The most common types of business insurance are liability, property, and business income insurance. The Business Owner’s Policy (BOP) bundles these together into a package for qualified small business owners. Other specialty coverages for different kinds of risks are also covered below.
Business Insurance helps protect your business from financial losses caused by unexpected events. Since every business is unique, each business will have different insurance needs. In this guide, we cover the most common types of business insurance.
Most business insurance is optional, so purchasing insurance is a business decision that can help reduce the risk of financial ruin in your business when an accident or disaster occurs. Some coverages, like workers’ compensation, are mandatory coverages in most states for businesses with employees.
The most common insurance coverages that are applicable to almost all businesses are liability, property, and business income insurance.
Liability Insurance (also known as General Liability Insurance) is the most common type of insurance for businesses. If your business or an employee injures a third-party in the course of business, liability insurance can help protect your business against the financial consequences of lawsuits. Third-parties include anyone who is not an employee of your business, such as a vendor, customer, or landlord.
This type of insurance covers claims from physical injuries or property damage caused by your business or products. It also covers non-physical injuries such as libel, slander, copyright infringement, or false advertising. Liability insurance generally excludes auto liability and professional liability, so separate policies are necessary to cover these risks.
If your business is responsible for damages, liability insurance will pay for damages up to the policy limits. Additionally, it will cover attorneys’ fees related to defending your business in court.
Examples of situations liability insurance would cover include:
- Bodily injury. The floor in your retail store has just been mopped. A customer walks on the floor, trips and falls.
- Property damage. The operations at your facility cause a fire, and the fire spreads to the neighboring unit’s office, burning it down. Liability insurance would cover the damages your business is responsible for paying to the neighbor.
- Products liability. Your product has a defect that you were not aware of, and the product malfunctions, injuring a customer.
- Copyright liability. Your marketing material looks too similar to a competitor’s, and they sue you for copyright infringement.
Property Insurance will compensate your business if property that you use in your business is damaged or lost due to accidents or disasters. It covers property such as buildings, equipment, inventory, furniture, tools and computers. Common covered causes of loss include fire, wind, hail, and vandalism. In some policies, theft is also covered, but even when theft is covered, employee theft is usually excluded.
Examples of situations property insurance would cover include:
- A fire is accidentally started in your restaurant kitchen, destroying your kitchen appliances and your food inventory.
- The building your business owns has its roof damaged by a severe hailstorm.
- A pipe bursts in your retail store, destroying fixtures and ruining merchandise.
Generally, your business will prepare a list of the property owned by the business in order to determine the appropriate amount of property insurance to buy. If you do not purchase enough insurance to cover the full value of your property, the insurance company may only reimburse you for a portion of the claim when a loss occurs due to a concept known as co-insurance.
A common choice in property insurance is the choice between replacement cost (RC) coverage and actual cash value (ACV) coverage. With replacement cost coverage, in the event of a loss, the insurance company will pay the cost to replace the property. With ACV coverage, the insurance company will deduct a depreciation charge, in order to account for the lower value of the item as you use it over time. ACV coverage costs less than RC coverage, but it also pays less in the event of a claim.
Flooding and earthquakes are commonly excluded from property insurance coverage.
Business Income Insurance
Business Income Insurance (also known as business interruption insurance) is coverage you can add to your property insurance coverage. If a covered cause of loss forces your business to stop operating, business income insurance will compensate your business for the lost profits it would have earned had the disaster not occured.
This type of coverage allows your business to continue paying its fixed expenses like rents and salaries while your business operations recover from the disaster. This way, you can retain your employees and pay for your financial obligations while reopening your business.
For example, assume you have a wholesale bakery with the following monthly sales and expenses:
- Sales: $40,000
- Rent and utilities: $5000
- Salaries: $15,000
- Profits: $10,000
A fire destroys the bakery. Business Income Insurance would cover your monthly profits of $10,000 plus the monthly salaries and utilities while your business is recovering from the fire. The loss of your inventory would be covered under the property insurance coverage.
Business Owner’s Policy (BOP) for Small and Medium Sized Businesses
A common insurance policy bundle offered to eligible small and medium sized businesses is called a Business Owner’s Policy, or BOP. This type of policy bundles together general liability and property insurance into a single policy. The pricing on a BOP can often be lower than purchasing the insurance policies separately. Often, business interruption insurance is also included in BOP plans.
In order to determine whether your business qualifies for a BOP, the insurance carrier will consider factors including:
- Number of employees
- Annual sales
- Size of office or facility
- Industry (high-risk industries are usually excluded)
Common Additional Coverages
The following coverages are common policies carried by many businesses. They include workers’ compensation coverage for businesses with employees, commercial auto insurance for companies that own vehicles or have employees that use personal vehicles for business purposes, and professional liability insurance for professional service businesses.
Workers’ Compensation Insurance
Workers’ Compensation Insurance covers wages and medical expenses for your employees who are injured while on the job. If an injured employee decides to accept these these monetary benefits, he or she agrees not to sue your business. Most states require workers’ compensation insurance for businesses that have employees, and will issue fines (or criminal penalties in some states) for companies that don’t have this coverage.
For example, your employee falls off a ladder while at work and is seriously injured. The employee cannot return to work, so workers’ compensation insurance would pay for the cost of the employee’s medical bills and rehabilitation. It will also pay for a portion of the employee’s lost wages while recuperating. If the employee chooses to accept these benefits, they would waive the right to file a lawsuit against your business.
Additionally, most states also require unemployment insurance and disability insurance. In many states, unemployment and disability are programs administered by the state government and may be automatically included in your payroll tax filings.
Commercial Auto Insurance
Commercial Auto Insurance covers vehicles owned or leased by your business and used primarily for business purposes. It can cover both damage or theft of the vehicles, and liability for automobile crashes caused by employees of your business.
