What sorts of insurance coverage do small businesses need?
Marcus Pickett
Small businesses have an array of insurance needs. Often, a small business will buy one policy -- known as a "business owner's policy" -- that combines most of their small business insurance needs, according to the Insurance Information Institute. A business owner's policy often is customized for the particular needs of that business.
Whether bundled together in a business owner's policy or purchased individually, here are some types of coverage that will protect your business from a variety of worst-case scenarios.
Business liability insurance
Liability insurance will cover the financial consequences of accidents for which the business is found liable, up to the policy's limits. If, for example, a customer is injured in your building, liability coverage would cover the hospital bills and the lawsuit that may result.
Knowing what your liability policy excludes is just as important as knowing what it includes. . For example, punitive damages (extra damages you may be ordered to pay to further compensate the victim) usually are not covered in a basic policy, according to the Insurance Information Institute.
Some exclusion gaps can be filled with endorsements (extra coverage for specific issues tacked onto your policy). Some common endorsements, according to the Insurance Information Institute, include:
- Employment practices liability: This would cover you if an employee sues you for discrimination.
- Liquor liability: If your business serves alcohol or you're hosting a holiday party, you may be liable if a customer drives drunk after being served by you. Liquor liability insurance would help pay for the resulting injuries and property damage.
- Employee benefits liability: If you offer group insurance benefits, you may get sued by current or former employees who allege that you neglected to properly administer the benefit plan. An employee benefits liability endorsement would cover you for these potentially expensive lawsuits.
- Errors and omissions liability: This would protect you if a client claims he or she was harmed by your advice or services.
Property insurance: Property insurance provides coverage for your building as well as property that is lost, damaged or destroyed by any of the perils (like fire, wind or burglary) listed in the policy. As with liability insurance, you may need supplemental coverage. Floods and earthquakes, for example, often are excluded from basic policies.
Be sure that you understand the difference between "replacement value" coverage and "cash value" coverage. Replacement value insurance will ensure that you can replace damaged property, regardless of depreciation, according to the Colorado Department of Regulatory Agencies (DORA). Cash value coverage, meanwhile, will simply reimburse you for the current market value of what you lost, which may not be enough to actually replace everything.
Workers' compensation insurance: Workers' compensation coverage pays for the medical bills and lost wages of employees who are injured while doing their jobs. If a worker dies on the job, the benefits go to that worker's family. Most states require it once your business has a certain number of workers, according to the Insurance Information Institute.
Commercial auto insurance: This insurance protects against bodily injury or property damage caused by any vehicles your business owns. There are usually state minimums for policy limits -- but if a delivery driver hits a pedestrian, that pedestrian may seek much more compensation than the state-mandated minimum, according to DORA. So, it's a good idea to purchase higher amounts of coverage or get an umbrella policy, which would cover you after your original liability coverage is used up.
Business interruption and key employee insurance: Property insurance will help you rebuild your business after a disaster or robbery. But what about all the income you lose while your business is out of commission? Business interruption coverage, according to the Insurance Information Institute, will reimburse you for lost revenue. The amount you can get is typically based on financial records of previous income. Key employee insurance, meanwhile, provides similar coverage if an integral employee (like a co-owner) dies or becomes disabled. It compensates you for lost income, lost business value and the expense of training new employees.
