Small businesses are the backbone of the American economy. Starting one is a chance to serve the community and provide top-notch products and services. However, accidents happen. Insurance is critical for covering costs from property damage, lawsuits and more.
Numerous types of small-business insurance are available. Here’s what company owners need to know about insurance in 2023.
What Business Insurance Do Small Businesses Need?
Determining which insurance policies to take out can be difficult. Small-business owners must scrutinize their operations and pick the best fit for their company. These six types of insurance are necessary for most entrepreneurs.
General Liability Insurance
General liability insurance is one of the most common types of small-business insurance. The budget should include room for this policy because it protects the company from lawsuits. Plaintiffs may allege an organization caused physical harm or damaged their property. They could also sue small businesses for defamation and reputation harm. General liability insurance covers these critical issues.
Data shows general liability insurance costs about $30 monthly or $360 annually. The premiums depend on the business’s location, size and history. States don’t mandate companies to have general liability insurance. Still, some require organizations to have this policy when acquiring licenses for construction and other fields.
Commercial Umbrella Insurance
Sometimes, standard insurance policies aren’t enough. Small-business owners could use an extra layer of protection if they’ve reached the maximum for their current policies. In this instance, they need commercial umbrella insurance. These policies offer additional liability protection and close the gap when costs get too high.
Commercial umbrella insurance depends on how much coverage the business owner needs. Monthly premiums average about $40 for every $1 million in coverage for the policyholder.
Some business owners may not obtain this coverage, but it comes in handy when they need insurance the most. For example, suppose a customer sues for $2 million and the owner’s liability policy only covers the company for up to $1.5 million. Umbrella insurance would cover the remaining $500,000.
Commercial Auto Insurance
Many small businesses have a company car or an entire fleet, so they should also have commercial auto insurance. Taking out this policy allows for financial protection in case there’s an accident and personal injury occurs. Commercial auto insurance also financially protects the company from extreme weather events.
Commercial auto insurance is critical for small-business owners with electric vehicles (EVs). An EV fleet typically has higher repair costs due to advanced technological features. Cars are also frequent targets for thieves who aim to steal them or the items inside, so insurance is essential. In fact, most states require it.
Workers’ Compensation Insurance
Another necessary policy for small-business owners is workers’ compensation insurance. Like commercial auto insurance, most states require companies to have it — even if they only have one employee besides the owner.
Obtaining this policy is important because it helps small-business owners if their employees become ill or hurt on the job. The insurance company will pay for the medical expenses, which can quickly become expensive. Refraining from this coverage can cost a business hundreds of thousands of dollars through a single claim.
Cyber Liability Insurance
Cybercrime has significantly risen since the pandemic. Thieves look to exploit vulnerabilities in software and employees, especially those working from home. Who is a primary target for cybercriminals? Small businesses are among the most susceptible. Research shows companies with 100 employees or fewer experience 350% more attacks than larger ones.
These threats make cyber liability insurance a must-have for small-business owners. It’s necessary in today’s digital age because it protects companies if a breach occurs. These policies often cover legal fees, lost income, ransomware demands and more.
Home-based Business Insurance
Home-based employment has risen significantly since 2020. Many entrepreneurs started businesses inside their houses and have continued for the last three years. Small-business owners who operate their residences should consider home-based business insurance.
Most homeowners have insurance to protect their house — but those policies only cover the residential side of the home. Small-business owners should get home-based business insurance to provide additional coverage for the business side. These policies protect professional equipment and other necessary components for the company. Even in a home, employers are susceptible to injuries and property damage.
What Insurance Mistakes Do Small-Business Owners Make?
Obtaining the right insurance policies is critical for small-business owners. However, some entrepreneurs make mistakes when determining their coverage. Here are some blunders to avoid.
Underinsuring the Business
Underinsuring the business is one of the most typical mistakes. Budgets can be tight, so owners may feel tempted to cut costs wherever they can. However, insurance might not be the place to do it. Underinsuring is unfortunately common in the United States. Research shows 75% of U.S. businesses underinsure themselves by at least 40%.
An underinsured business is vulnerable to accidents daily. One incident could lead to financial ruin for a small business if it doesn’t have a strong enough insurance policy.
Renewing Current Policies
Why do so many businesses end up underinsured? One reason is cost-cutting to improve the bottom line. In addition, many organizations renew their policies without accounting for company growth.
Business owners should stay with an insurance company if they have a good relationship. However, a company may need to upgrade coverage as it grows or downsize its insurance policy after shrinking or moving to a new location. Reducing coverage limits can be an excellent cost-saving measure.
New businesses must hire workers. Employers classify each employee based on their hours and compensation. The workers could be full time, part time, independent contractors, temporary or another classification. Misclassifying workers leads to underpaying or overpaying insurance premiums.
Business owners may designate workers as independent contractors when they qualify as employees. Correcting this mistake helps businesses avoid financial penalties and back taxes owed. For example, the Department of Labor (DOL) fines companies for each misclassified employee and threatens jail time.
It’s also essential to use the correct classification code for employees. The code for a business owner will depend on the industry, and it matters for financial reasons. For example, meat packing plants use 2011 for their standard industrial classification (SIC). The code matters for injury rates, so owners shouldn’t accidentally choose the code for a more dangerous occupation due to the higher rates.
Using Insurance to Protect Small Businesses
Running a small business means money is often tight. Owners need to decide where to allocate financial resources, making tough choices.
One area entrepreneurs shouldn’t skip is business insurance. Most small businesses need various policies like liability, auto and workers’ compensation insurance. The costs may stack up monthly, but they’ll be handy when protecting from million-dollar lawsuits.