When Do You Need Insurance for Your Small Business?
Business owners know they need insurance – but it’s key to determine which types of coverage you need and when.

Business owners know they need insurance — but figuring out exactly what types of coverage and policy limits they need can be pretty complex. Coverage needs vary greatly depending on things like your business’s location, employee headcount, and industry. So what types of insurance should a small business owner consider purchasing to ensure they’re covered on all fronts?

Here are some of the most common types of coverage and when they’re applicable to your business.

General Liability Insurance

General Liability insurance protects your business from third party injury and property damage claims. As an example, let’s say you own a store and a customer slips on water that had been spilled on the floor earlier, sustaining an injury. Your business can be held liable for the resulting injury, including medical treatment and any legal costs. Without a General Liability policy, you’ll likely have to pay these costs out of pocket and, depending on the situation, even a minor incident could bankrupt a small business.

This coverage is applicable to a wide variety of businesses, particularly those that have frequent physical interactions with clients or partners. It’s applicable whether you have a storefront, visit a client’s property or simply host non-employees in your office space. In some cases, customers will require proof of General Liability coverage before entering into a business arrangement: a common scenario for contractors and businesses providing construction services.

Commercial Property Insurance

While General Liability protects you in the case of third-party injuries or property damage, Commercial Property Insurance protects your business’s own property. That could include a physical office space or retail store location, as well as equipment and supplies. If you own a building or any personal property that is used for business, you’ll want to purchase Commercial Property Insurance, which will cover costs resulting from things like fire and theft.

Most small business owners are eligible to purchase a Business Owner’s Policy, or BOP, which bundles General Liability and Commercial Property Insurance in a simple package.

Workers Compensation Insurance

Workers Compensation Insurance covers medical costs and lost wages when an employee is injured or falls ill on the job. This protects the employer as well, as they’re protected in the case that employees decide to sue the business for the incident.

Most states make Workers Compensation mandatory if you have over three employees, with some exceptions for certain types of businesses. But even if it’s not required, if you employ anyone you should still consider purchasing a policy, especially if your industry is known for occupational hazards or risks for work-related illnesses.

Cyber Insurance

Cyber Insurance covers liability for cyber attacks, which are becoming increasingly common for small businesses. In fact, according to First Data, 90 percent of all cyber attacks that occur impact small businesses. If you store customer data electronically, such as personal information or credit card numbers, you’re at risk for a data breach, which could cost your business big time. For example, an employee could accidentally click on a phishing email and reveal confidential customer information to an outsider.

After a data breach, a business is legally required to notify affected customers, which can be costly. Additional costs may include legal defense, settlements, reputation damage and lost business. Without Cyber Insurance, these can quickly add up and it could be impossible for a small business to recover.

Errors & Omissions (E&O) Insurance

E&O Insurance, which is sometimes referred to as Professional Liability Insurance, protects your business in the case of mistakes or errors made in the course of servicing clients. It’s a must-have for professional services firms and consultants but applies to many other types of businesses as well. If a client sues for negligent acts or errors that they believed caused them a financial loss, E&O Insurance will cover related legal costs and settlements.

If you’re wondering whether or not your small business needs E&O Insurance, a simple way to think about it is to ask, “Do I provide services to clients for a fee?” Each industry requires different coverage specifics, but whether you’re a public relations consultant or a personal trainer, if you’re advising or servicing clients, you’re at risk for E&O claims. A Chubb survey found that 52 percent of businesses without an E&O Insurance policy believed they received coverage for these sorts of claims from their General Liability policy, but that is not the case and can leave your business in peril if you’re not appropriately covered.

Directors & Officers (D&O) Insurance

D&O Insurance covers the managers, executives and board members of your company in the case that they are sued for decisions they made in the course of working for your business. For example, an investor could sue a company executive for breach of fiduciary duties or a former executive could bring suit against others if they felt they were wrongly terminated from the company. If a company goes bankrupt, vendors could sue directors and officers for the company’s failure in an attempt to collect debts. In these cases, without D&O insurance, directors and executives could be held personally liable and face risk to their own assets. It’s a scary situation and one that most managers don’t want to wind up in.

D&O claims are most common with large, publicly traded companies. But that doesn’t mean small businesses don’t need protection. Customers, employees, competitors, partners, investors and government regulators could all make claims against your business. If you want to recruit experienced and talented directors and executives — or if you’re seeking to expand your pool of shareholders — a comprehensive D&O policy can be quite advantageous in today’s litigious society.

When Do You Need Insurance for Your Small Business?

By Maxime Rieman
Business.com / Insurance / Last Modified: February 22, 2017