Choosing the right small-business insurance coverage is essential if you want to protect yourself from unforeseen losses that can put you out of business.
So even if you have a great product, a solid marketing plan and the perfect location, if you try to save money by buying minimal insurance protection, you're "rolling the dice," says Kevin Foley, an independent insurance agent in New Jersey.
Business owners need to "protect their investment and to make sure their operation can sustain itself after having a loss," says Daniel Abraham, vice president of the HUB International commercial insurance brokerage in Fall River, Mass.
An insurance agent can help you decide how much protection you need.
The following five types of insurance coverage are among the most essential for small businesses. If each of the coverages were purchased separately, the cost would be in excess of $5,000 annually. Foley says most of these coverages are available as part of a business owner’s policy (BOP), which typically would cost about $500 a year. The exception is cyber liability insurance, which normally isn’t available as part of a BOP package.
1. General liability insurance.
Any business can become the target of a lawsuit, Foley says. Complaints may range from allegations of product defects to "slip and fall" suits stemming from injuries that occurred on your premises. This coverage pays for damages if your business is found to be liable, as well as attorneys' fees and court costs. It also pays medical bills for people who are injured on your property.
This type of coverage protects businesses from the mistakes they make, Abraham says. It will pay to compensate people for injuries or property damage caused by your business.
Costs for this coverage are based on the size of your business and how likely your insurer thinks you are to file a claim. Foley says it's common for a small retail business, such as a book store, to pay a premium of about $1,000 per year. A manufacturing company, which typically has a greater risk, could pay $2,500 or more, he adds.
2. Property coverage
This type of policy protects your property, any improvements you've made and your inventory, Foley says. It will pay for the costs of repair or reconstruction, if your premises are damaged. Like a homeowners insurance policy, it protects you against a variety of mishaps, such as theft, fire or vandalism. It also covers all personal property, such as computers and office equipment.
This type of policy protects both building owners and businesses that lease space. If you are a tenant, you typically are not be responsible for repairing structural damage. Your property policy would cover the things you own, such as your equipment and inventory. Policy costs vary, depending on the value of what you insure and your risk of experiencing losses. If it is not purchased as part of a BOP plan, small businesses typically have annual premiums of between $250 and $750, Foley says.
3. Cyber liability.
This policy can protect your business from claims arising from credit card and identity theft. Losses may result from computer network failures or security breaches.
"If you're doing business over the Internet, you really ought to look into cyber liability," Foley says.
Such policies may be written to cover the cost of public relations services to help restore your reputation, if you're responsible for a security breach that harms customers.
A recent credit card data breach during the holiday shopping season may have affected as many as 100 million Target shoppers, the Reuters news agency reported on Jan. 14, 2014. The stolen information included names, mailing addresses, phone numbers and email addresses.
Cyber liability coverage typically costs at least $1,000 annually, Foley says. Costs depend on how insurance underwriters measure the risk you pose.
4. Employment practices liability.
This coverage will cover claims that may stem from hiring and firing practices, harassment charges, and allegations of discrimination. Lawsuits alleging improper treatment of employees are common and can be costly to defend.
"Accusations have to be defended against," says Jim Armitage, an insurance agent and broker in Arcadia, Calif., adding that "attorneys aren’t cheap."
If an employee or a job applicant alleges discrimination over issues such as race or gender, they may file a complaint against you, Foley says. Your coverage pays for the costs you incur when contesting such claims. This protection typically is not included under a general liability policy.
A $1 million employment practices liability policy for a small business typically would cost about $2,500 annually, Armitage says. Even with this coverage, some policies require the insured to be responsible for the first $3,500 to $10,000 in expenses, if a lawsuit is filed against their business, he adds.
5. Loss of income.
This coverage compensates you for lost income if your business is forced to close.
"It covers your net income, continuing expenses and increased expenses," Foley says. He says such policies typically are used to pay for:
- Increased accounting expenses.
- Increased legal expenses.
- The cost of renting space to house your business while your old location is repaired.
- Increased advertising expenses to tell your customers you have moved to a new location.
This type of coverage typically is included in BOP policies. If purchased separately, Foley says $50,000 in coverage typically would cost a business about $500 annually.