Frequently Asked Questions About Small Business Insurance
Business Insurance Frequently Asked Questions. We often receive similar questions from small business owners: How do I choose the right business insurance? How can I save money on small business insurance?
This Business Insurance Frequently Asked Questions provides answers to these - and other - questions about commercial insurance for small businesses.
Please take a few minutes to browse our comprehensive FAQ section. Chances are you'll find the answer to your question about small business insurance here.
Find answers to questions on various commercial insurance topics below.
Read Business Insurance Frequently Asked Questions to get answers to commonly asked commercial insurance questions including: How do I choose the right business insurance? How can I save money on small business insurance? and others.
You can skip to the following types of business insurance using these links:
First, the basics: every business owner needs General Liability Insurance and Commercial Property Insurance. Some smaller companies choose to combine these into a single Business Owner's Policy (BOP) or Commercial Package Policy (CPP).
If you have employees, most states require you to carry Workers Compensation Insurance, too, or have created laws which incentivize carrying the insurance, or disincentivize not carrying the insurance, to the point where it becomes disadvantageous not to do so.Why General Liability?
Because almost every business gets sued eventually. This policy pays the settlement or damages when one of your products hurts a customer, when a customer gets hurt on your premises, or when one of your employees damages a customer's property.
The statistical likelihood that someone will eventually slip and fall on your property is high, no matter how well you keep it maintained. You want this insurance against the day it happens.Why Commercial Property Insurance?
Because sooner or later something or someone could damage your property and physical assets, and you need a way to replace them if you're going to stay in business! These threats could come from fire, weather events, or criminals who target your company.
Commercial Property Insurance protects more than the building. It also protects your furniture, fixtures, and equipment, or FFE, as well as your inventory. Just imagine what would happen if you lost all your computers overnight, or if all your inventory was wiped out with no clear way to replace it.
Many lenders absolutely require this insurance as a condition of loaning you money to purchase your business location.What Other Types of Insurance Might I Need?
This depends on several factors:
Other types of insurance you might need may include:
No business owner wants to spend more than he or she has to!
You might be tempted to control costs by taking lower policy limits, but that means you'll be responsible for anything your insurance doesn't cover. Costs can exceed policy limits more quickly than you think. It's important to set them appropriately for your industry and mode of business.
You might also be tempted to control posts by opting for a higher deductible, but that means you'll have to pay the deductible before any benefits kick in. That could prove untenable, or at least very expensive. There are better ways to do it.
You can control costs by taking the following steps:
34% of small businesses will face a lawsuit sooner or later. Without the proper insurance package, you're going to have to pay those costs out of pocket. Being sued can cost many times what business insurance will cost.
Not exactly. The problem is that a truly comprehensive policy capable of covering every single risk a business owner could possibly face would be so expensive few would be able to pay for it. Having smaller policies addressing specific types of scenarios mean insurance companies can limit their own risks, reducing costs.
A comprehensive policy wouldn't benefit you either. Imagine you're running a small cupcake shop. Now imagine you're being asked to pay for a policy that covers the types of risks roofers incur. That wouldn't make a lot of sense for you, since your cupcake shop isn't nearly as dangerous for employees or customers as your standard roofing job.
The closest we can offer you may be a Business Owner's Policy (BOP) or Commercial Package Policy (CPP), which includes both Commercial Liability Insurance and Commercial Property Insurance. This policy will still have some gaps. If you drive your own car for business purposes, send your employees to drive for business purposes, or maintain a fleet of vehicles, for example, you'll also need a Commercial Auto Policy.
You may even choose to purchase all or most of your policies from the same company, bundling them together for more costs savings and generating a single bill to pay each month. This customized approach is in reality pretty close to having a "comprehensive policy" in every way that counts. It just needs to be put together properly so you get all the coverage your business needs.
It's almost impossible to keep your business open for any length of time without some sort of accident, natural disaster, or lawsuit. And for some unlucky business owners a major event could happen sooner rather than later: even hours after opening for the first time.
One event could incur losses so large as to put you out of business if you don't have insurance. Every lost piece of inventory, every dollar from a lawsuit, every replaced window...it would all have to come out of your pocket.
And in truth, it can be impossible to do business at all if you don't have certain types of insurance.
Want to sign a commercial lease? Your landlord will make certain types of insurance a condition of your lease.
"No problem," you say. "I'll just buy a piece of property." Unless you have cash to do it yourself, you'll need a loan. The bank will make certain types of insurance a condition of your loan, too.
Have employees? If you don't have Workers Comp insurance, you could even be in violation of the law.
Need a business license? Your licensing body will probably demand certain types of insurance as well.
And believe it or not, failing to get small business insurance could even limit your growth. Larger clients may demand to know what kind of coverage you have before they'll do business with you. They want to know they'll be compensated if something goes wrong when they work with you...and they already know you probably don't have the amount of money they'd need for proper compensation sitting around in your bank account. When you have proper insurance, they'll know they'll get paid. They also want to know you can cover your share of the liability if a lawyer goes after both of you.
In short: if you don't have small business insurance, chances are you don't have a business, either.
Need a certificate of liability insurance to apply for a professional license, lease a space, to file documents with the city, state, or county, or to finally land that contract with a major client you've been pursuing for months? There are plenty of situations where a business owner must prove he or she is adequately covered to move forward with necessary transactions.
The certificate is a one page document declaring your coverages. It will include a description of your coverage limits, the date the policy started, the date the policy expires, and "additional insureds," which are non-employee third parties, like independent contractors, you might have opted to cover with your policy.
