Small Business Insurance - Part 1:
What Type of Insurance Do I Need?

By Caron Beesley

Protecting your business investment with insurance is a critical part of small business ownership. It minimizes the risks associated with unexpected events, liabilities, and losses.

However, as with all insurance markets, knowing and finding the best insurance for your needs is not an easy task.

Whether you are starting a business, taking on employees for the first time, or evolving your business structure, there are many variables that determine the right insurance for your small business, including your business structure, business activities, location, whether or not you hire employees, and so on.

Most of the information published in the public domain comes directly from those with the greatest amount of vested interest - the insurance companies and their agents. So it's no surprise that navigating the maze of small business insurance laws and best practices can be confusing.

There are two fundamental types of insurance - commercial business insurance, which is not necessarily required by law, and employer insurance, which is.

Below is a summary of the types of insurance you may wish to consider to protect your assets and investments, as well as the insurance requirements you must comply with as an employer.


1. Types of Commercial Business Insurance

This section covers the types of insurance policies available to you as a small business owner. Although not necessarily required by law, you would be wise to purchase enough business insurance to protect your assets against events such as the death of a partner, a natural disaster, or lawsuit.

And it's a misconception to think that structuring your business as a corporation or LLC limits the need for business insurance. While these business structures do protect the personal assets of the owner from business liabilities, relying on business structure alone to protect your assets is not a substitute for liability insurance, which covers your business from losses.

It's also important to know that, in certain instances, state law may require that your particular business activity is covered by some form of insurance. For example, if you use a car or truck for business purposes, your state may require that you purchase commercial auto insurance for its use.  Refer to your state government insurance office for more information about what insurance your state requires.

Here is a summary of the kinds of business insurance policies to consider for your small business:

- General Liability Insurance - This insurance broadly covers and provides protection against the legal hassles associated with accidents, injuries and claims of negligence.
- Product Liability Insurance - If you manufacture, wholesale, distribute and retail a product, this insurance protects against financial loss as a result of a product defect that can cause injury. 
- Professional Liability Insurance - If you provide a service to a customer, this insurance can protect against malpractice, errors, and negligence in the provision of those services to your customers. Some state governments require certain professions (e.g. physicians) to carry such a policy. Check your individual state requirements here.
- Commercial Property Insurance - This covers everything related to the loss and damage of company property due to a wide variety of events such as fire, smoke, severe weather, vandalism, etc. The definition of "property" is broad, and includes lost income, business interruption, buildings, computers, company papers and money. This is definitely one you should talk to an insurance expert about to understand your specific needs.
- Home-Based Business Insurance - Homeowners' insurance policies do not generally cover home-based business losses. While you may be able to add on certain property damage riders to your policy, you may need to purchase additional policies to cover other risks, such as general and professional liability.
 
Since there are such a wide variety of insurance policies available, always discuss your individual business insurance needs with an insurance agent or broker.


2. Insurance Requirements for Employers

If your small business hires employees, you are required by state law to pay for certain types of insurance. Here is a breakdown of the three key employee insurance requirements:

- Workers Compensation Insurance - Businesses with employees are required to carry Workers' Compensation Insurance coverage through a commercial carrier, on a self-insured basis, or through the state Workers' Compensation Insurance program. Visit your state's Workers' Compensation Office for more information on your state's program.
- Unemployment Insurance Tax - If you have employees you are required to pay unemployment insurance taxes as determined by your state. First you'll need to register your business with your state's workforce agency. The State Taxes page on Business.gov includes links to connect you with your state's agency.
- Disability Insurance - In the U.S., it is mandatory to purchase disability insurance only if your business is in one of six locations - California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island.  You can find specific inks to these state insurance divisions here.

If your business is located elsewhere, the law does not require you to purchase disability insurance for your employees; however it can be purchased and provided as part of an "employee benefit" scheme to your employees through commercial insurance companies.