The Three Main Types of Insurance Every Small Business Needs

 Photo of of small business office

Every small business needs to make sure they have the necessary insurance in place.  Regardless if this is a new venture or if you have an established business, taking the time to ensure the right insurance is in place is necessary.  Here are the three main types of insurance every business needs.  Your particular industry may have other requirements though, so check with the regulations and laws in your state.

General Liability Insurance (Also Called Business Owners Policy)

This is the main type of insurance you must have in place if you operate any business that is in an office or retail environment where employees or guests may be.  This is sometimes jokingly referred to as trip and fall insurance, but that is an inaccurate depiction of what this covers.  Not only does this cover someone getting hurt while on your premises, it also covers the building owner in the event of fire or damage caused by you, it covers theft of property, and also can extend to protect from cyber liability.

This insurance is going to be required by the building you operate in.  They will tell you what the minimums are in your lease.  It is common to be $1 million to $2 million in coverage.  This insurance is not expensive in most cases, though.  This insurance is also often required by customers as proof of insurance before starting work.

When pricing out this insurance, make sure you have several pieces of information prepared.  Include any of the requirements by the building, the cost to replace your property, the average value of any inventory, as well as the value of any customer equipment or property you may be in possession of.

And lastly, shop the competition.  Shop this policy heavily between carriers.  Often certain carriers specialize in your particular business more than others.  We shopped ours last year and got better coverage for 25% less by talking to the right company.  Look for any discounts offered such as paying in full, claim free, and industry association discounts.  Be sure and price it out each year from several carriers as well.

Workers Comp

Depending on the state you work in, workers comp insurance may be a requirement of businesses with as few as five employees.  Regardless of the requirement, I think you should get this coverage if you have just one employee.  This insurance protects you in the event one of your employees gets hurt while at work for a minimal cost.

The price of the insurance is based on the job categories your employees fall into.  So someone that works at a desk in an office will be far cheaper than a construction worker in the field, it is all based on the risk profile.  So before you call to get a price, put together a list of all of your employees, their pay, and what job category they fall into.  The insurance carrier will pool everyone and come back with a rate.  Odds are the rates are set by the state, so there will not be huge difference, if any, between carriers.

In order to get discounts on this type of policy, you can do a couple of things.  First, you can exclude the business owner(s) from the policy.  This can save you a substantial amount.  Additionally, if you combine this with your General Liability Insurance carrier you may get a discount on that policy as well.

Note, with workers comp insurance you will have to do an annual audit of your payroll and your coverage, this is required by the every carrier I have worked with.  If your payroll exceeds what you paid for, perhaps because you added employees throughout the year, you will have to pay the difference.  On the flip side, if your payroll is less, they will refund the difference,  The rates are set per thousand of payroll.  Some companies can tie this insurance to your weekly payroll, this avoids the annual audit and always keeps the cost true.  But before you do that make sure there is not a management fee to do this.  The audit that will be required is painless and quick.

Professional Liability Insurance (Error and Omissions Insurance)

This is a definite must if you are in the professional services business.  This insurance, also called malpractice insurance, protects you in the event of a lawsuit filed by someone you worked with or for.  Depending on your industry, this may also be required.

The truth is, in the course of doing business, there will be mistakes.  In is inevitable.  Oftentimes, you can work through the mistakes and make it right.  On rare occasion, the situation can lead to a lawsuit of some sort.  That is when you need E&O insurance.

The policy will cover you for specific amounts of coverage, and of course the cost will increase base don these limits.  Unlike other insurance, this policy will probably increase each year.  The reason is that the policy covers you for all previous years.  As a result, it never seems to go down.  Perhaps you can shop this around and find a cheaper carrier, but just be prepared to have rising costs.  Regardless, I strongly recommend you protect your business with E&O insurance.  It is just a routine cost of conducting business.

Conclusion

With all of these policies, you are transferring risk to someone else.  That is what insurance is for.  Thats what you pay for.  Most people cannot personally cover damages from a fire, injured employee, or a lawsuit.

Never settle for one carrier, never buy from a friend, and never just renew the policy.  Make sure you always update it each year to make sure the coverage is still accurate.