It would be nice to think working out of your home on your own computer would never produce a situation requiring business insurance. But remember, for the most part, your clients aren't covering you with their business insurance policies. And many will actually require you to have your own insurance before you can start working for their company.
Cash flow can be a big issue for freelancers, and purchasing insurance coverage may feel like an outlay you don't have room for right now. But take heart: buying business insurance can improve your professional image in the eyes of potential clients, which could mean increasing your income. And if you ever face a situation where you need the insurance, the policy really will pay for itself by ensuring the policy pays for the disaster: not you.
Still reluctant? Ask yourself the following questions:What kinds of assets do I use in my freelancing business?
If it's just a cheap laptop you might be able to bounce back pretty fast. Your freelancing equipment may even be covered by another equipment replacement policy.
But if you have a state-of-the art graphic design computer with $6000 of 3D rendering software on it you might want to consider a small business policy to ensure you can replace the equipment and software in the event of a fire or theft.Are there sources of risk or liability I'm not considering?
For example, could you be sued?
Is there any chance something you post on a blog post could be construed as libel? What if you accidentally create a problem for a client with something you wrote by accidentally violating someone else's copyright? What if you damage your client's equipment while working on-site?
What if you mess up and use an image without the proper licensing? Even the world of stock photo licensing can be confusing and intense enough to create problems.
Do you ever drive to client locations? If you do so and get into an accident, your auto insurance company may refuse to cover you, which could mean huge medical and property damage expenses you're not prepared to face.
Most freelancers are sole proprietors, which means any liability they incur is personal. This means you could lose your home or other assets if you're targeted by a big enough lawsuit. Don't take the chance.Do any of my target clients request or require insurance prior to starting work?
While you might never have had a client make this request in the past, it could happen in the future. Who would you like to work for? Do they ever require you to be insured?
If so, it might be smart to put your coverage in place right now.Is it really going to be as expensive as I think?
There's no reason not to at least investigate the possibility of covering your freelance business with a Business Owner's Policy (BOP) or Commercial Package Policy (CPP).
Covering independent contractors is complicated...Many insurance policies specifically exclude contractors...
Mostly because they're a third party, which means using them exposes your business to risk you wouldn't have been exposed to if you'd stuck to working with employees.
That's the trade-off: you don't have to cover their vacation time, benefits, or handle their taxes, but you also don't have total control over how they conduct their tasks. And if you do have total control, they may be classified as employees after all.
And because you don't have total control, you could find their work failing to meet safety standards, or client expectations. Even the best contractors sometimes damage a customer's property or cause an accident by mistake. And while in a perfect world the contractor would be the one who had to field that liability, the truth is the client's lawyers are going to try to frame you as one of the responsible parties as well. That could mean a lot of money out of your pocket if you haven't handled insurance correctly.But Workers Comp is different.
Most states have come to recognize many businesses use independent contractors in the hopes of working around certain requirements, like covering them under Workers Comp. They've handled that by mandating coverage for independent contractors too.
You may not have to cover them if they're already covering themselves. Check your local laws for more details, or ask your insurance agent.It's important to protect yourself when working with independent contractors.
First, always use a contract! You might be tempted to hire your independent contractors with a "handshake agreement" or with the exchange of a few emails. But a contract is the best way to make sure obligations are understood on both sides...and it gives you the ability to require proof of insurance before work begins.
Once the contractor has signed, get a copy of their Certificate of Insurance to make sure they have the coverage you want to see. You want them to have General Liability Insurance at a minimum. If your state's laws let you get around paying for Workers Compensation if they're handling their own, then get a Certificate of Workers Compensation coverage, too.
You can also handle the problem by reaching out to your own insurance agent. Most policies allow you to name "additional insureds," third-parties whom the policy covers. You can name specific contractors which will be covered by the policy. All other contractors get covered by the exclusion, but you remain protected from the actions of your contractor or contractors of choice.
There's no getting around the need to get great business insurance. But if you're feeling a little "insurance poor," even after taking steps to reduce costs, take heart. You can claim business insurance as a tax deduction. The IRS has specifically named it as one of the costs of doing business.
You may deduct premiums for most types of business insurance. You may not deduct:
Make sure you keep your billing statements. Provide them to your accountant or tax professional if you use one, or make sure to enter them correctly into Quickbooks or similar software.
Be careful about health insurance premiums if you're a sole proprietor. The Affordable Care Act means they're handled on a different part of the tax form, one where you're both claiming an expense and demonstrating you've met your insurance obligations. The rules governing health insurance are complex, so be sure to keep that separate.
Finally, keep in mind that tax laws change every year. Staying on top of them is a full-time job even for CPAs. Getting help from an accountant is good risk-management of a different sort: avoiding an IRS audit, or large tax bills you can't pay!
Most states on the US only require two types of commercial insurance policies - and only under specific circumstances:
Any other policies and coverages are optional for the business to purchase. There is not one commercial insurance policy that covers every risk small businesses face. There are different commercial insurance policies that cover various accidents, damages and lawsuits that could financially devastate a small business without the right protection.
Click on the links below to read state specific commercial insurance FAQs for the states we are currently licensed in, including information on minimum business insurance requirements, coverages, policies, limits and more:
Learn about the coverages available for specific industires with the Insurance FAQs below:
There are many questions that our readers ask. We answered some of the most common ones here. If you have additional questions, or would like to contribute to the Business Insurance Frequently Asked Questions, please contact us here:Contact Us.