If you’re just running a part-time, home-based small business (for example, a home-based sewing business), you may not need to purchase business insurance. However, if your small business expands, or if you’re running a home-based business that provides professional advice, you may need to purchase business insurance that provides coverage from potentially expensive claims that may arise. Even if your business never puts a foot wrong, you may at some point be hit with a frivolous lawsuit that can be expensive to defend.
Most insurance policies provide coverage of not just damage awards, but legal costs that arise from lawsuits. Remember, even if you obtain a favorable judgment, you may be stuck with large legal bills from the costs of your defense, making insurance a good investment.
Most small businesses, particularly stores and service-based businesses, purchase a commercial general liability policy. These policies provide coverage for bodily injury, property damage, personal injury or advertising injury that may occur at your business or at a client’s site. The policy also obliges the insurer to defend the client in court, indemnify the client from damage awards up to policy limits, to settle reasonable claims. Failure to meet these three requirements can lead to a bad faith judgment against the insurer.
Commercial general liability policies allow businesses to continue to operate while facing legal action, and prevents lawsuits from financially breaking businesses.
A good example of a covered claim under a CGL policy would be a claim arising from a client being injured at a store. Unless the circumstances of the injury are specifically excluded from coverage under the policy, the insurer will be obliged to defend the insured against the claim in court, settle the claim if there’s a clear claim or indemnify the insured up to policy limits if the case goes to trial and a jury or judge finds in favor of the plaintiff.
CGL policies typically cost about $500 per year, but prices can vary depending on where your business is located, how much coverage you buy, the nature of your business and the track record of its management. For example, management that has faced frequent lawsuits in the past may pay a higher rate than management with a relatively clean record.
Commercial general liability policies provide coverage for many of the pitfalls a small business can run into but not all. There are a variety of other insurance policies that can help small businesses reduce risk.
- Theft insurance is a good policy for stores and businesses with significant physical inventory or assets to have. Theft insurance can indemnify insureds from losses that occur from outside theft or employee theft.
- Business auto insurance provides coverage to business owners from property damage or injury that may occur as a result of the use of vehicles owned by the business. Pretty much any vehicles, including cars, trucks, tractors or forklifts owned by your business needs to be covered. You’ll likely want to purchase collision and comprehensive coverage and also buy uninsured driver coverage as more than 10 percent of all drivers are uninsured, and an accident with an uninsured driver may leave you with a large repair bill if your coverage doesn’t pay for the accident.
- Property coverage will provide your business with coverage for damages that may occur to your business’ real property and the contents inside the business. The good thing about this coverage is that it will pay for replacement costs, not the depreciated value of your property.
An example of property coverage in action would be providing coverage for damage to your business property after a fire. Your property coverage, unless an exclusion exists, would cover losses that resulted from the fire.
- Employers liability coverage provides protection to the business owner from employee-brought suits, such as suits for discrimination, wrongful termination, sexual harassment, etc. Businesses that have a significant number of employees should purchase this coverage, as these suits can be costly and are typically not covered under CGL policies.
- Life insurance policies for key personnel provide benefits to the business should the owner or a key employee die. This provides funds for keeping the business open while inheritance or other issues caused by the death of a key player die. Life insurance policies are advisable for sole proprietor businesses, or partnerships where one partner would need to buy out the other partner’s stake in the business in the event of a death.
- Business interruption coverage provides coverage of interruption of business due to a covered event such as a natural disaster or terrorist attack. This provides business owners with income while their businesses are closed because of a covered occurrence. An example would be the aftermath of a major hurricane which left a business destroyed or inoperable. A business interruption policy would provide monetary compensation to the business owner to make up for lost income.
- Umbrella coverage provides additional coverage for claims that exceed the coverage amounts of underlying insurance policies. Consider it a firewall in case a suit or series of suits or other damages exceed the coverage amounts of your CGL or other policies.
Seek Professional Help
If you’re a first-time business owner, it may be worthwhile to seek the advice of an insurance professional when you shop for insurance. An insurance broker can help evaluate the insurance needs of your business and suggest options. Unlike agents, brokers are not bound to specific insurers, and can help you shop around to find the best policies at the best prices.
Things To Remember
Many business owners purchase insurance policies and never review them again. This is a mistake. Policies have set periods and exclusions that could leave you exposed to risk. Periodically review your insurance policies to make sure they’re still in force and to ensure that they provide coverage for all reasonable risks that your business may face.
It’s also a good idea to be aware of your policy limits. Most policies provide coverage only to a certain dollar amount, so if upon review your policy limits seem likely to be inadequate to cover possible damages, you may want to increase your coverage. Also be sure to understand whether the limits to coverage are lifetime limits or are per year limits. It’s recommended that most businesses have at least a $1 million limit CGL policy.