Examples of situations commercial auto insurance would cover include:
- Your employee is driving to meet a client in a company owned vehicle. The employee crashes into another vehicle, injures another driver, and is at fault for the crash. The other driver sues your company, since your employee was driving a company-owned vehicle while working. Auto insurance would cover damages awarded against your company for the crash such as the other driver’s lost wages and medical expenses.
- Your company van is parked outside of your warehouse. Over the weekend, the van is stolen and the police are unable to locate it. After a waiting period, your insurance company will reimburse your company for the value of the van.
If your employees use their personal vehicles for company business such as sales calls or to run errands for the company, you may also want to have hired & non-owned auto insurance coverage. This coverage can protect your business in the event that an employee using a personal vehicle for business purposes causes a crash where the liability for the crash exceeds the employee’s personal auto insurance limits.
For example, your employee drives his personal car to a business meeting with a vendor. On the way to the meeting your employee hits several pedestrians and is at fault for the crash. In total, the damages for the crash exceed $500,000, but the employee’s personal insurance only has $100,000 of coverage. The injured sue your company, since the employee was using their car for a business purpose. Hired & non-owned auto would cover the remaining $400,000 of the damages beyond the employee’s personal coverage limit.
Professional Liability Insurance
Professional Liability Insurance (also known as Errors & Omissions or E&O Insurance) covers professional service businesses such as lawyers, architects, brokers, investment advisers, technology consultants, and medical professionals for liability created in the performance of their professional duties.
If a client perceives that your business has injured them or caused financial losses through your mistakes or negligence, they may sue you and your business, and professional liability insurance can help pay for damages and legal fees. This type of professional liability is usually excluded from a general liability insurance policy.
For medical professionals, this insurance is also known as medical malpractice insurance.
Examples of situations professional liability insurance would cover include:
- An investment advisor makes investments for a client and the investments lose money. The client sues the advisor for negligence. Professional liability insurance would cover the costs of defending the suit as well as any damages awarded.
- An architect draws up plans for a building but the work includes an undiscovered error. When the building is built, the error is discovered, and the client sues the architect.
- A doctor treats a patient but prescribes the incorrect drug, leading to patient harm. The patient sues the doctor for damages.
Professional liability insurance is usually offered on a claims-made basis, which means that the claim will only be covered if both the incident and the claim happen while the policy is in force. If coverage is dropped, incidents that occur before the coverage was dropped but not filed until after the coverage is dropped will not be covered.
Other Specialized Coverages
Commercial Umbrella Insurance
Commercial Umbrella Insurance gives your business added protection from large lawsuits and accidents. It serves as additional coverage that begins when the limits of your general liability, auto liability, or other insurance coverages are not enough to cover the damages.
Umbrella insurance is a cost effective way to add to your insurance coverage and protect against large judgments. This type of insurance is a good choice for companies with substantial assets to protect or high risk exposures like retail storefronts. Other risks suitable for umbrella insurance include having high net worth clients, or businesses that involve a lot of driving. Umbrella Insurance usually starts at $1 million in coverage, and is sold in increments of additional $1 million.
Commercial Flood Insurance
Flood Insurance is offered by the National Flood Insurance Program (NFIP), which is administered by the federal government. It helps protect your business from property damage caused by flooding, which is generally excluded from most general property insurance coverages.
Floods are caused by natural water sources such as inland, tidal, or surface waters affecting two or more properties. Water damage caused by man made sources, such as a burst pipe, are not considered floods, and are covered under property insurance.
Only businesses in certain communities qualify for flood insurance from the federal program, and a community has to elect to participate in the NFIP. Communities that want to participate in the NFIP are required to adopt plans for floodplain management.
Employment Practices Liability Insurance
Employment Practices Liability Insurance (also known as EPLI) protects your business against employee lawsuits based on accusations of wrongful termination, sexual harassment, and discrimination. EPLI will pay for your company’s legal defense, as well as any judgments against your company, up to the limit of coverage.
EPLI is usually offered on a claims-made basis, which means that the claim will only be covered if both the incident and the claim happen while the policy is in force. If EPLI coverage is dropped, claims filed after the coverage is dropped, for incidents that occured before the coverage was dropped will not be covered.
Directors & Officers Liability Insurance
Directors & Officers Insurance (also known as D&O) protects directors and officers of a company if they are personally sued for management actions they made in their role as directors or officers of a company. Although the company purchases the insurance, the benefit of the insurance is paid to the individual directors and officers themselves.
D&O Insurance is helpful for companies that want to attract outside directors and officers, as many talented professionals are unwilling to risk personal liability for the actions they take as directors or executives. D&O Insurance is usually written on a claims- made basis.
Key Employee Insurance
Key Employee Insurance protects your business against the untimely death of a key employee. This type of insurance is a life insurance policy on the life of the key employee, with the policy owned and paid for by the business. In the event of the death of the key employee, the business will be compensated in order to provide funds for the business to continue operating and find a replacement for the key employee. Unlike most types of commercial insurance, which are generally tax deductible as business expenses, key employee insurance is not allowed as a business deduction by the IRS.
Data Breach Insurance
Data Breach Insurance protects your business against the loss of information and data caused by thieves or hackers. This insurance helps cover the cost of notifying your customers, public relations efforts, as well as the cost of legal liability and legal fees to defend against lawsuits due to the data breach.
Commercial Crime Insurance
Crime Insurance protects your business against losses from crime such as theft and robbery, which are generally not covered by property insurance. It also provides protection against losses from forgery or computer fraud. Many crime insurance policies also provide protection from employee theft, which is also commonly excluded from general property insurance coverage.