Common types of business insurance

All business owners make plans in order to ensure operations run smoothly. An essential part of this process is identifying issues that may cause disruption and outlining how to prepare for them. Being insured against these risks plays a key role in smart business planning.

Without business insurance, small businesses could leave themselves exposed to claims that may jeopardize their survival. Fortunately, there are several types of business insurance, covering everything from damage to property, customer injuries on the business premises, and protection against unforeseen events.

This article looks at the different types of business insurance that are available to small business. It will also discuss the importance of insurance in order to help owners make more informed decisions about which types they should take out.

What are the different types of business insurance?

The types of business insurance that are available to protect small businesses from risks, claims, and liabilities include:

  • General liability insurance
  • Property insurance
  • Workers’ compensation insurance
  • Business interruption insurance
  • Commercial auto insurance
  • Professional liability insurance
  • Cyber insurance
  • Umbrella insurance

Gaining a clearer understanding of the different types of insurance and why a small business may consider taking out cover can help inform small-business decision making.

General liability insurance

General liability insurance is a type of business insurance that offers protection against third-party claims. These claims often include customer injury, property damage, or advertising injury. Small businesses that have general liability insurance can mitigate the financial risks associated with legal disputes.

Business owners may also wish to consider acquiring general liability insurance if they want peace of mind that part or all of their legal expenses would be covered in the event of a lawsuit. It can also help businesses build trust with customers and partners as it demonstrates a commitment to responsible business practices.

Property insurance

This type of business insurance protects a business's property, such as a shop, warehouse, or hairdressing salon, and may cover damage from unexpected events such as fire, theft, or natural causes.

Without property insurance, business owners would be liable for the costs of repairing any property damage. The level of cover will depend on the insurer, so it is always advisable to review the coverage and seek professional guidance to ensure sufficient cover for your business's needs.

Property insurance should be considered for small businesses with physical premises that want to protect their financial investment and safeguard against big repair bills in the event of property damage. In some cases, having property insurance that covers repair costs can mean that the business is back up and running quicker than if the owner had to fund the repair themselves.

Workers’ compensation insurance

According to Forbes, for businesses that employ people, workers’ compensation insurance is mandatory in most states, but the rules may differ1. It provides cover for employees that suffer work-related injuries or illnesses and may include coverage for medical expenses and lost wages.

As a legal compliance, small businesses risk potential penalties and legal action if they do not conform to the laws of the state in which they operate. Small businesses that have this type of business insurance also demonstrate a commitment to employee wellbeing. This can help create a positive work environment and boost employee loyalty.

Business interruption insurance

Unexpected events such as fires, floods, or natural disasters can happen at any time. Such events may lead to business disruption. In this event, business interruption insurance can help offer financial protection by compensating for lost income or expenses.

Business interruption service may help small businesses recover more swiftly from these types of events and can help the business weather unexpected downtime. The types of cover available may vary between providers, so it is important that business owners conduct research to find the right level of cover for their needs.

Commercial auto insurance

Small businesses that use vehicles for business purposes may wish to take out commercial auto insurance. Indeed, it is mandatory in many states for businesses to carry auto insurance if they use vehicles for work-related purposes. Auto insurance can protect against the costs associated with theft, accidents, or vehicle damage.

It may also help safeguard small businesses against costly legal claims that can arise in the event of accidents involving business vehicles.

Professional liability insurance

Professional liability insurance is also known as “errors and omissions” or “malpractice” insurance. It is an insurance that helps safeguard small businesses that provide professional services such as advice, expertise or services. This includes lawyers, accountants and medical professionals. It may offer protection against claims of negligence, errors, or omissions in their provision of professional service.

It can help provide financial coverage to defend legal claims and for legal defense and settlements. It may also help businesses in the professional services sphere demonstrate their credibility and commitment to providing trusted professional services.

Cyber insurance

Cyberattacks can affect businesses of all shapes and sizes and are a growing threat to businesses. Small enterprises may wish to consider cyber insurance to help protect the business from the financial impact of cyber threats. This insurance can help cover expenses and liabilities that relate to data breaches and cyber incidents.

Cyber insurance cover can help small businesses demonstrate that they prioritize data security and, as a result, can build customer trust. It can also help to cover the legal costs of an attack, which may help a small business recover more efficiently should they be compromised.

Umbrella insurance

This type of business insurance provides additional liability cover. It may provide an extra layer of protection against unforeseen or high-cost incidents. The level of coverage will likely vary between insurers, so it is crucial that small business owners do their research and seek professional advice to ensure they make informed decisions.

Small businesses may consider umbrella insurance to give them peace of mind that they have covered any gaps in the other insurances and therefore have comprehensive risk coverage.

The importance of business insurance

Small business insurance can help to provide peace of mind in the following areas:

Financial and fraud protection

Business insurance can help provide coverage against fraudulent activities such as employee theft, cyber fraud, and dishonest business practices. It can also help cover the legal expenses of fighting legal claims against the business.

Risk management

Ensuring a business has sufficient insurance cover is a fundamental part of risk management. Without insurance in place, businesses could be leaving themselves open to risks such as property damage or liability.

General business operations

Business insurance can help small business owners protect against the risks that could cause unnecessary downtime, such as damage to property due to a fire or flood. It may help provide continuity and stability to the business as, should the worst happen, the business would have the right cover in place for a swift recovery.

The fallout of lack of business insurance

Without the correct types of cover, small businesses could be leaving themselves vulnerable to large financial costs that threaten their ability to operate. As some of the business insurance types form part of a legal requirement, they also run the risk of non-compliance penalties.

They also potentially face legal consequences, operational disruption, reputation damage, and vulnerability to cyberattacks.

Despite the clear disadvantages of not having adequate business insurance, many small businesses still do not have sufficient cover. According to a survey from NEXT2, the current landscape for small business insurance shows:

  • 29% of small businesses do not have any business insurance
  • 90% state lack of confidence that their business is adequately covered
  • 53% said their greatest barrier to getting business insurance was knowing what they need

According to data from the Insurance Journal, Simply Business3 have reported that the most common and costly liability claims are:

  • Reputational claims ($50,000)
  • Product liability ($35,000
  • Customer slips and falls ($20,000)

For many small businesses the risk of not having business insurance may often outweigh the cost of getting the right level of cover. It is important that small business owners consider assessing their risks and seek professional insurance advice to review their needs and ensure they are sufficiently covered.

Learn more about small business insurance.

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