Starting a Business

What Type of Business Insurance Do I Need and How Much Does it Cost?

J.J. Starr  
types of business insurance

Business insurance is usually an essential piece to a healthy business. Most small businesses will need at least one type of business insurance policy. Small businesses with a few employees, equipment, vehicles, and a permanent location may need to carry five or more policies. 

This guide will walk you through the most common forms of business insurance. Plus, it will provide you with a pricing guide to help you estimate your costs. By the end, you should have a clear idea of which policies you need and what you need to budget. 

However, this article is not intended to offer legal or financial advice. Always consult your attorney, state laws, and business advisors when deciding on your policy. 

Four common types of small business insurance 

Though your small business may not ultimately require all four of the following policies, be sure to consider their value carefully before deciding. 

General liability insurance

Most small business owners will need a general liability policy. It covers you if someone sues you due to bodily injury, property damage, and personal injury for things like defamation. Liability insurance pays out if your business is found liable for damages. Not only does it cover the cost of those damages, but it will also cover attorney fees and other legal defense costs. 

Keep in mind that you’re only covered up to coverage limits and minus the deductible. Be sure to set these at a reasonable amount. 

Commercial property insurance

If you own or rent a commercial space—or commercial equipment—you may want to consider a commercial property policy. This type of policy will cover you up to coverage limits when you are affected by a covered loss. Always ensure that your policy extends coverage to all the property you need. Some policies don’t cover certain types of equipment without a special rider. 

Keep in mind that these types of policies almost always exclude coverage for floods, earthquakes, and other natural disasters. If you live in an area affected by these kinds of events, you may want to have an additional policy.

Business income coverage

Also called business interruption insurance, business income coverage replaces your lost income when your place of business or equipment is damaged by a covered loss. If your business relies on a physical location, equipment, or other property for you to generate income, then income coverage could be a wise idea. 

Most small business owners purchase business income coverage as part of their business owner’s policy (more on this later). 

Workers compensation insurance

If you have a few employees, every state (except Texas) will require you to carry workers’ compensation insurance. Even if it’s not required, carrying workers’ comp coverage is a great way to attract high-quality employees and protect them. 

Workers’ comp pays for medical bills related to an injury in the workplace, no matter who is at fault for the injury. It also replaces part or all of your employee’s income depending on the policy. There is also a death benefit that will be paid out to a worker’s family if they perish from an injury sustained while working. 

Additional business insurance coverage to consider

As we said, there are a number of insurance policies tailored to the various needs of small businesses. Below are a handful of common insurance products. 

Business Owner’s Policy (BOP)

Looking to streamline your insurance policy? A BOP combines three essential coverage options: general liability, business income, and commercial property coverage. When business is interrupted by a disaster, BOP coverage steps in to protect your income. 

There are some exclusions with this policy, including certain weather events and pandemics. You can purchase a rider for certain weather events, like a hurricane, 

Professional liability insurance

Depending on your profession, you may need professional liability coverage. Also called Errors and Omissions Insurance, these policies protect you from actual or alleged negligence related to your professional services. If you’re held liable for damages related to your services, this policy covers your legal defenses and your fines.

Remember that you’re only covered up to policy limits, minus the deductible. There are likely guidelines as to how much professional liability protection you need. You can seek guidance from a professional organization, for example the American Massage Therapy Association (AMTA) provides business insurance best practices for massage therapists. 

Commercial auto insurance

If you have commercial vehicles, you should know that personal car insurance won’t cover you. You need a commercial auto policy for that. Be aware, if you use your personal vehicle for work purposes, you may need a commercial policy to cover you while you’re using your car for work. 

A commercial car insurance policy should cover at least the following:

  • Bodily injury liability protection
  • Property damage protection
  • Uninsured and underinsured motorist proportion
  • Medical payment coverage as outlined by state laws

If your commercial vehicle is financed, your lender may also want you to carry comprehensive and collision coverage. You may also need gap coverage if the vehicle depreciates faster than you can pay down the principal. 

Home-based business insurance

If you work out of your home, you may want to add home-based business coverage to your homeowners or renters insurance policy. This policy covers equipment and other business-related property if it is damaged in your home. That includes printers, computers, and files. 

Some self-employed individuals may not need additional coverage for their business equipment. For example, people who use a laptop for business and personal use may not need a business rider. However, some business operations will not be covered by a standard homeowners policy. Worse still, some business practices may nullify parts of your homeowners insurance. Homeowners personal liability protection does not generally cover a liability claim that involves your business. 

