Business insurance can be a confusing and intimidating subject for many people. There are many variables that come into play with business insurance that must be carefully weighed and considered before a decision can be made, but the importance of business insurance means that the risk of going without it is simply too great.
How does business insurance work?
As with most types of insurance, business insurance is used to protect your business and your business assets from catastrophic or unforeseen events. As with any type of insurance, you need to balance your coverage against what is most likely to happen to your business and not to find yourself unprotected if something were to happen, which could lead to financial collapse.
Essentially, business insurance is a contract between an insurance company and your business that agrees to take on part of the business risk in exchange for payments. The insurance company will agree to cover the business’ financial losses sustained in the event of an incident, so long as it’s covered by the agreed-upon policy. Like all forms of insurance, you will have a deductible that must be paid before the insurance company will cover the losses (up to the limit of the policy)
When a loss has occurred, the business will typically file a claim with the insurance company. For example, if a fire destroys part of the business’ building or inventory, your company will be expected to file a claim against the property insurance policy. Once this has occurred, an insurance adjuster will visit the site to assess the damage and—if found feasible—to process the claim. You will then receive compensation for your losses.
What types of business insurance are there?
There are an incredible amount of insurance options available to you as a business owner that can help you offset the costs of multiple accidents, incidents, or damages. These can include:
- General liability insurance: This covers third-party liability claims, such as injuries to other people (not employees).
- Property Insurance: which covers the loss and damage to your business property because of a storm, a fire, or some other catastrophic event.
- Product liability insurance: this covers you against damage, death, injury or other accidents that may occur due to a faulty product.
- Workers’ Compensation: this covers your employees in case they fall ill, are injured, or are killed while working for you.
- Loss of income: This type of insurance covers your business expenses and employee wages if you cannot operate your business for a period of time.
- Professional liability coverage: this covers your business against loss that is due to negligent duty, wrongful acts, and any services that may lead to another person’s injury.
These types of coverage only scratch the surface of what types of business coverage are available to you. The type of insurance you need and the level of coverage can only be determined by your business needs, however, you may find that if you have lenders or the bank has a say in some expensive equipment or parts of your business, they may require specific types of coverage to protect their investment.
Business insurance for liability
Insurance isn’t all about recouping financial losses. Using business insurance to protect your company against personal liability is also a hugely important component. Personal liability refers to the concept that a business owner can be held personally responsible for injuries sustained or damages that happen on their business’ property or during business operations. This can include customers being injured at your worksite or in your store. If you’re found to be liable, you (as the owner) will have to find a means to pay for the injuries or damage. If you don’t have personal liability insurance, this could mean having to sell your home or your business and liquidating any other assets to cover the costs.
If you’re considering opting out of personal liability insurance due to the cost, it’s important to remember that the cost of having to pay out a personal liability claim on your own is much higher and will often cost you all that you have worked for and built. It should also be noted that business insurance is often a tax-deductible expense as well.
Many states do require some form of business insurance for a business to be granted a license to operate. For example, if you have any employees you must purchase worker’s compensation coverage through the state or through a commercial provider. There are also a handful of states that require businesses to carry disability insurance.
When something happens at the business that forces you to make an insurance claim, it’s safe to say that you will most likely have to close your doors for a few days. Whether this is because someone was injured and investigations have to occur, or because your business itself was damaged and needs to be repaired. While property insurance may cover the building or equipment, it won’t do anything for your lost profits—even if you run a home business. This is why you should also consider investing in something called ‘business interruption insurance’, which pays for lost sales until you get the business up and running again. If you fall ill while running a business, disability insurance can provide you with a percentage of your income to tide you over.
Many people mistakenly believe that liability waivers, such as signs or warnings, will protect them in case of malpractice or accidents, but these usually never cover you completely. In some states, it’s not possible to use a waiver to protect your business at all.
Tips to save money
To save the most money, try to purchase all your insurance from the same company. You will see the most cost savings and benefits from purchasing all your insurance from one location. Also, when you’re starting a business, you should perform a risk-management audit that will help you identify areas of potential liability and what those accidents may cost you. If you perform this analysis every year, you will be in a better position to seek out the type of insurance you need and in what amount.