Nobody likes buying insurance. It can be confusing and expensive, and you won't see any benefit unless you have a loss, accident, or claim.
But insurance can make or break your business. Without the right insurance, a theft or fire can cause devastating losses. A personal injury lawsuit can leave you struggling just to pay the legal fees and yet many small business owners don't take the time to evaluate their needs and get appropriate coverage.
If you have formed a corporation, limited liability company, or other business entity, you may not realize that you still need insurance.
Business entities protect business owners from being personally liable for business debts and judgments. But a business entity won't help your business survive a fire, flood, data theft, or personal injury lawsuit. Nor will it protect you if you personally are accused of being negligent.
To decide whether you need business insurance, ask yourself two questions:
- Does your business have property—including inventory, computers, and other equipment—that you could not easily afford to replace? If your only business property is a laptop, you may not need to insure it. But if you have tens of thousands of dollars of store inventory, insurance is a must.
- Is there a reasonable chance your business could be sued for a substantial amount of money? For example, you might be sued if someone has an accident on your premises, if you aren't as careful as you should be, if you suffer a data breach, or if an item you make or sell is defective and injures someone.
If you answered “yes" to either of these questions, business insurance will help you minimize your risks.
Types of business insurance
There are several kinds of business insurance, each designed to protect against a particular set of risks. The insurance your business needs will depend on its type and size.
- Liability insurance covers your obligations and legal defense for accidents, injuries, and negligence. Contrary to popular belief, home-based businesses need liability insurance because homeowners' policies do not protect against business liability risks.
- Property insurance reimburses you if your property is damaged or destroyed due to fire, storm, or theft. If your business is home-based, find out if your homeowners' policy will cover your business property.
- Vehicle insurance covers damage to—or caused by—vehicles used for business purposes.
- Workers' compensation insurance pays for lost wages and medical care for employees who are injured on the job. It is required in almost all states for employers who have more than a certain number of employees.
- Professional liability insurance, also known as errors and omissions insurance, protects people in service occupations from liability for negligence or malpractice in performing their professional duties.
- Product liability insurance protects manufacturers, wholesalers, distributors, and retailers. People who make and sell products may be found liable if a product is unsafe and injures someone.
- Business interruption insurance can help cover the cost of relocating, paying employees, and paying rent if you have to move or shut down because of a fire or other event.
- Identity theft insurance provides liability coverage to businesses that suffer a data breach. It also may cover the cost of notifying and providing services to customers who are victims of identity theft.
- Umbrella insurance extends your coverage to losses that exceed the limits of other policies.
To get business insurance, contact an insurance agent who specializes in insuring small businesses. You'll often save money by getting a business owner's policy that combines several types of business insurance into a single policy.
As with most things, it pays to shop around. However, beware of choosing the cheapest insurance or eliminating certain types of coverage just to save money. A bare-bones policy may not protect you if you actually have to make a claim. Worse, many policies have “coinsurance" clauses that may lead to only a partial payment if the insurance company determines you were underinsured.
Be sure you know what your insurance covers, and ask your agent for clarification as you need it. When your policies come up for renewal, check out the competition and make sure you are still getting the best deal for your business.
If you do have to make a claim, be sure to provide complete and accurate information, file your claim right away, and consider seeking legal advice if your claim is denied.
By evaluating your risks, choosing appropriate coverage, and staying on top of the claims process, you will help ensure that your business has the protection it needs when it needs it.
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