Insurance for your business is an essential safety net. When you’re sued by a client or have to shut down certain operations, insurance can help you cover those unexpected costs. However, picking the right coverage and policies can be complicated — even understanding all the factors can be overwhelming. As a small business owner, you may not know where to start. This article can help you learn about the different aspects of an insurance policy, how their costs are determined and how to pick the best one for your company.
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All insurance covers certain unexpected events, but scalable insurance plans are especially flexible. Insurance with scalability can change as your company and its needs evolve. For example, you may be able to adjust your plan if you reduce the size of your team or if a global pandemic limits your productivity. Verify any scalability before locking into a coverage decision.
When considering the cost of insurance, pay special attention to the cost per employee. Calculate the income for each employee as well as the cost of their wages. The cost of your business insurance (or health insurance coverage for your employees) should not greatly exceed the average income that you receive from each one — if the cost of coverage per employee is much higher than what you earn from each employee, you’ll quickly end up in the red.
Although the cost of insurance can be a concern, in the long run, insurance can protect you from major payouts in lawsuits. As you try to balance coverage and cost, make sure you aren’t skimping on the quality of the coverage to save money. Stick to credible providers and choose the best coverage within your budget.
If you have employees, you need workers’ compensation insurance. Often, landlords require tenants to acquire a general liability policy to protect against bodily injury or property damage lawsuits. Clients may ask you to have a specific type of insurance before working with you. Research and an insurance agent can help you figure out what you need for your state and industry.
Different industries come with various risks. Professional liability insurance is a good fit for experts who provide a service like accounting or consulting. The insurance helps cover any mistakes they might make. Product liability is better for businesses selling goods, including restaurants and retail stores. It can cover flawed goods or food that causes an illness. Consider your field and the risks you face when you shop for insurance.
Just like most health insurance policies, business insurance plans usually have a deductible you must pay before the insurance company begins to cover your bills. A higher deductible comes with lower premiums. Consider both the costs of the premium and deductible when you choose your coverage plan. Don’t go with a high deductible that you won’t be able to pay in order to have lower premiums.
Some businesses are considered inherently riskier than others. For example, onstruction companies have more risks than marketing companies, since there are so many opportunities for mistakes and accidents while building. Faulty construction could also lead to lawsuits that insurance companies become responsible for.
You will likely need a combination of policies to meet all of your business’s needs. Small businesses may have a business owner’s policy (some general liability and property insurance), business interruption insurance (in case of hazards like floods and fires), errors and omissions insurance (for professional liabilities), product liability insurance (for stores and restaurants selling goods), cyber insurance (to protect data and technology) and auto insurance (if your business uses any vehicles).
Consider all of your insurance provider options as well as their professional ratings. Providers with good ratings are known to promptly pay and provide consistent coverage. Research types of insurance to see what may be relevant to your business. You can input all of your options into a spreadsheet to compare their deductibles and what they cover. The time spent doing this detailed work will pay off in the future.
As you would with any business decision, collect estimates from various providers before you make your final choice. Factors like your company’s size, its location and which assets you want to cover can all influence your rate, so provide the same information to all possible providers. Once you receive your quotes, rule out outlier prices (those that are particularly low or overly high) and get a handle on the true price range.
Gathering quotes is also a crucial step for lining up your budget with your insurance costs — you may find that you need to make a few changes in order to comfortably accommodate the price of the coverage you need. If your rates seem a bit high, you can make changes like adding fire suppression systems or creating a safer work environment to lower your risk and your premiums with it.
While a bare-bones general liability plan may be the cheapest choice, you can find a better option to fit your company’s needs — often without a major increase in cost. Compile a list of your risks, and factor in issues you’ve faced before as well as any you think you may face in the future. Does your company use heavy machinery? Do you use vehicles to deliver goods or services to your customers? Speak to any trusted mentors or contacts you have in the industry; they may have different experiences or insights that you can benefit from in your risk assessment.
To be on the safe side, you should overestimate your insurance needs. You can then cross-reference your list of risks with any coverage options to find the best fit. If you’re having trouble finding the perfect option, set up a meeting with an experienced insurance agent.
The federal government requires workers’ compensation, unemployment and disability insurance for every business with employees. Beyond that, you’ll need to carefully review the legal requirements for a business in your industry and state. You should be able to reference your state’s website for the Division of Insurance or related arm, and an outline of insurance obligations.
If you seek aid from an insurance agent, speak with someone in your state when possible. Agents may also specialize in a particular industry — finding one proficient in yours would provide you with the most specific advice tailored to your situation. Once you select your required insurance plans, you will have a better sense of the gaps remaining in your coverage and how best to fill them with other plans.
As your business changes over time, your insurance needs will also change. Each year, review your insurance costs and coverage to make sure they align with what you currently need or anticipate needing in the near future. If you expand your facilities or purchase new equipment, check in with your provider to see how that affects your coverage.
Additionally, plan for when you are no longer able to run the business — even in an emergency situation. A yearly review is also an opportunity to cut any coverage you no longer need, which will allow you to relocate those funds into more appropriate coverage.
Operating without the requisite insurance coverage will do more than force you to pay out of pocket for any incidentals — you can also face fines, penalties and even be shut down for not complying with state regulations.
A key step in choosing business insurance is figuring out which types your company needs and doesn’t need. These are the most common types of business insurance:
Max Freedman and Scott Gerber contributed to his article.