Do All Small Businesses Need Insurance? Understanding the Details

The United States is home to approximately 30.2 million small businesses. Defined as a privately owned corporation, partnership, or sole proprietorship with fewer employees and less annual revenue than a corporation or regular-sized business (these numbers vary by sector but typically equate to fewer than 500 employees and less than $7 million in revenue ), small businesses make up a significant percentage of industries ranging from health care and manufacturing to retail trade and transportation.

Considering the immense size of most large businesses, the need for insurance as a protective measure makes sense. But what about small businesses, most of which have an average of only 10 employees? The short answer is yes: all businesses need insurance. Let’s take a closer look at the multiple small business insurance options to choose from.

What Is Small Business Insurance and Why Does it Matter?

Business insurance, also known as commercial insurance, serves to protect a company’s assets, property, and income. Small businesses most commonly enact a business owner policy (BOP), which combines three different forms of coverage -- property insurance, business interruption insurance, and general liability insurance -- into one contract.

• Property Insurance: This portion is usually available as named-peril coverage, only offering coverage for damage caused by events that are explicitly stated in the policy (e.g., explosion, fire, wind damage, smoke damage, vandalism, etc.). Alternatively, open-peril coverage -- which protects businesses from nearly every type of loss except those specifically excluded -- can be chosen. Properties protected by a BOP include owned and rented buildings, any business-owned items, and any items that are owned by a third party but temporarily kept within the care or control of the business owner.
• Business Interruption Insurance: Also known as business income coverage, this coverage helps replace lost income and additional expenses if the business is impacted by a covered peril. For example, if a fire or earthquake makes your office uninhabitable, business interruption insurance will cover the costs of renting a temporary office while repairs are made. Most policies are restricted to a specific timeline, such as six months after the covered peril occurs.
• General Liability Insurance: Accidents happen and can be absolutely devastating to a small business. If a customer or visitor is injured at your business or as a result of a defective product and you are found legally responsible, general liability insurance can help pay for the costs of the injured party’s medical expenses. It can also provide coverage for any legal costs that may accrue if you’re taken to court.

Because small businesses face challenges unique to their size as well as their trade, additional coverage may be purchased depending on a company’s specific needs and concerns.

In general, insurance offers financial protection in the event of an unexpected event. For example, health insurance covers the cost of medical problems and emergencies, car insurance covers the costs of repairs after vehicle accidents, and homeowners insurance covers the costs of damage repairs after natural disasters. Without business insurance, many small businesses would be unable to deal with the financial consequences of these unplanned and devastating events.

Additional Coverage, Explained

Small businesses come in many different shapes and sizes. Depending on the specifics of their particular industry, a company might want to purchase extra coverage to ensure they are protected for extra peace of mind.

• Commercial Auto Insurance: If a business commands a fleet of vehicles or uses company cars to conduct its business, commercial auto insurance is essential. Any vehicles (such as cars, trucks, vans, SUVs, etc.) that carry employees, products, or equipment are eligible for protection from damage and collisions. Additionally, non-owned auto liability insurance can be purchased to protect the company if employees drive their own cars on company business.
• Worker’s Compensation Insurance: Certain industries, such as manufacturing or construction, pose more risk to workers. While the odds of getting injured on the job are slim if you work in an office, employees who often use heavy machinery or power tools are statistically more likely to have accidents that cause bodily harm. Worker’s compensation provides wage replacement and medical benefits to these individuals in exchange for their right to sue the company for the incident. State laws vary but all businesses that employ W2 workers must provide worker’s compensation.
• Professional Liability Insurance: Also known as errors and omissions insurance, this additional coverage offers protection against the costs of defending a negligence claim, as well as any damages that may be awarded in such a civil suit. Any advice- and service-providing business -- from lawyers and accountants to hair salons -- should invest in professional liability insurance.
• Data Breach Insurance: Businesses that deal in information, particularly those that store sensitive or non-public data about employees or clients, are responsible for protecting that information. If a breach occurs either electronically or from a paper file, data breach insurance can protect the company against the loss.
• Renter’s Insurance: Many small businesses are unable to outright purchase the space they’re operating out of. An affordable alternative to working from home is renting. In such cases, rental insurance can offer protection for the property and the items within it in the event of an accident or disaster; in fact, most landlords require proof of rental insurance before you’ll be able to sign a lease agreement.

Small businesses don’t usually have the capital to handle serious financial disasters and accidents in the same way large businesses do. This means that business insurance is vital to the safety and success of all small companies. Although the bundled plans of business owner policies can make obtaining basic insurance coverage easier for small businesses, they may not be enough to cover the risks unique to a specific industry or field. Instead, small businesses should focus on their personal needs to ensure they get the protection and coverage most suited to their specific needs and situation.Looking for more exclusive content? Check out what’s trending on the Mployer Advisor blog, and see here for how much your small business health insurance will cost.

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