What is business insurance?

A stronger-than-expected hurricane hits your warehouse.  A worker injury at your factory. A customer slips and falls in your store. A stove catches on fire in your restaurant’s kitchen.  

Business insurance protects companies when things go wrong. Accidents and unforeseen incidents that damage your bottom line are bound to happen. But business insurance helps to limit the amount of money you’ll need to shell out as a result.

Business insurance may feel more like a “nice to have,” but depending on the size and scope of your business, a few basic types of coverage are pretty essential. And when an accident (inevitably) happens, you’ll be happy you have it.

What is business insurance?

There are many types of business insurance. Some policies protect your inventory and office furniture, while others limit your company’s liability for a defective product or lawsuit. You can find some kind of insurance to cover pretty much every business risk.

Business insurance is a contract between a business and an insurance company. The business agrees to pay the insurance company a monthly or annual fee, while the insurance company agrees to share in the risks associated with operating the business.

If a business experiences a loss that its insurance policy covers, the insurance company is obligated to reimburse the business for the loss up to a maximum amount. The business, however, will likely need to pay a deductible to the insurance company before receiving reimbursement funds.

Types of business insurance

Here are some common types of business insurance: 

General liability insurance: A basic type of business insurance that most companies should invest in. It covers claims involving bodily injury, property damage, medical expenses, libel, and slander resulting from a company’s products, services, or business operations.

Property insurance: Covers the damage to your property — such as equipment, inventory, and furniture — if you’re impacted by a fire, storm, or theft. Keep in mind that property insurance often does not cover damage from certain natural disasters, like hurricanes, floods, and earthquakes. 

You usually need to purchase a separate policy for specific natural disasters, which can be expensive if you’re in an area at high risk for these types of events. 

However, if replacing your business property would be expensive and burdensome, you should invest in property insurance.

Workers’ compensation insurance: Required if you have employees. This insurance provides cash and/or medical care to workers who become injured or sick while on the job.

Professional liability insurance: Protects you and your business if a client accuses you of malpractice. This one’s important for service companies like consulting firms, as well as law, accounting, and real estate firms.

Product liability insurance: Covers the cost of damages, such as bodily injury or harm, caused by your products. These damages could result from product design defects as well as faulty instructions or warning labels. 

If you have general liability insurance, some product liability coverage is likely included in your plan. But you’ll probably want to opt for extra protection if you manufacture, distribute, or sell products.

Commercial vehicle insurance: Essential if you have company vehicles. Covers vehicles and drivers for bodily injury and property damage, in the event of an accident.  

Business interruption insurance: Reimburses a business for the income it loses due to incidents and events that prevent customers from visiting the business, like vandalism and civil unrest. 

This type of insurance is particularly relevant to brick-and-mortar businesses. Note that losses from events like covid might not be covered, unless your policy specifically lists coverage for pandemics. 

Home-based business insurance: A specific policy to cover your business equipment, inventory, and assets if you run a business from home. Homeowners’ policies often don’t cover all business assets, so this coverage is important for people who run businesses out of their houses.

Business owner’s policy: Combines the types of policies small businesses usually need under one umbrella policy (say workers’ comp and vehicle insurance). Buying a bundled business owner’s policy can help simplify the insurance purchasing processing and save you money. 

Do I need business insurance? 

The answer is probably yes. A couple good reasons include:

• Lawsuits. Customers can sue you for damages or injuries related to a defective product, and an employee can sue you if they get hurt on the job. Lawsuits can bankrupt businesses, and business insurance provides some safety against this risk.

• Protection during the unexpected. Having business interruption coverage, for example, can allow you to continue paying your employees and your rent if an incident forces you to temporarily close your business.

Your business insurance needs are determined by what your business does and the risks it’s exposed to. 

The federal government requires every business with employees to carry workers’ comp insurance. Some states have specific business insurance requirements, too.

These steps, recommended by the Small Business Administration, can help determine what type of coverage your company needs.

Assess your risks: Think about what types of incidents could put your company on the hook for lots of cash. For example, if you run a financial consultancy, you probably need professional liability insurance. If you make electric bikes, you should definitely have product liability insurance.

Work with reputable, licensed commercial insurance agents: Agents can recommend what type of coverage you should consider buying, given your line of business. They can also connect you with multiple policy options to consider and compare. Note that agents get commissions from insurance companies, so beware of the agent who’s just trying to make the sale.

Shop around: In order to get the best coverage and price, get several quotes from different insurance companies and agents, and compare them.

Small business insurance cost

Small business insurance costs can vary quite a bit, depending on the type of coverage the company needs.

Business owner’s insurance is the most common type of policy for small businesses, because it combines the main coverages most small businesses need — like general liability and property insurance — into a discounted bundle policy. 

The median cost of a business owner’s insurance policy is $53/month and $636/year, according to Insureon. General liability insurance, another common policy among small businesses, has a median cost of $42/month or $500/year. 

Here’s a list of the median and average monthly costs of typical small business insurance policies:

Source: Insureon

Finding business insurance policies

There are many sites that aggregate business insurance policy options, allowing you to compare quotes for different types of coverage across various insurance providers. A few of these sites include Insureon, NetQuote, and CoverHound.

When searching on these sites, you’ll be asked a bit about your company — like what services you provide and where and how your business operates. You’ll also be asked about the types of coverage you’re looking to buy. 

You’ll still often need to connect with an agent over the phone to discuss coverage options while using these sites.

If your business insurance needs are quite specific, it might make more sense to work directly with an agent who has experience advising a company like yours.

When assessing your insurance needs, try to imagine what could go wrong — situations where you wouldn’t be able to cover the cost of an accident or incident that happens on your company’s watch — and insure against those risks.

It’s important to reassess your risks annually, too. Your business insurance needs may change as your company grows and evolves.

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