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What Is Small Business Insurance? A Complete Guide to Insurance for Startups

June 6, 2024

Small business insurance protects a business’s assets, income and property against certain risks. Insurance is essential for small businesses, even those that are just starting out. Small businesses are required by law to have certain types of insurance coverage, like workers compensation, whereas other coverage options are optional but crucial for protecting against risk. Insurance protects your company from potential losses caused by accidents, lawsuits or natural disasters.

Take a look through these topics to learn what small business insurance is and how it can protect your startup:

What Insurance Is Required for Small Business?

What Is a Business Owner’s Policy?

Why Do Small Businesses Need Insurance?

How Much Does Small Business Insurance Cost?

How Can I Keep Insurance Premiums Down?

What Insurance Is Required for Small Business?

Small businesses that employ workers are required to have workers compensation in most states. If you employ fifty or more full-time equivalent employees, you’re required to provide health care insurance under the Affordable Care Act. There are other forms of insurance that companies need to protect themselves from loss, even though they’re not required by law. Here are the common types of small business insurance your company could need:

1. General Liability Insurance

General liability insurance is applicable to all types of small businesses. It provides coverage against losses to your business due to property damage, injury, medical expenses, lawsuits, libel and slander.

2. Commercial Property Insurance

Commercial property insurance is a good idea for any company that owns a significant amount of property, equipment and assets. It protects your company from loss and damage to your business property due to natural disasters, civil disruption or vandalism and other crimes.

3. Business Income Insurance

Business income is a good investment for all small businesses. It provides coverage of your income in the event that your company has to stop operating for a period of time because of property loss or damage caused by fire, storms, or other disasters.

4. Professional Liability Insurance

Professional liability is recommended for all businesses that provide professional services to clients, including lawyers, accountants, doctors and more. It provides protection from financial loss stemming from mistakes, negligence or malpractice in the workplace.

5. Product Liability Insurance

Product liability insurance gives important coverage for small businesses that manufacture and sell products. It protects your company from financial loss stemming from faulty goods that cause injury or other harm to a customer or employee.

6. Commercial Auto Insurance

Commercial auto auto insurance is needed by all businesses that use work vehicles, even if those vehicles are already covered by a personal policy. Commercial auto insurance covers work cars and trucks, as well as their drivers, from financial losses stemming from accidents.

7. Commercial Flood Insurance

Commercial flood insurance is recommended for all businesses, but especially those in coastal areas prone to flooding. It covers the cost of damage to your business property in the event of a flood.

8. Commercial Umbrella Insurance

Umbrella insurance acts as a liability safety net. It extends the coverage limits of your liability insurance policies. If a liability claim against your company exceeds the limits of your general liability policy, commercial umbrella insurance can kick in and help cover the excess liability claim. It serves as an extra layer of protection against liability.

9. Workers Compensation

Workers compensation is recommended for all businesses with employees and is mandatory in most states. It provides benefits to employees who become ill or injured in the workplace.

What Is a Business Owner’s Policy?

A Business Owner’s Policy (BOP) is a convenient and cost effective insurance option for small businesses. It combines the coverage of all major liability and property insurance risks into one insurance policy package meant to specifically meet the coverage needs of small businesses. A Business Owner’s Policy combines the following common insurance coverage options into one bundle:

General Liability Insurance: To protect your company from loss caused by common liability risks, such as injury and property damage.
Commercial Property Insurance: To cover your business property from natural disaster, civil unrest and crime.
Business Income Insurance: To compensate you for the money lost following a disaster that caused your business operations to stop for a period of time.

Why Do Small Businesses Need Insurance?

Small businesses need insurance to help cover the costs associated with liability claims, property damage and other catastrophes affecting business operations. If you don’t have business insurance, you’ll have to pay out of pocket for legal claims against your company and damage to your business property, which can easily bankrupt a small startup. The average cost of a liability claim is now more than $15,000, according to the Insurance Journal.

In some cases, your small business might be required by law to carry certain insurance policies. For example, it’s likely that your state compels you to have workers compensation insurance if you employ workers.

If your business employs fifty or more workers, you’ll need to provide them with health insurance. This article explains the healthcare coverage responsibilities of small businesses.

How Much Does Small Business Insurance Cost?

The cost of small business insurance depends on your industry and the specific risk factors affecting your company. To evaluate the cost of your small business insurance coverage, an insurance agent will look at the following:

The risk level of your industry
The location of your business
The size, age and condition of your business property
The number of employees at your company
Your annual income

According to a survey conducted by Insureon, the average yearly cost of business insurance is $1,281.

How Can I Keep Insurance Premiums Down?

Small businesses can implement a few cost-saving measures to lower their business insurance premiums and potentially save thousands of dollars per year:

1. Remove Unnecessary Coverage

Review the coverage for your small business and consider whether all of it is necessary. At the very least, you should have general liability insurance and workers compensation, if you have employees. But maybe, for example, professional liability insurance isn’t necessary for your specific business model. Ask yourself if you really need each of your coverage options.

2. Raise Your Deductible

When your deductible is lower, you’ll pay higher premiums regardless of the type of insurance. Raising your deductible can reduce your annual costs, but make sure your deductible is still an amount you’re willing and able to pay, if the need arises.

3. Compare Costs

It’s important to shop around when you’re looking for small business insurance to find the best option at the best price. To save time and money, work with a licensed insurance broker who can evaluate your needs and then shop around at different insurance providers to find you the cheapest price for the coverage you need.

4. Package Your Policies

One easy way to save money and simplify your insurance coverage is to bundle your various policies. A Business Owner’s Plan will streamline your insurance plan so that you only have one policy that covers multiple liability and property risks. Getting an insurance package lowers the overall cost of your coverage.

5. Reduce Your Risk Level

Higher risk businesses pay higher insurance premiums. Discuss with a broker what can be done to lower your company’s risk level. This could include installing a security system at your office or enacting workplace safety measures.