Even when cash is scarce, or revenues down, small businesses shouldn't neglect their insurance needs. Businesses that are underinsured or without broad, proper, and adequate coverage are taking needless risks that could lead to serious financial problems, or even bankruptcy. In a crisis, a business that has no insurance or is underinsured can be totally destroyed.

Key Takeaways

  • Small-business owners need to have broad, adequate insurance and should periodically review and update their coverage as their circumstances change.
  • Policies available to small businesses include business owner's, product liability, professional malpractice, and commercial insurance.
  • A homeowners policy can be an important complement to a business owner's policy, but it usually doesn't cover claims related to a business conducted in the residence.
  • Minimum insurance requirements for a business are often imposed by the state in which it is located.

Insurance Basics

Insurance policies are contractual agreements between the insurer and the insured. The contract will detail such information as:

  • What is insured
  • The cost of the insurance
  • The conditions under which a claim may be made
  • The terms of payment if the claim is honored

Most insurance policies have deductibles—the amount of money the insured must pay toward a claim before the insurance company pays anything. Usually, the higher the deductible, the lower the premium—or cost of the insurance. Premiums may be paid on a variety of schedules, including annually (the most common), quarterly, or monthly.

Policies will also indicate the period of time that they will be in force. In most cases, the insurance company, agent, or broker from whom the business owner bought the insurance will alert them when it needs to be renewed. But, just in case, it's worth noting the date on a calendar and renewing by the deadline, so there is no gap in coverage.

Types of Business Insurance Coverage

There are a number of types of insurance that business owners may want to consider. The appropriate choices will depend on the kind of business, its size, and its particular risks.

Business Owner's Insurance

A business owner insurance policy offers small and midsize companies broad protection against financial loss. If their property is damaged by fire or flooding, for example, the insurance company may pay the cost of repairs It might also cover the owner's legal liability for bodily injury to someone if the business is held accountable.

Exactly what business owner insurance covers will be specified in the policy. An all-risk policy, which covers every eventuality except for specifically cited exclusions, offers more protection than a named-perils policy, which only covers the risks it names.

Among the risks that may be covered in a business owner's policy are:

  • Fire
  • Flooding (for instance, when a pipe bursts; for natural disasters, you'll need to get flood insurance )
  • Other sources of property damage
  • Theft
  • Bodily injury
  • Business interruption for specified reasons

Product Liability Insurance

This type of insurance, obtained at additional cost, may be a necessity if you sell a product that has the potential to injure a user. Even if you did not design, manufacture, or distribute the product, if you sell it and it injures someone, you may have legal liability that should be covered.

Commercial Insurance

A commercial insurance policy may be required if your business is larger and more complex than a simple single-owner or partnership retail operation, or is a service-oriented business or professional practice. (A professional practice may also require malpractice insurance, which is covered below.)

Businesses that may require a commercial insurance policy include manufacturers, restaurants, and commercial real estate operators. A commercial policy is typically more expensive than a business owner policy because the risks are correspondingly higher and potentially more costly to the insurance company.

Professional Malpractice Insurance

Professions that give advice and/or provide services may require professional malpractice insurance to protect themselves from substantial liability in the event of a lawsuit.

  • Medicine
  • Dentistry
  • Law
  • Accounting
  • Advertising
  • Financial planning
  • Occupational therapy
  • Computer analysis
  • Journalism
  • Psychotherapy
  • Real estate

Insurers calculate premiums for malpractice insurance based on actuarial data for risk, dollar damages, and other relevant factors. Prices vary widely depending on the profession, its subspecialties, and the specific services or advice offered. Neurosurgery, for example, is a profession that carries a high premium for malpractice insurance, while a single-owner, private-practice accountancy would normally pay a smaller premium.

Homeowners Insurance

Home-based businesses that are run from a private residence need to have a comprehensive homeowners policy as a complement to business owner's insurance.

Coverage typically includes:

  • Home or personal-property damage caused by fire or storms
  • Medical costs of occupants' injuries caused by fire, storms, wind, and lightning
  • Medical and legal expenses of other persons accidentally injured in the insured home
  • Loss or theft of specified personal property, either in or away from the insured home

However, a homeowners policy doesn't cover claims related to a business conducted in the residence. For example, if a customer or delivery person is injured on the premises, any claim arising from that injury would not be covered by the homeowners policy.

Under certain circumstances, if you have a home-operated business in which risks are minimal, you can ask to have a low-cost rider or endorsement added to your homeowners policy to cover damage to your business assets. However, some insurers will not let you cover your business if your customers, employees, or vendors visit your home. Coverage also may not apply to costly equipment or inventory used or stored on the premises, or if hazardous or combustible materials are used or stored there.

Just as it's a mistake be uninsured or underinsured, being overinsured can be a costly waste of money for a business.

The Dollar Amount of Coverage

The dollar amount of coverage for property damage or loss should be consistent with the replacement cost of the properties involved, including your home if applicable. Liability coverage is more difficult to calculate, so it's useful to consult with a knowlegeable agent or broker, especially one who is familiar with your type of business.

Some states also impose minimum insurance requirements for businesses. Your agent, broker, or state insurance department can provide the details.

The Bottom Line

If you run a business, you should discuss your insurance needs in detail with a knowledgeable insurance agent or broker and be completely candid in describing the business so that whatever coverage you buy will be adequate. Make sure you know what's covered and what isn't—and review your coverage periodically as your business evolves. Once you know exactly what kind of policy or policies you need, you can compare prices from different insurance companies and look for the best value.