Employment practices liability insurance

This type of insurance protects you in the event you’re found legally liable for any of the following: 

  • Wrongful termination
  • Sexual harassment
  • Discrimination
  • Invasion of privacy
  • False imprisonment
  • Breach of contract
  • Emotional distress
  • Wage and hour law violations

Your employment practices coverage will pay for legal defense and penalties. Attorney’s fees can easily bankrupt you without this coverage—and these events are not covered by general liability insurance in most cases. If you have employees, it’s important that you consider adding employment practices protection to your insurance plan. 

Commercial umbrella insurance

A commercial umbrella policy fills in coverage gaps left by other policies. Umbrella policies extend the coverage of other liability insurance policies, most often auto insurance and general liability policies. Umbrella coverage is designed to protect you from unusually high settlements.

If you’re found liable and damages exceed the limits on your general liability insurance, for example, your umbrella policy kicks in to provide additional coverage. Umbrella insurance is often inexpensive because of how rarely it needs to be used. Though you may never need to use your umbrella policy, it can be an absolute life saver if you do. 

Key employee insurance

The business owner isn’t the only player who can make or break a business. With some businesses, a key employee (or several) contributes significantly to a company’s success. While most people think of c-level employees as having “key” roles, key employees could also be your operations manager, product designer, salesperson, or other type of employee.

The policy is owned by the business, but taken out on the key employee’s life. It pays out if the employees dies or is disabled and unable to work. If your business’s success heavily depends on one or a few employees, you should consider adding this coverage option to your plan. 

Data breach and cyber liability insurance

As the name implies, a data breach policy covers you when hackers break into your company’s stored data. Sometimes data breach coverage is included in an errors and omissions policy. An independent data breach policy typically offers broader protections for losses during a data breach. If a data breach would cost you more than the average business, you may wish to purchase higher limits of data breach protection. 

Data breach coverage is often used interchangeably with cyber insurance, but they are not quite the same thing. Cyber liability policies protect you for both the losses directly and indirectly related to the data breach. Direct losses includes the cost of notification, monitoring, investigation, and repair. Indirect losses include settlements, regulatory fines, and attorneys fees.

Business hazard insurance

Hazard policies cover your business property from damage by natural disasters. The most common policies are meant to cover flood, hail, and severe storms. You need to purchase an individual policy for each peril. The cost of these policies depends on how likely it is for your business to suffer damages due to the peril. For example, if your business is in a flood zone, your business hazard policy covering flood will be higher than a business that’s not in a flood zone. 

How much does business insurance cost?

The cost of business insurance can vary based on the business, the industry or profession, and the type of policy. A small business could pay as little as $500 a year for insurance or as much as several thousand dollars a year. Let’s take a closer look at business insurance costs.

Factors that affect the cost of business insurance

There are many factors at play when determining the cost of business insurance. One major factor is the number of policies you need to purchase. Some businesses require several policies, while a sole proprietorship might only need one policy. 

The price for each policy will depend on several factors as well. That includes:

  • Coverage Limits
  • Deductible
  • Business size
  • Industry
  • Location
  • Income
  • Number of employees
  • Claims history
  • Insurance company

Average business insurance premium costs

The average monthly premium costs of business insurance are:

  • General liability: $65
  • Professional liability: $97
  • Commercial Auto insurance: $187
  • Workers’ compensation: $111
  • Business owner’s policy: $99
  • Commercial Umbrella: $129

Sources: Insureon, Nerdwallet

How can you save money on business insurance?

There are a few simple tactics you can use to lower your business insurance premiums. The first is to be sure you’re setting your coverage limits to the right amount. Buying a policy with limits higher than what you’d feasibly need will lead to unnecessarily high premiums. 

Next, you should compare quotes from multiple insurers—at least five. Be sure to take notes during the process, especially in regards to any special perks or coverage options included in the price. Don’t forget to ask about discounts. 

Speaking of discounts, the third simple tactic is to bundle your business insurance products. Many insurance companies offer discounts for carrying multiple insurance lines—as much as 20 percent off. You may even get a bundling discount by buying business insurance through your car or homeowners insurance provider. 

J.J. Starr
J.J. Starr J.J. is an educator, personal finance writer, and former registered banker. She's helped dozens of small businesses set up and manage their day-to-day expenses, secure business loans, and develop financial plans.
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