Types of business insurance

Published Friday 15 May 2026

Table of contents

• Why is business insurance important?
• 10 types of business insurance every small business should know
• How to choose the right business insurance
• How much does business insurance cost?
• When to review your business insurance
• Protect your business finances with Xero
• FAQs on types of business insurance

Key takeaways

• Business insurance protects your company from financial losses caused by lawsuits, property damage, employee injuries, and unexpected disruptions to your operations.
• The right coverage depends on your industry, business size, number of employees, and the specific risks you face; most small businesses need at least general liability and commercial property insurance.
• Bundling policies into a business owner's policy (BOP) can save you money while covering the most common risks small businesses encounter.
• You should review your insurance coverage at least once a year, and any time your business goes through a major change like hiring employees, moving locations, or launching new products.

Why is business insurance important?

Running a small business means taking on risk every day, from customer interactions to equipment breakdowns. Small business insurance helps you manage those risks so a single unexpected event doesn't derail your finances.

Many states and industries require specific types of coverage, such as workers' compensation or professional liability insurance. Without the right policies, you could face fines, lose contracts, or be unable to operate legally.

Beyond legal requirements, insurance gives you peace of mind. It means you can focus on growing your business knowing that if something goes wrong, you have a financial safety net in place.

10 types of business insurance every small business should know

Not every business needs the same coverage. Here are 10 common types of business insurance to consider as you build a policy that fits your specific needs and risks.

1. General liability insurance

General liability insurance covers claims of bodily injury, property damage, and advertising injury caused by your business operations. It's the most fundamental type of business insurance and often the first policy small business owners purchase.

If a customer slips and falls at your office or you accidentally damage a client's property, general liability insurance helps pay for legal fees, medical costs, and settlements. Many landlords and clients require proof of this coverage before signing a lease or contract.

2. Commercial property insurance

Commercial property insurance protects your physical business assets, including buildings, equipment, inventory, and furniture. It covers losses from events like fire, theft, vandalism, and certain natural disasters.

Whether you own or lease your workspace, this policy helps you recover financially if your property is damaged or destroyed. Keep in mind that standard commercial property insurance typically doesn't cover floods or earthquakes, so you may need separate policies for those risks.

3. Workers' compensation insurance

Workers' compensation insurance covers medical expenses and lost wages when an employee gets injured or becomes ill because of their job. Most states require businesses with employees to carry this coverage.

Even if your state doesn't require it, workers' comp protects both you and your team. It covers your employees' recovery costs while shielding your business from costly lawsuits related to workplace injuries.

4. Professional liability insurance (errors and omissions)

Professional liability insurance, also known as errors and omissions (E&O) insurance, covers claims of negligence, mistakes, or failure to deliver professional services as promised. It's especially relevant for service-based businesses like consultants, accountants, and technology providers.

If a client claims your advice or work caused them financial harm, this policy covers legal defense costs and any settlements or judgments. Some industries and licensing boards require E&O coverage as a condition of doing business.

5. Commercial auto insurance

Commercial auto insurance covers vehicles owned or used by your business, including cars, trucks, and vans. It protects against liability claims, collision damage, and injuries resulting from business-related driving.

If your employees drive company vehicles or use their personal cars for work tasks like deliveries or client meetings, you need this coverage. Personal auto insurance policies typically exclude accidents that happen during business use.

6. Business interruption insurance

Business interruption insurance, also called business income insurance, replaces lost revenue when your operations are disrupted by a covered event like a fire or natural disaster. It can also cover ongoing expenses like rent, payroll, and loan payments while your business is closed.

Having a business continuity plan is a smart first step, but insurance adds a financial layer of protection. This coverage helps you stay afloat and pay your bills during the time it takes to get back up and running.

7. Cyber insurance

Cyber insurance covers the costs associated with data breaches, cyberattacks, ransomware, and other digital threats. It typically pays for customer notification, credit monitoring, legal fees, and data recovery.

Even small businesses are targets for cybercriminals, especially those that store customer payment information or personal data. As more business operations move online, cyber insurance is becoming an important part of a well-rounded coverage plan.

8. Business owner's policy (BOP)

A business owner's policy (BOP) bundles general liability insurance, commercial property insurance, and business interruption coverage into a single, cost-effective package. It's designed specifically for small and mid-sized businesses.

A BOP is often less expensive than purchasing each policy separately, making it a practical choice if you're looking for broad coverage on a budget. Many insurers let you customize a BOP with additional endorsements to match your specific risks.

