As a small business owner, you are very much aware of some of the expenses facing you in the first couple of years. One of the expenses you may not have considered is insurance. In the back of your mind, you know you need it. But perhaps you have put off the big decision because of how difficult it can be to get accurate information and advice.
Most of the information and advice we get about insurance comes from the insurance industry. They are highly motivated to sell us coverage that is not necessarily in our best interest.
What follows is a little information that will help you cut through the noise:
Two Categories of Business Insurance
The Small Business Administration has provided some valuable information about insurance that every new business owner needs to review. One part of that information deals with the different types of insurance available. There are two fundamental categories:
- Commercial Business Insurance
- Employee Insurance.
The first is optional. The second is mandatory. Employee insurance has three parts:
- Workers Compensation Insurance – This insurance must be obtained through a commercial insurance provider or your state’s Workers’ Compensation Insurance Program.
- Unemployment Insurance Tax – You must register your business with your state’s workforce agency and pay unemployment insurance based on your state’s regulations.
- Disability Insurance – This type of insurance is mandatory only in the following states: California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island. That said, it is a good idea to have it whether or not your state requires it.
Here is a quick list of some of the more standard types:
Commercial business insurance is a lot more broad. Employee insurance covers your workforce. Commercial business insurance covers everything else. How much of everything else do you need covered? Answer that, and you will know how much insurance you need. Different industries may require special types of coverage beyond what is considered standard. Sites like Econtractorsinsurance.com offer a multitude of options for different business models to make sure that you are covered. One example is something like pollution liability which is not very common but might be something your industry needs you to provide.
- General Liability Insurance
- Product Liability Insurance
- Professional Liability Insurance
- Commercial Property Insurance
- Home-Based Business Insurance
The first three are about protecting your assets in the event you are sued. General liability is about accidents, injuries, and claims of negligence. Product liability refers to any litigation related to product defects that cause injury. Professional liability has to do with mistakes you make as a professional in your field such as malpractice. In this litigious society, it is hard to imagine a company producing aproduct or offering a service not needing all three of these.
The other two are all about protecting the physical property associated with your business. While commercial property insurance is largely self-explanatory, home-based business insurance is not. There is a good chance your home owner’s insurance does not cover liability from you running a business out of your home. Do you see clients in your home? You need to make sure that liability is covered. Do you use dangerous materials, or have high power consumption needs for your business? If you blow up your house while trying to invent a time machine, that might not be covered. You will need home-based business insurance. In April 2007, the Northwest was deluged with floods caused by over 8” of rainfall. Many people go their entire lives without ever encountering a natural disaster, especially one of that magnitude. Because it never happened to them, they think it can never happen to them. That is only the kind of thing that can happen to people on the evening news. As a result of this kind of thinking, business owners are shocked when it does happen to them, not only by the scope of the damage, but by the refusal of their insurance company to pay. When starting up, business owners are often looking for ways to cut down on expenses. They put off some important things believing they will get around two it after the profits start rolling in. Business insurance should never be on the list of things delayed. It should be the first thing completely up and running before the grand opening. Businesses without proper insurance have even grander closings.
Insurance companies are under no obligation to pay for things that are not covered. Many people just assume that because they have insurance, they are covered, come what may. This is simply not the case. If your business is in an area that is known for storms and floods, you may have to pay extra for storm and flood insurance. If you live in hot, dry climates, don’t be surprised if fire protection insurance is not standard. Hint: it most likely is not. These types of disasters leave a lot of small businesses out of business, and liable for a lot of money.
Cautionary Tale
The first three are about protecting your assets in the event you are sued. General liability is about accidents, injuries, and claims of negligence. Product liability refers to any litigation related to product defects that cause injury. Professional liability has to do with mistakes you make as a professional in your field such as malpractice. In this litigious society, it is hard to imagine a company producing a product or offering a service not needing all three of these.
