What to Know When Choosing Business Insurance

What to keep in mind when choosing business insurance

The decision-making process may seem daunting when you’re seeking business insurance, but it gets much easier when you keep all the following aspects in mind.

Coverage terms and conditions

As with any business decision that involves signing a contract, it’s paramount to read the fine print. “Not all commercial policies are created equal,” said Jeff Kroeger, executive vice president and head of commercial lines for the insurance broker World Insurance Associates. “Many contain problematic exclusions, restrictions, terms, and conditions that may result in an uncovered claim.”

Ciara Gravier, founder and CEO of The Bunker Insurance & Risk Management, echoed Kroeger’s concerns. “Business owners should carefully review what’s included in each quote and check for any limitations,” she said. “It’s wise to ask, ‘What am I not covered for?’ to understand the policy’s limits and whether additional coverage is necessary.”

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. You may be able to adjust your plan if you reduce the size of your team, for example, 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 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. 

Legal requirements

If you have employees, you need workers’ compensation insurance. Landlords often 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 different risks. Professional liability insurance is a good fit for experts who provide a service such as accounting or consulting. The insurance helps cover any mistakes they may 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. 

How to choose business insurance

Take these steps to increase the chances of winding up with an insurance plan that meets all your needs.

1. Research the market.

You will likely require a combination of policies to meet all 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 such as 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 your insurance provider options, as well as their professional ratings. Providers with good ratings are known to promptly pay and provide consistent coverage. “Rating agencies like AM Best, Moody’s, or Standard & Poor’s offer ratings that reflect an insurer’s financial strength and reliability,” Gravier said. “This is especially important for businesses looking for long-term relationships with their insurer.”

Research types of insurance to see what may be relevant to your business. You can input all your options into a spreadsheet to compare their deductibles and what they cover. The time spent doing that 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 such as 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 such as adding fire-suppression systems or creating a safer work environment to lower both your risk and your premiums. 

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

A bare-bones general liability plan may be the cheapest choice, but 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 and 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 you can benefit from in your risk assessment. 

“Having conversations with peers and business groups you are a part of will help point you in the right direction,” said Nicole Farley, vice president of carrier operations at the insurance agency software provider Bold Penguin. 

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. 

“Business owners should be prepared for the conversation with an agent about their insurance needs,” Farley said. “Have contracts available for review, be able to explain your business in detail, and know what your long-term goals are. An experienced agent will be able to take these details and put together a customized insurance plan for your business now and in the future.”

Gravier also suggested speaking with an agent as you look beyond general liability insurance. “A dedicated agent or point of contact can be invaluable in navigating the claims process and managing changes as the business grows,” she said.

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, and finding one proficient in yours will 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. 

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. Below 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. This type of insurance is especially common for attorneys and accountants to obtain, but any business that provides services may benefit from it. Consultants, information technology specialists, and medical practitioners all minimize risk with professional liability insurance.

Commercial property insurance

Commercial property insurance helps cover the costs of fires, explosions, natural disasters, vandalism, and other types of business property damage. 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 your company or employees inflict on another entity’s property or belongings. 

“General liability insurance is the single most critical policy for any business to have,” Gravier said. “General liability covers essential risks that nearly every business faces, such as customer injuries, property damage, and legal costs from third-party claims. For instance, if a customer slips and falls in a store, the business could be liable for their medical bills and even a lawsuit. Without general liability coverage, these expenses come out of the business owner’s pocket and can be financially devastating — especially for a new or small business.”

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 the 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

Proper cybersecurity software can be a substantial safeguard against cyberattacks (as can cybersecurity risk assessments), but 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 may 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.

“Commercial auto insurance protects against property, liability, and medical costs if you are involved in an automobile accident [at work],” Kroeger said. “It pays for your legal responsibility to others for bodily injury or property damage. It pays for damage or theft of your vehicle.”

Commercial umbrella insurance

What happens when your insurance coverage still leaves you with steep out-of-pocket costs? This daunting scenario becomes easier to face with a commercial umbrella insurance policy, which offers a great backup plan for any high-risk business.

“Commercial umbrella insurance provides protection for losses that exceed the policy limits found within an organization’s standard liability insurance portfolio,” Kroeger said. 

Employment practices liability

You’re well aware there’s no excuse for inappropriate and illegal treatment of employees, but you may want coverage to protect against claims stemming from that behavior. After all, just because you know better doesn’t mean everyone on your team does. Moreover, your business may be on the hook for inappropriate and illegal behavior even when coming from someone at your company other than you. That concern is where employment practices liability insurance comes into play.

“Employment practices liability insurance protects against risks due to employment-related lawsuits such as wrongful termination, discrimination, and sexual harassment,” Kroeger said.

Workers’ compensation insurance

Unlike the other types of insurance 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 those injuries, which saves you the burden of paying out of pocket or facing an employee lawsuit.

Insurance can be costly, but lawsuits are costlier

Working with a certified insurance agent and moving gradually through the process of choosing business insurance can keep your company’s finances intact amid moments of legal liability. You may think you’ll never be sued, but you never know. Build out your insurance portfolio smartly now, and you’ll have all the protection you need when the unexpected occurs.

Max Freedman and Scott Gerber contributed to his article.