What is small business insurance?
Small business insurance will pay you money in case something bad happens, in exchange for monthly or yearly payments. “Something bad” includes damage to property, as well as being sued.
It’s important to have because a small twist of fate can result in big losses for your business. For instance, if a faulty faucet floods your souvenir shop during the peak of the busy season and you’re not insured, you end up paying out of pocket for repairs and suffering a loss of income at the same time.
Or let’s say your online store gets hacked and your customers’ information is stolen. Without insurance, you could be held liable for their losses, and taken to court. That type of scenario may seem unlikely, but 36–53% of businesses face litigation every year.
Small business insurance required by law
There are some types of insurance that you, as a business owner, are required by law to have.
These vary state by state, but there are three that are essential for any business with employees: Unemployment insurance, disability insurance, and workers’ compensation.
Paid as a percentage of every employees’ paycheck, unemployment insurance supports people when they’re out of a job. It’s up to you to withhold the money to cover this insurance.
Federal and state unemployment insurance are two different beasts. The federal rate for unemployment insurance is 0.6% of an employee’s pay. State rates vary.
Bottom line: You don’t need to purchase an insurance policy to take care of unemployment insurance—but you do need to be sure to withhold it. Our guide to calculating payroll taxes explains how to do that.
Much like unemployment insurance, disability insurance is taken as a percentage of each employee’s paycheck. It’s covered at the federal level. Also, five states have their own disability insurance.
Disability insurance costs 0.25–0.5% of each employee’s pay.
Workers’ compensation supports your employees financially if they’re injured on the job and prevented from working. In exchange, employees aren’t able to sue you for those damages.
It’s mandated at a state level, so the cost, coverage, and other variables differ state by state. Our guide to workers’ compensation has everything to get you started.
Insurance covered by a Business Owner Policy (BOP)
To make insurance shopping simple, providers offer Business Owner Policies (BOPs). A BOP covers the essentials—general liability, commercial property insurance, and interruption of business insurance.
You can usually supplement this core package with add-on coverage. The add-on coverage you have to choose from depends on your provider.
Here are the three core types of insurance a BOP takes care of.
1. General liability insurance
A must-have for virtually any business, general liability insurance protects you from being sued if you cause damages in the course of running your business.
This covers damages that occur to customers on your property—a parking lot fender bender, for example. It also covers damages your business causes to other individuals or businesses—like the new kid on your landscaping team taking out someone’s prize-winning roses with a weedwacker.
Finally, general liability insurance protects you in case of “advertising damages.” If a competitor claims your marketing materials libel or slander them, or somehow rips off their intellectual property, they could sue you. General liability is there to cover costs.
General liability insurance generally costs from $400 to $600 per year, although that varies depending on how high-risk your business is.
2. Commercial property insurance
Covering all your physical assets, commercial property insurance is especially important if your business has a brick-and-mortar location.
It’s also important if you work from home. For instance, if a burst pipe floods your home office and destroys your work computer, commercial property insurance can cover the loss.
Some types of homeowner’s insurance can be extended to cover your home. This varies depending on your policy. Even if you’re covered, it may be wise to extend it with separate commercial property insurance.
For instance, if homeowner’s insurance covers you for $1,000 of damage, but you’ve got $12,000 worth of business inventory stored in your guest bedroom, your coverage will fall short in case of a major accident—and you’ll have to take care of the costs out of pocket.
Expect commercial property insurance to cost $500 to $1,000 annually. As usual, rates will vary based on your specific circumstances.
3. Business interruption insurance
Often provided as an add-on to commercial property insurance, business interruption insurance covers you in case your business is prevented from operating.
For instance, if bad weather leads to a three day power outage at your café, business interruption insurance covers the money you would have otherwise made during that time.
The price of business interruption insurance depends heavily on how much your business earns per day, as well as how likely your business is to be interrupted.
Other types of insurance you should probably have
Outside of core coverage offered by a BOP, there are two more types of insurance almost every business benefits from having.
Professional liability insurance
You may think of professional liability insurance as something only doctors and lawyers need to worry about. But if you have clients, and there’s any chance you could end up causing them damages, there’s also a chance they could sue you. Professional liability insurance protects you from that.
For instance, let’s say you have a freelance graphic design business. Your client needs brochures designed in time for a big conference they’re attending. But, due to circumstances beyond your control, you’re unable to get the work done on time.
Your client could then sue you for the cost of the business they lost at the conference. Professional liability insurance protects you from that. The cost of this type of insurance ranges widely, and depends on what line of business you’re in and what types of risks you face.
Product liability insurance
If you’re selling anything with your business name on it, you could be sued for damages.
Let’s say you’re ordering tin toy boats from India, branding them with your company’s name and the name of your city, and selling them as tourist souvenirs. It turns out that some of the boats were made with paint that washes off in hot water, staining your customers’ bathtubs.
Even though someone manufactured the boats, you’re selling them as your own product. So the customers are able to sue you for damages to your tubs. In that case, product liability insurance protects you.
Product liability insurance costs from $0.25 to $100 per unit sold. The exact numbers depend on the price of the product what kind of risk you face.
