Business owners turn to Google about 100 times each month looking to learn: "what does business insurance cover?" While state-by-state regulation does require certain insurances, the answer to this question is often up the individual. Basic general liability business insurance is where everyone starts out with their Business Owner Policy (BOP). From there, business owners make choices about policy limits, depth of coverage, and other details that are unique to their needs and risks. Depending on your location, industry, and size, you may even be legally required to carry certain types of business insurance.
Those basic details are enough to manage. But then when you get into the buying process, all kinds of fine print comes up, your goals get hazy, and risks can seem either exaggerated or minimized. Plus, you don’t know what you don’t know about the details. To help you prepare, here are some common questions asked by small businesses shopping for insurance, with clear answers to help you find exactly the coverage you need.
What is business insurance?
Just like car insurance protects you from risk when driving your vehicle, and homeowner’s or renter’s insurance guards your property, so too does business insurance protect you from liability when a cause of loss occurs either on your business premises or in the process of your work. This could be anything from a natural disaster, to theft, to employee-related risks and legal liability.1 However, the extent of your protection against those threats depends on the BOP you’ve created.
Why do I need business insurance?
Small businesses need insurance to help them recover from expensive, unexpected incidents. A recent five-year analysis of small business insurance claims revealed that theft (20%) was the leading reason business policy holders decided to file a claim. Water damage claims and wind/hail damage claims were runners-up, and equally common (15%). Fires and customer injuries (10%) ranked last, but were among some of the more expensive incidents.2 The payouts for each claim ranged anywhere from $8,000 to $30,000.3 In each case, without extensive enough coverage, business owners would have been required to shoulder those costs themselves.
What is a Business Owner Policy (BOP)?
A BOP is a custom bundle insurance policy made up of different kinds of coverage depending on a business owner's needs. Property coverage and general liability coverage are the foundations of these bundle, and are usually required by state law. Extra coverage in some areas may also be required by your state’s laws, or you may simply judge it a good idea to invest in the extra coverage against the unexpected. Here’s more detail about policies that might be part of a BOP:
Required Coverages: These policies are the core of a BOP and are required for most businesses in most states.4
- Property Insurance: Property insurance can be tailored to cover your building itself, the building’s contents, and any property of others that is in your care inside the building, like items you’re storing or repairing. It’s important to fully understand not only what items are covered under your basic policy, but what causes of loss as well. Incidents like computer hardware failure, power surges, or even employee dishonesty might not be covered under a basic policy.5
- General Liability: Liability insurance is essential to protect a business and its owner against the threat of being held responsible for accidents on their property, incidents related to their products, or others’ bad actions, like fraud. There’s also coverage included in most basic business insurance policies for non-physical personal injury, like slander, and for advertising injury, like violating copyright. These basic policies protect business owners from a lot, but every policy is different, so be sure to discuss the terms with your broker.6 In case any of these incidents do arise, general liability insurance covers the cost of legal defense and any damages.7 Based on one small business insurer’s claims history, 35% of all general liability claims result in a lawsuit.8
- Vehicle Coverage: Any time a car, truck, or van is used for business purposes, it must be insured with a commercial policy. Every state has established different rules for minimum coverage, and in fact, many states will only sell commercial policies with limits exceeding their states’ minimum to ensure compliance.9
Additional Coverages: These policies may still be required by law, but only for specific industries or in some states.
Even your peers in your industry may be paying a vastly different insurance premium for complex reasons.
- Crime Coverage: If your business needs protection against liability for employee fraud, robbery, or forgery, you should consider purchasing additional crime coverage as part of your BOP. These polices also usually ensure stolen property is covered under your policy if someone breaks into your building.11
- Errors and Omissions: Errors and omissions policies basically protect your business against failure to perform. Depending on your industry, that could mean anything from copyright violations to errors in property appraisal. Medical malpractice policies are similar to errors and omissions policies.13
- Umbrella Policy: Umbrella policies protect against a rainy day by shielding your business against extra liability beyond the limits of the other basic policies.14
What is worker’s compensation insurance, and how does it work?
Worker’s compensation insurance cannot be purchased as part of your BOP. Instead, it must be maintained as a separate policy. Some states have one or more authorized private insurer to sell worker’s compensation coverage for businesses, while others serve the coverage themselves out of a publicly-run state fund.15
If you employ workers and issue W-2s, you’re required to have worker’s compensation coverage, though the policy minimums vary by state. Some states even require businesses to cover uninsured independent contractors.16
Though state laws differ, the process of determining worker’s compensation premiums for businesses is relatively standard. The insurer will start by considering how many employees you have, how risky their work is, and whether or not anyone has filed a worker’s comp claim against your company in the past.17 Your business income, payroll, and location are other factors that have become more important in setting these premiums in recent years. Every year you and the insurer will go over the details to make sure the premium is in line with coverage needs.18
How much business insurance coverage do I need?
Over-insuring can be as much of a financial concern as underinsuring.19 When setting up the basics of your BOP policy, here’s some insight into deciding how much coverage you actually need.
