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What to Know When Choosing Business Insurance

Updated Feb 14, 2024

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Sean Peek
Senior Analyst & Expert on Business Ownership at business.com
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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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What to keep in mind when choosing business insurance

Scalability

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. 

Cost per employee

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. 

Coverage

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. 

Legal requirements

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.

Industry risks

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. 

Deductibles

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. 

Did You Know?Did you know

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.

How to choose business insurance

1. Research the market.

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.

2. Get quotes from multiple insurance providers.

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. 

3. Look beyond general liability insurance to cover all your risks.

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. 

4. Know your specific industry’s business insurance obligations.

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. 

5. Reassess every year.

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. 

FYIDid you know

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.

Types of business insurance to consider

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:

  • Health insurance. Although health insurance doesn’t directly cover your business, it’s among the most important types of business insurance, because it helps your employees get the medical care they need to stay healthy. In the end, health insurance helps protect your bottom line, since healthier employees are more productive. Additionally, most full-time employees expect health insurance as part of their benefits package.
  • Professional liability insurance. Professional liability insurance protects against lawsuits that your clients or customers file to allege that your company has not adequately carried out its promised duties.
  • Commercial property insurance. Commercial property insurance helps cover the costs of fires, explosions, natural disasters, vandalism and other types of business property damage. Note that some policies limit coverage to the types of property damage specified in your contract, while others provide more flexibility.
  • General liability insurance. If you face lawsuits for personal injuries (including those sustained in the workplace) or advertising injuries, general liability insurance can help cover your costs. It can also help with the costs of any damage that your company or employees inflict on another entity’s property or belongings. 
  • Business owner’s insurance. A business owner’s policy combines general liability insurance and property insurance into one policy, typically to save money on premiums. When these policies are bundled together, the premium prices are significantly less than the total of your theoretical premiums for separate general liability and commercial property insurance plans.
  • Cyber insurance. While proper cybersecurity software can be a substantial safeguard against cyberattacks, you may want to take out a cyber insurance or data breach policy for extra security. Since even the best cybersecurity programs don’t guarantee protection from especially complex cyberattacks, cyber insurance could help to protect your bottom line.
  • Commercial auto insurance. If your company’s operations include driving company-owned vehicles, you might want to take out a commercial auto insurance policy. Like personal auto insurance (which won’t cover your business vehicles), commercial auto policies can help cover property damage and injury claims after accidents that anyone driving your company vehicles causes.
  • Workers’ compensation insurance. Unlike the other types of insurance types listed here, workers’ compensation insurance is usually not optional. That’s because it gives your employees a legal mechanism to receive wages lost to injuries or illnesses stemming from their work for you. Workers’ compensation plans can also cover employee medical bills related to these injuries, which saves you the burden of paying out of pocket or facing an employee lawsuit.

Max Freedman and Scott Gerber contributed to his article. 

Sean Peek
Senior Analyst & Expert on Business Ownership at business.com
Sean Peek has written more than 100 B2B-focused articles on various subjects including business technology, marketing and business finance. In addition to researching trends, reviewing products and writing articles that help small business owners, Sean runs a content marketing agency that creates high-quality editorial content for both B2B and B2C businesses.
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