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How Much Does Insurance Cost for a Small Business?

Kimberlee Leonard
Kimberlee Leonard
business.com Contributing Writer
Sep 30, 2021

Insurance is essential to protect small businesses, but costs can be prohibitive. Here's how to evaluate policy types, find out what's affecting your insurance price, and get the lowest rates.

When you run a business, you need to budget for small business insurance. Insurance is financial protection from loss types that can happen in the course of running a business, including third-party claims of injury, property damage, employee injury or theft.

The insurance you choose will depend on your business and what kinds of risks you face. While most businesses with at least one employee are required to get workers’ compensation insurance, most insurance policies are optional. However, the fact that insurance is optional doesn’t mean it isn’t necessary.

As you shop for insurance, you’ll find that budgeting for the right types of policies is important. Here’s a look at what some of the most common policies might cost you.

What does insurance cost for a small business?

Small business insurance costs depend on many factors. Every policy serves a different risk-protection purpose and is priced accordingly. Here are some of the most common types and their average annual costs:

Policy typeAverage annual cost
General liability$500
Business owners policy$636
Workers’ compensation$1,332
Professional liability$1,164
Commercial auto$2,244
Commercial umbrella$1,548

Source: Insureon, Progressive Commercial

As you can see, insurance costs are all over the map, depending on the type of insurance purchased. Your business may spend more or less than what’s deemed average.

Did you know?Did you know? State regulations may require workers’ compensation and commercial auto policies, but other policies are often voluntary. It’s highly recommended that small business owners carry at least general liability policies to cover costly claims.

What affects your business insurance costs?

While insurance type affects the price, many other factors will cause your premiums to go up or down. Every business is unique, which means you likely won’t see two businesses with the same insurance premium unless they qualify for the base or minimum premium.

Consider these factors when getting quotes for small business insurance:

Industry

Insurance carriers will want to know what you do so they can classify your company correctly for the insurance you’re purchasing. Keep in mind that specific industries have higher risk factors for some policy types. For example, a doctor’s professional liability policy costs more than a tutor’s because a doctor’s mistake can cost someone their life, while a tutor’s error might lead to someone failing a test.

Location

Where your business operates will affect your insurance rates. Insurance is regulated at the state level, and insurance carriers price policies based on the claims history of your operational area. This means that the insurance company may break down costs by ZIP code, using city and county claims data to determine how much of a risk it is to run a business in that location.

Years in business

Insurance companies gain confidence in companies that have been operating for years. The longer you’ve been in business, the more likely you are to operate in a safe, responsible way. For new companies, management experience can also affect the rate, with lower rates for managers knowledgeable in the industry, thus reducing risk. 

Property owned

Your business assets will determine how much business property coverage you’ll need. These assets include inventory, supplies, materials and business equipment. Businesses don’t often think about how much it would cost to replace all their office furniture and equipment, but that’s precisely what would happen after a total loss. Business insurance needs to take your business property into account.

Number of employees

The more employees a business has, the more exposure it has to risk. This is especially true when it comes to workers’ compensation. The more employees on the payroll, the higher the probability that someone will get hurt on the job for some reason. 

Revenue

Revenue is another risk indicator. The idea is that the more you earn in sales, the more exposure you have to the public. This higher exposure increases your chances of a claim, and the higher your revenue, the more you become a target to claims in which third parties seek big paydays from deep-pocket companies.

Payroll size

Payroll is used to calculate your workers’ compensation premium. The workers’ compensation equation multiplies every $100 of payroll times the job classification and your company’s claims history. As the amount of payroll you process goes up, so does the premium.

Claims history

All insurance policies will consider the company’s claims history. The more claims you have, the higher your premium, because you’re considered higher risk than a company with no claims. Insurance companies see claims as a trend, and a company with claims isn’t trending in the right direction. Claims-free companies may receive a discount if they’ve gone without a claim for several years.

Coverage selected

If you select more coverage, you’ll pay more in premiums. However, it’s important to point out that double coverage for something like a general liability policy won’t cost twice as much, although it will be more expensive. Get quotes that adequately cover your financial risk to determine if the cost falls within your budget.

FYIFYI: Even businesses in the same industry will have unique factors affecting their insurance rates. You likely won’t see two businesses with the same insurance premium.

How to get the lowest rates for your business insurance

If you’re concerned about the cost of small business insurance, there are a few things that can help lower your rates.

Here are five tips to lower your business insurance rates:

  1. Check your industry classification. Ask the insurance company what your industry code is, and confirm that it makes sense. Incorrect coding can lead to higher premiums. You may need to provide job descriptions to the insurance company to confirm that your company operates on a lower risk scale with potentially lower rates.

  2. Ask for credits. Don’t hesitate to ask your insurance carrier what credits it offers. You may qualify for something that reduces your premium. For example, the insurance company may offer a credit if you have a security system in place that reduces risk of theft.

  3. Implement safety programs. This helps businesses buying workers’ compensation insurance. The insurer may offer rate reductions for businesses with a formal safety program that is reviewed regularly and implemented throughout the company.

  4. Don’t file small claims. In many cases, it’s best to take care of minor incidents on your own without filing a claim. Companies don’t always look at how much a claim costs to determine claims trends and increase premiums; they only look at whether a claim was filed.

  5. Raise your deductible. If you’re going to handle minor incidents on your own, then it makes sense to increase the deductible. This is the amount you spend when there’s a claim before the insurance kicks in. Remember that the higher your deductible, the lower your premium.

TipTip: Ask your insurance provider if it offers discounts for premiums paid in advance. Paying insurance costs upfront may save you money.

Business insurance FAQs

Here are the most common questions about small business insurance.

What type of insurance should a small business have?

Identifying what type of insurance a small business should have can be tricky. Some policies, such as workers’ compensation and commercial auto, are required by state laws. Other policies, such as professional liability, could be required for licensing, but aren’t always. For example, most states require doctors to carry malpractice insurance.

But what do you do about the policies you aren’t required to have, but maybe should? The answer comes down to risk. A business owners policy provides both liability coverage and business property coverage in one cost-effective policy. This would cover your business’s most significant risks, including fire, theft, and third-party injury or damage.

Does a small business have to have insurance?

In many cases, a small business isn’t required to have insurance. There are some exceptions. For example, a business with a lease may be required to purchase liability insurance, employers must get workers’ compensation, and some professionals may be required to get professional liability insurance.

But just because you aren’t required to have insurance doesn’t mean you shouldn’t be seriously considering a policy. A slip-and-fall accident could cost more than $20,000, while product liability claims could cost more than $35,000. The right insurance can be the difference between an incident that’s covered and one that you pay for out of pocket.

Why should you get business insurance for your small business?

Even minor claims can have a financial impact on a small business. Think about a minor burglary, which averages $8,000, or a customer injury claim, which might be more than $30,000. Without insurance, a company must pay for these incidents out of savings or take on debt. 

Most small businesses don’t have the resources to handle these types of claims and could go out of business as a result. Small business insurance covers the costs of claims so that business owners can focus on growing their business.

Image Credit:

Jirapong Manustrong / Getty Images

Kimberlee Leonard
Kimberlee Leonard
business.com Contributing Writer
Kimberlee has spent the past 20 years either directly involved in insurance and financial services or writing about it. She’s a former Series 7 and 65 license holder and former State Farm agency owner. As a small business insurance expert, her work can be found on Fit Small Business and Thimble.