Small Business

5 Types of Insurance Your Business (Probably) Needs

Your business began as a great idea, and has now proceeded to funding. Now, among other priorities, you need to insure the enterprise.

You may be surprised by the number and range of policies you’ll require, or should seriously consider, at least. Here’s a rundown of the types, and what they cover, in rough order of the likelihood you’ll need them. (And this list even omits some types that specifically relate to being an employer.)

A leading reason to get many, even all, of these policies could be the lending requirements of a bank, credit union, or online lender. We also note other reasons, including the requirements of regulators or would-be investors and business partners.

Given how numerous the types are, there’s appeal to a Business Owner’s Policy (BOP), which combines multiple policies into one package; bundles often include commercial property, general liability and business interruption coverage, for example. (One caveat: Certain types of business, such as manufacturing and construction may be excluded from getting a BOP.) We also note some typical smaller bundles throughout.

A final tip. The last U.S. Census of businesses reveals that more than half--52% to be precise--of small businesses are based at home. Yet the Small Business Administration (SBA) warns that a homeowner’s insurance policy generally offers protection against few, if any, of the potential claims from a home-based business.

General Liability Insurance

This covers your business’s legal expenses, plus any required settlements, when non-employees sue your company for any reason except financial mismanagement. Among other perils, it protects you against any physical harm an employee might cause to a client, or their business and property, along with any harm customers may suffer from your business, such as from a slip or fall on your premises.

Why Necessary? It’s often a requirement of doing business. For instance, cities and counties in New York require you provide proof of such liability insurance in order to obtain a General Contractor License. And just as mortgage lenders and landlords can require liability insurance on your home or apartment, landlords may stipulate it for commercial leases or mortgages. A large client might also want to see proof that you have liability insurance, for reassurance that a lawsuit will not put you out of business.

Product Liability Insurance

Sometimes bundled with General Liability, this coverage policies covers you should you make or sell a product that injures a customer or damages his or her property.

Why Necessary? A must for manufacturers, distributors, and retailers. For instance, restaurant owners will want to have this type of coverage in case they are sued over foodborne illnesses.

Errors and Omissions Insurance

Alternatively known as Professional Liability Insurance, this protects you should you be sued for financial damages arising from negligence, errors, dishonesty or breach of contract. It’s the counterpart to General Liability Insurance, which does not cover financial mismanagement or fraud.

Media Liability is a specialized form of Errors and Omissions Insurance. This is a policy that should be considered for companies working within publishing, broadcast, advertising and other media professions. It helps protects businesses from third party claims often regarding plagiarism, copyright infringement, defamation and similar libel threats. As more companies work towards establishing a social media presence and blogs, it’s important to understand the risks and protection options associated with those efforts.

Why Necessary? Practically any business might be sued for failure to carry out their professional obligations. Further, many state licensing boards require professionals such as doctors, nurses, and architects to obtain professional liability insurance. And accountants, IT professionals, or business consultants might find that clients won’t do business with you if you don’t have errors and omissions insurance.

Property Insurance

If you own commercial real estate, property insurance covers it from damages caused by events such as fire and natural disasters. These policies generally also cover the contents of the business, including equipment and inventory.

Why Necessary? As with your home, a bank that’s lending you money to buy a commercial property will require you to have adequate property insurance. And even if you finance the purchase in some other fashion, failing to insure your offices, physical plant and other assets against fire and more would be unwise.

Business Interruption Insurance

In case a fire or other disaster prevents you from operating your business for an extended period of time.

Why Necessary? Helpful, especially if your business would not be readily able to recoup lost business, or could incur heavy costs, were it forced to close for even a few days.

Key Person Insurance

What would happen to your business’s value, or its ability to deliver on promised work, if you or other vital, hard-to-replace employees were to die? If the answer points toward catastrophe, you probably need to purchase “key person” insurance. The business essentially purchases a life-insurance policy for each of those essential staffers, payable to the business itself in the event of death.

Why Necessary? The most valuable asset to many businesses are its staff members, and a number of possible partners, including potential investors, may be eager to see their value insured. Candidates for the coverage might include the main developers of the company’s intellectual property or its founders. The more concentrated is their knowledge and expertise, and the harder it would be to replace, the more important this coverage will be.

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.