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Updated Apr 10, 2024

How Much Does Insurance Cost for a Small Business?

Insurance is vital for small businesses to protect against risks, and costs vary based on factors such as industry and coverage needs.

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Kimberlee Leonard, Senior Analyst & Expert on Business Operations
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Insurance is essential for small businesses, as it offers financial protection against various risks and losses that can occur during operations, including third-party injury claims, property damage, employee injuries and theft. A lack of insurance in a time of crisis can be devastating.

Your coverage and its ensuing costs will depend on your business and its specific risk factors. While most businesses with employees need crucial business insurance, like workers’ compensation, other policies can be just as essential for comprehensive protection and peace of mind. 

As you shop for insurance, you’ll need to budget for the policies you need. Here’s a look at the costs you can expect for suitable business coverage. 

What does insurance cost for a small business?

Business insurance costs depend on many factors, including industry, number of employees and total revenue. A business’s claims history, chosen coverage, policy limits and deductibles can also affect costs. 

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

Policy type

Average annual cost

General liability

$504

Business owner’s policy

$684

Workers’ compensation

$540

Professional liability

$732

Commercial auto

$1,764

Commercial umbrella

$900

Sources: Insureon, Progressive Commercial

As this list demonstrates, insurance costs vary widely by policy type. Your business may spend more or less than these averages. High-risk industries or locations that are prone to natural disasters generally face higher premiums, and the level of necessary coverage further determines overall costs.

FYIDid you know
State regulations may require workers' compensation and commercial auto insurance policies, but other policies are often optional. It's highly recommended that small business owners carry at least general liability insurance 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 you get 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 business insurance 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 a business’s operational area. The insurance company may break down costs by ZIP code, using city and county claims data to determine how risky 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 safely and responsibly. For new companies, management experience can also affect the costs; rates are lower for managers who are knowledgeable in the industry.

Owned property

Your business assets will determine how much commercial property insurance 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 of their office furniture and equipment, but that’s precisely what would be necessary after a total loss. Business insurance must consider your business property.

Number of employees

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

Revenue

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

Payroll amount

Payroll is used to calculate your workers’ compensation premium. The workers’ compensation equation multiplies every $100 of payroll by the job classification and your company’s claims history. As the amount of your small business payroll increases, so does the premium.

Claims history

All insurance policies will consider a 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 business with claims isn’t trending in the right direction. Companies may receive a discount if they’ve gone several years without a claim.

Selected coverage 

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.

FYIDid you know
Even businesses in the same industry will have unique factors that affect their insurance rates. Ask your business insurance broker about your specific financial risks.

How to get the lowest rates for your business insurance

Here are some tips for lowering your business insurance rates:

  • Check your industry classification. Ask the insurance company for your industry code, and confirm that it makes sense. Incorrect coding can lead to higher premiums. You may need to provide job descriptions so the insurance company can confirm that your business operates on a lower-risk scale with potentially lower rates.
  • Ask for credits. Ask your insurance carrier what credits it offers. You may qualify for credits that reduce your premium. For example, the insurance company may offer a credit if you have a security system, which reduces the risk of theft.
  • Implement safety programs. Safety programs help businesses that are 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.
  • 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 look only at whether an insurance claim was filed.
  • Raise your deductible. If you’re going to handle minor incidents on your own, it makes sense to increase your deductible, which is the amount you must pay before the insurance kicks in. Remember that the higher your deductible, the lower your premium.
TipBottom line
To save money on business insurance, ask your insurance provider if it offers discounts for premiums paid in advance.

Business insurance FAQs

Here are the answers to some of the most common questions about small business insurance.
It can be tricky to identify suitable insurance for your business. Some policies, such as workers' compensation and commercial auto, are required by state law. Other policies, such as professional liability insurance, sometimes may be required for licensing. For example, most states require doctors to carry malpractice insurance. However, some policies aren't required but are wise to have. It's important to consider your risk. For example, a business owner's policy (BOP) provides liability and business property coverage in one cost-effective policy. This policy would cover your business's most significant risks, including fire, theft and third-party injury or damage.
In many cases, a small business isn't required to have insurance, but there are some exceptions. For example, employers must get workers' compensation insurance, and a business with a lease may be required to purchase liability insurance. Some professionals also may be required to get professional liability insurance. Even if business insurance isn't mandatory, however, you should still seriously consider 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 a covered incident and one you pay for out of pocket.
Even minor claims can have a big financial impact on a small business. For example, a minor burglary could cost an average of $8,000, while a customer injury claim could exceed $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 financial resources to handle these claims and could go out of business as a result. Small business insurance covers claims costs so a business owner can focus on growing their company.
A BOP helps cover ongoing expenses and lost revenue when a business can't operate normally, thus ensuring its financial survival during such disruptions. To be eligible, a business generally must have annual revenues of $5 million or less. Those who earn more than $5 million in revenue may not qualify for this type of insurance under a standard BOP and would need to purchase individual policies.
Many small businesses are eligible for a BOP. However, low-risk businesses are more likely to be approved. To be eligible, businesses must employ no more than 100 people. Additionally, the business must have a brick-and-mortar location, like a commercial space or office, and have business interruption insurance (also known as business income insurance) for a period not exceeding one year.

Sean Peek contributed to this article.

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Kimberlee Leonard, Senior Analyst & Expert on Business Operations
Kimberlee Leonard is an insurance expert who guides business owners through the complicated world of business insurance. A former State Farm agency owner herself, Leonard started her decades-long career as a financial consultant advising on investment strategies before switching her focus to insurance and risk mitigation for businesses. Leonard has developed insurance primers on everything from small business insurance costs to specific policies, such as excess liability insurance. She has also reviewed business software tools, analyzed employee retirement plan providers and continues to share insights on financial topics as they relate to business. Leonard's work has been published in Forbes, U.S. News and World Report, Fortune, Newsweek and other respected outlets.
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