, usually as a result of fire, water, vandalism or related causes, though it might not always include more dramatic events such as earthquakes or hurricanes.
- Workers compensation
This provides coverage to employees who are injured on the job. It makes up for lost wages and covers medical expenses, in return for which the employee usually gives up the right to sue their boss. In most states this is a legal requirement for W-2 employees, so don't skimp on it or the state may penalize you heavily.
- Data breach (also known as cyber liability insurance)
Important if you store sensitive information such as payment data or credit card information. It provides coverage after the theft or loss of both first-party and third-party data. So that means you're covered regardless whether the data breach happens directly to your company or to a company whose data you are working with.
- Auto liability
If you do business using your vehicle, make sure you’re covered for injuries while you are using your car for business. If your employees use their own cars, consider getting employer's non-owned liability insurance, because it protects you against injury or damage caused by your employees when they are driving their own vehicles for your business operations. This would be in addition to any liability coverage carried on the employee’s vehicle.
- Inland marine insurance
This includes loss to movable or specialized types of property, historically as an addition to ocean marine insurance. It may include options for tools, equipment and merchandise while they are in transit, in the business vehicle or at a job site. It also includes property coverage for construction equipment, medical diagnostic equipment, fine arts, solar panels and wind turbines, cameras and movie equipment, musical instruments and a wide variety of other types of property.
Quiz the brokers: Six questions to ask
Once you've worked through all the options with different brokers, you'll be offered a selection of their small business insurance products that they believe are best suited to your business. Now is the time to ask a few questions of your own:
- What are the broker's qualifications, as a business and as a team?
- What is their experience with similar companies (number of employees, revenue, industries)
- Will you be working with the same contact or do they rotate their staff?
- Why they are better than the competition?
- What resources are available?
- Will you have online access to your account and all policy details?
Be sure to get all bids and cost estimates in writing so you can compare them in your own time.
Review the products and make your decision
You'll have a lot of information to take in once you've collected all the offers from your prospective brokers. Review their bids carefully and consider these points:
It's not the most important factor, but it certainly does matter.
- Level of coverage
Make sure you're happy with this, in all areas of your business.
- Costs and consequences if you are sued
How much would you have to contribute before the coverage kicked in?
- Stability of the company
Is the broker backed by a financially secure insurer?
Are you happy with the level of service you've received so far? If not, walk away.
- Understanding of your business needs
Their awareness here will tell you a lot about how well they know your business.
- Packages and discounts
There are many variables that can impact costs, but you could consider package deals (such as BOP) and ask for discounts when buying multiple forms of coverage.
- Additional options
Experienced agents will mention other items you should insure. Don’t think of this as aggressive selling, but rather useful information about the available types of coverage for small businesses.
Get the coverage right
It's always advisable to get the most appropriate form of small business insurance, whether you're selling to consumers, other businesses or the public sector. Coverage is available for almost any kind of risk, so if you shop around you should find one that works well for you.
Do your homework before buying. Understand federal and state regulations and make sure you know which parts of your business are vulnerable and might need coverage.
Writing this all down, or recording it in your accounting software so you can access it more easily, will help you figure out what kind of insurance you need. It will also help you see what you might lose if you don't get the right coverage.