Keep in mind, this isn’t meant to cover products you sell as a retailer. If you have a souvenir shop that sells the boats, but they aren’t branded with your company name, you won’t be on the line for damages. In that case, the manufacturer is liable.
Business insurance for specific businesses
Once you’ve got a BOP with professional liability and product liability added on, you’re in pretty good shape to protect your business against unforeseen circumstances.
That being said, depending on specific features of your business, you may have extra risks you need to have covered. Here are the most common extra types of insurance purchased by small businesses.
Employment practices insurance
You may have kitchen cupboards filled to the brim with “World’s Best Boss” mugs. But your employees can still sue you.
Wrongful termination, discriminatory hiring and promotions, mental and emotional damages—there’s a whole buffet of options for a disgruntled employee who wants to make your life harder.
If you have employees, and especially if your business has a high turnover of staff, employment practices insurance is a good idea. Price ranges from $800 to $3,000 annually, and will depend upon how many employees you have, turnover rate, and whether employees have sued you in the past.
Key person insurance
If your business relies heavily on the work done by one person—a well-known artist or designer, an account manager with thousands of clients who love them—then key person insurance is, well, key. Price varies according to how much revenue the key person helps to bring in per year, and their likelihood of becoming incapacitated.
It may be tempting to register your delivery van as a “leisure vehicle,” but it’s a bad idea. Commercial automotive insurance protects you in case your vehicle is damaged or causes damages in the course of doing business. That coverage doesn’t extend to a one ton white cube van you drive around just for fun.
Your regular automotive insurance provider should be able to set up a commercial plan for a new vehicle, or switch your personal vehicle to a commercial plan if necessary. Rates for small businesses range from $750 to $1,200 generally. Many states have a minimum liability you’re required to purchase.
Often, BOPs will offer coverage specifically meant for ecommerce. These protect you in case your store suffers downtime due to service outages or other forces outside of your control. They also protect your neck in case hackers steal your data.
For a deeper dive, check out Shopify’s comprehensive intro to e-commerce insurance.
Outdoor property insurance
Outdoor property insurance supplements regular commercial property insurance, protecting assets outside your brick-and-mortar location.
If your cafe has an outdoor seating area or your brick-and-mortar has signage mounted on the outside of the building, outdoor property insurance is a smart choice. Specifics vary, but your plan can cover anything from vandalism to windstorms. Rates will vary depending on what types of coverage you choose.
Summary: Common small business insurance types
How to buy small business insurance
Unfortunately, buying insurance for your business isn’t as simple as selecting a random provider, walking into their office, and signing up for a policy. But it’s still a fairly straightforward process, as long as you follow the right steps.
1. List the types of business insurance you need
Make a worst-case-scenario list for your business. Where do you face risks of damaged property, liability, and not-so-freak accidents? Then, organize each of those risks under a different type of insurance. For instance, if you sell toy spinning tops that have the potential to take someone’s eye out, file it under product liability.
2. Compile a list of brokers
Fit Small Business has an extensive comparison of their top 15 insurance providers for small businesses. It’s a great place to start. And Reviews.com offers a comparison of four large providers, plus a tool that lets you compare average rates based on your zip code. Choose potential providers based on what types of businesses they cater to, and what types of insurance you need.
3. Get quotes and compare
You can get quotes online from most providers. Once you’ve got quotes, compare rates and coverage to find the insurance plan that works for you.
Tips for buying small business insurance
Don’t automatically settle for the cheapest policy
Rates can vary widely between insurance providers. If you find a deal that’s too good to be true, be sure to read the fine print, and make sure it gives you all the coverage you need.
Get a high liability insurance limit
Don’t underestimate the potential for a lawsuit to put you in the red. It’s hard to anticipate just what kind of legal costs you could one day face—so make sure you get coverage that can handle just about anything.
Make sure your coverage changes along with your business
Your business is an organic, growing entity. Its insurance needs will change with time. Make yourself familiar with the finer details of your coverage, and stay on top of changes in your business. For instance, if you start carrying more inventory, you may need more commercial property coverage.
Don’t skimp on the deductible
A deductible is the amount of money you have to pay out of pocket before your insurance kicks in. It only comes into effect if you file a claim.
Say your work vehicle gets into a fender bender, suffering damages of $4,000. Your deductible is $500. You’ll need to pay that $500 yourself, before your insurer covers the remaining $3,500.
When you buy a policy, you should choose the highest deductible your business can afford. That may seem counterintuitive—after all, the higher your deductible, the more you’ll have to pay out of pocket in case of a mishap. But when you select a higher deductible, you get a lower insurance premium—meaning lower monthly payments. And that saves you cash in the long run.
The best small business insurance
There many different types of business insurance, and different types of providers too. If you’re looking to buy, check out our list of The Best Small Business Insurance (2020).
Some types of insurance—like unemployment and disability, and employer protection—are only necessary if you have employees. In that case, you need to be clear about who is an employee, and who’s a contractor—it’ll affect how much pay you need to withhold, and how much your insurance costs. Learn more with our guide to independent contractors vs. employees.