9. Product liability insurance

Product liability insurance covers claims of injury or property damage caused by products you manufacture, sell, or distribute. If a defective product harms a customer, this policy helps pay for legal defense, settlements, and medical costs.

Even if you don't manufacture products yourself, you could still face liability claims as a retailer or distributor. Any business in the product supply chain can benefit from this coverage.

10. Key person insurance

Key person insurance is a life insurance policy that your business takes out on an essential employee, partner, or founder. If that person passes away or becomes permanently disabled, the policy pays your business a lump sum to help cover the financial impact.

Losing a key person can disrupt operations, reduce revenue, and make it harder to secure loans or investment. This coverage gives your business time and resources to find a replacement or restructure without a financial crisis.

How to choose the right business insurance

Choosing the right coverage takes some research, but it doesn't have to be overwhelming. Follow these steps to find policies that match your business needs and budget.

1. Assess your risks. Start by identifying the specific threats your business faces. Consider your industry, whether you have a physical location, whether you handle customer data, and how many employees you have.
2. Research legal requirements. Check your state's requirements for business insurance, especially workers' compensation and professional liability. Some industries and business licenses also require specific coverage.
3. Compare providers. Get quotes from at least 3 insurance providers to compare coverage options, limits, deductibles, and premiums. Look for providers experienced in your industry.
4. Consult an expert. Talk to an insurance broker or your accountant for guidance on the types and amounts of coverage that make sense for your situation.
5. Review annually. Your business changes over time, and your insurance should keep up. Set a reminder to review your policies at least once a year and update them as needed.

How much does business insurance cost?

The cost of business insurance varies widely depending on several factors specific to your company. Understanding what drives pricing can help you budget and compare quotes more effectively.

Key factors that affect your premiums include:

• your industry and the level of risk involved
• the size of your business and annual revenue
• your location and local regulations
• the number of employees on your payroll
• the coverage limits and deductibles you choose
• your claims history

To give you a general idea, small businesses typically pay around $500 to $1,000 per year for general liability insurance. Workers' compensation costs vary significantly by state and industry, ranging from a few hundred dollars to several thousand per year. A business owner's policy (BOP) often starts at around $500 per year for small, low-risk businesses.

Keep in mind that the cheapest policy isn't always the best fit. Make sure your coverage limits are high enough to protect your business if a significant claim occurs.

When to review your business insurance

Your insurance needs change as your business grows and evolves. Reviewing your coverage regularly helps you avoid gaps that could leave you exposed.

Here are some common triggers that should prompt a review of your policies:

• hiring new employees or contractors
• moving to a new location or opening additional offices
• launching new products or services
• experiencing significant revenue growth
• changing your business structure, such as forming an LLC or partnership
• purchasing expensive equipment or technology
• expanding into new markets or states

Even if none of these changes apply, it's a good practice to review your policies at least once a year. Your business plan and insurance coverage should grow together.

Protect your business finances with Xero

Having the right insurance is one piece of protecting your business. Keeping your finances organized and visible is the other. With clear records and up-to-date financial data, you're better positioned to assess risks, track expenses, and make confident decisions about your coverage.

Xero's cloud accounting software helps you manage invoices, track cash flow, and keep your books in order, so you always have a clear picture of where your business stands. Get one month free.

FAQs on types of business insurance

Here are some frequently asked questions about types of business insurance to help you make more informed coverage decisions.

What type of insurance does a small business need?

The types of insurance you need depend on your industry, number of employees, and specific risks. At a minimum, most small businesses benefit from general liability insurance and commercial property insurance. If you have employees, workers' compensation is required in most states.

Is business insurance required by law?

Some types are required by law, depending on your state and industry. Workers' compensation is mandatory in most states for businesses with employees, and certain professions require professional liability insurance. Check your state's regulations and any licensing requirements to find out what applies to your business.

What is the most common type of business insurance?

General liability insurance is the most widely held type of business insurance. It covers third-party bodily injury, property damage, and advertising injury claims. Many contracts, leases, and business licenses require it as a condition of doing business.

Can I bundle multiple business insurance policies?

Yes, a business owner's policy (BOP) bundles general liability, commercial property, and business interruption insurance into one package. Bundling typically costs less than buying each policy separately and simplifies managing your coverage.

How does business insurance protect against lawsuits?

Business insurance covers legal defense costs, settlements, and judgments when a covered claim is filed against your company. General liability handles claims related to injuries and property damage, while professional liability covers claims of negligence or errors in your services. Without coverage, you'd need to pay these costs out of pocket, which could be financially devastating.