Property Insurance: Small business property insurance coverage limits and premiums are as varied as the risks small businesses face, and the things they want to defend. First, you’ll define exactly what property you want covered, from a building, to technology and documents inside it, to intellectual property. Then, you decide to what extent you want to protect it. Basic form business property insurance covers losses related to fire, storms, or other natural disasters, sometimes including the cost of removing damaged property. Broad form coverage extends the basic policy to include other perils like civil commotion or specific weather conditions. Special form property insurance is the most comprehensive, and covers all direct physical losses, except any listed in the policy as not included.20
Insurers can determine the value of your property (and therefore limits of the policy) based on either the actual cash value (ACV) of your assets, or the cost to replace them in the future (replacement cost). If you choose ACV, your premiums might be lower, but the coverage might not be enough if you need to make a claim. Insuring for the replacement cost might mean higher premiums, but gives greater security. Additionally, a building ordinance or law endorsement added to your policy will cover the costs of bringing an older building up to code after a disaster.21
- General Liability: Liability insurance, along with your property insurance, forms the core of your BOP. It’s recommended that small businesses carry at least $1 million in general liability insurance, no matter what their size, industry, or trade.22 Generally, any business in an industry that must report annually to the Occupational Safety and Health Administration (OSHA) is either legally required to carry more than this coverage, or might still be wise to do so, due to being in what’s called a high-risk industry. These businesses run the spectrum: Manufacturing, construction, healthcare, performing arts venues, museums, and more all need to be more aware of liability risks.23
- Other Types: Outside being driven to seek insurance by the potential for disaster or state laws, many business owners might need to buy a policy because a partner or vendor requires it to do business. In those cases, your decision about coverage may be dictated by their requirements, i.e., they want a contractor to have a certain amount of worker’s compensation coverage before coming to a job site.24
- Commercial Umbrella Policy: An umbrella policy to provide additional liability coverage might make sense for your small business in specific situations: If your facility is open to the public, if your employees are at a high level of occupational risk, if employees regularly drive for work purposes, or if there are other reasons you are regularly vulnerable to third-party lawsuit, extra coverage is something worth considering.25
How are costs for business insurance determined?
The short answer to this question is: on an individual basis. Even your peers in your industry may be paying a vastly different insurance premium for complex reasons. Factors like your industry, the type of contracts you sign, the number of people you employ, your business’ location, and the size of the business all play a role. Insurers also weigh the risk represented by your yearly revenue—the higher the sum, the more of a target you might be for lawsuits.26
When and why can my insurer terminate my policy?
The specific conditions in which an insurer can terminate a small business’ policy will be laid out in the initial insurance agreement. However, it’s important to know that many states require insurers provide more than 30 days’ notice of a policy cancellation. Some states even limit the reasons an insurance company can cancel a small business policy to instances of fraud or failure to keep up with loss control strategies the insurer might require.27
Can you write off business insurance, or deduct business insurance from taxes?
Yes, within reason. As long as your insurance is comparable to what most others in your industry deem necessary and useful, the expense of your premiums can be subtracted from your taxable income.28 However, since the value of insurance extends beyond the taxable year, you may only be able to partially deduct it, depending on when you paid the premium.29 It’s always best to consult with an accountant to make sure you’re getting all appropriate tax deductions.
What should I look for in an insurance broker?
Businesses in high-risk industries like hospitality, manufacturing, and construction should consider commercial umbrella coverage.
Since the need to file a small business insurance claim could come up at any time, business owners should look for brokers that are responsive and can be reached many ways, like text, call, and email. It might seem counterintuitive, but it’s also a good sign when a business insurance broker admits they don’t know it all and calls on an attorney or other expert to affirm your coverage is exactly what’s needed. This shows they are more dedicated to meeting your needs than maintaining their image as an expert. At the same time, the best business insurance brokers not only know the current state of legislation and requirements, but can advise you about changes in those rules as soon as they occur.30
Are all sizes of businesses required to have business insurance?
The answer to this question varies by state, but businesses as small as sole proprietorships are required to carry business insurance under certain conditions. It’s essential to determine what is necessary for your region, industry, and size.31
What happens in a business insurance audit?
When you set out to establish a BOP with an insurance company, they are going to conduct an audit of your company to make sure you both agree on assessed risks and liability. The audit is usually focused on ensuring projections for the business’ income were accurate. If the business made more money than expected, the insurance company may retroactively adjust the premium to collect on the unknown extra liability. They will also increase the premium moving forward. If the business made less profits than anticipated, many insurers will refund the policy holder the amount they overpaid. Completing an audit might seem like a hassle, but if you delay in returning documentation, some insurers eventually generate “assumed audits,” in which they “assume” your profits spiked by 50% or more and raise your premium significantly. Keep careful records of income, profits, and both physical and financial losses to make completing the audit more straightforward.32
Whether you’re a small business owner considering upgrading your business insurance, or buying for the first time, we hope these small business insurance FAQs gave you enough insight to weigh your options confidently.