Business Insurance 101: A Beginner’s Guide to the Basics

Whether venturing into an entrepreneurial endeavor for the first or fifth time, protecting yourself and your business is an integral part of the process. Protection comes in various forms, from self-education to investing in business insurance. Knowing what type of insurance is either required or simply a good idea depends on the product or service being supplied, the scale of the operation, and the financial scope of the organization.

What is Business Insurance?

Generally, business insurance protects a business against unexpected events such as employee injuries, deaths, natural disasters, or lawsuits. Per the U.S. Small Business Administration, “unless you are an employer, business insurance is generally not required by law, however, it is common practice to purchase enough insurance to cover your assets. If your business is an LLC or a corporation, your personal assets are protected from business liabilities; however, neither business structure is a substitute for liability insurance, which covers your business from losses.”

Types of Business Insurance

  • General Liability

Protects against lawsuits concerning bodily injury, medical expenses, property damage, libel and slander, lawsuits, and judgments during appeal procedures.

  • Product Liability

Product liability insurance is a good idea for businesses that rely on selling or providing a product. Per the U.S. Small Business Administration, this insurance “protects against financial loss as a result of a defect product that causes injury or bodily harm. The amount of insurance you should purchase depends on the products you sell or manufacture.”

  • Professional Liability (Errors & Omissions Insurance)

This type of insurance is generally useful for any business that offers a type of service. In short, it protects business against errors and malpractice, as well as negligence. Professional liability may be required depending on the type of service being offered.

  • Commercial Property

Commercial property insurance offers extremely broad protection that is determined exclusively by the type of business, the type of property needing coverage, and the insurance provider or broker. The broad spectrum of coverage includes damage inflicted by fire and smoke, wind, hail, and even vandalism to property such as a structure or building, computers, lost income, or even company documents.

There are two basic forms of commercial property insurance: all-risk policies and peril-specific policies.

An all-risk policy is one of the broadest types of property insurance that a business can invest in. Unless specified within the policy, businesses are covered for a wide-range of damage inducing incidents. On the other hand, peril-specific policies provide protection and coverage for incidents specifically listed within the insurance policy.

  • Home-Based Business Insurance

The most important aspect of home-based business insurance is the reality that it generally does not cover home-based business losses. Therefore, it’s important to understand the differing types of home-based business insurance: adding a rider to an existing homeowners or renters insurance policy or investing in a business owner’s policy.

Adding a rider to a homeowners or renters insurance policy is a great option for very small businesses, such as one-person operations. Coverage extends to a limited amount of business equipment, as well as third-party liability coverage.

For larger businesses, it’s a good idea to invest in a bit more protection via a business owner’s policy (BOP). Generally, a BOP policy protects home-based businesses against damage to equipment and/or data, business interruption, and professional liability claims (such as malpractice).

How to Choose

What’s Your Risk

In insurance terms this process is called underwriting. Per Investopedia, underwriting “helps to create the market for securities by accurately pricing risk and setting fair premium rates that adequately cover the true cost of insuring policyholders. If a specific applicant’s risk is deemed to be too high, underwriters may refuse to cover it.”

Before selecting an insurance provider or type of insurance policy, it’s beneficial to personally assess your risk. This will help to determine the most secure and appropriate policy and can offer valuable insight into business practices that may help to lower these risks in the future.

Research Insurance Companies

While it may seem like the easiest option to choose an insurance company you are familiar with or have been recommended, make sure to do your homework. Different insurance companies offer varying levels of coverage at a range of costs. Some companies may specialize in certain types of businesses, which often means they are more knowledgeable and have an extensive network in that specific field.

Find a Broker

Brokers are not a necessary part of obtaining business insurance, but it’s not a bad idea to look into this type of representation.

With that said, the U.S. Small Business Administration warns that “brokers receive commissions from insurance companies when they sell policies, so it’s important you find a broker that is reputable and is interested in your needs as much as his own. Make sure your broker understands all the risks associated with your business.”

 

Reliable insurance companies should offer clients guidance and advice as to the best policies for their specific situation. With that said, it’s important for business owners to self educate. The U.S. Small Business Association and the National Federation of Independent Businesses both offer a wealth of resources to help businesses start off right and obtain success.

 

Surmount Insurance Services (SIS) offers guidance and advice backed by the expertise of their executive team. For more information or to speak with a representative directly, feel free to contact us.

 

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