10 Types of Small Business Insurance Coverage to Consider

Different types of business insurance are designed to cover various aspects of your business operations, including liability, property and employees. However, there is no one-size-fits-all policy to shield against all risks, so you have to choose your coverage based on several factors, such as the type of business you own, your industry and the types of risks you face.

Understanding the most common types of insurance for small businesses can help you decide what coverage you need and which policies to purchase.

From general liability to workers’ compensation insurance and more, we’ve highlighted the most common types of business insurance that may provide critical coverage, no matter your industry. Understanding the basics of business insurance will help you pick policies that provide the tailored coverage your business needs.

Many owners start with a business owner’s policy (BOP), which combines basic coverages such as general liability, commercial property and business income. However, you can add other types of policies to minimize your business's risks, which may be appropriate depending on your field.

General liability insurance covers third-party claims of bodily injury, property damage and personal injury, such as libel or slander. For example, if a customer slips and falls on your premises, this insurance helps cover medical expenses and legal fees.

General liability insurance costs vary based on factors like business size, location and industry risk. However, businesses in higher-risk industries, such as construction, might see higher premiums due to the increased likelihood of claims.

While general liability insurance is not legally required, you may need it to do business, such as entering a contract or providing services to a client. Not having this coverage can also lead to paying for injuries or damages out of pocket, which could lead to significant financial losses.

To protect their business and employees, companies with employees should get workers’ compensation insurance. It provides coverage for medical expenses and lost wages for employees injured or fall ill due to their jobs. It also covers rehabilitation costs and death benefits if an employee passes away from a work-related incident. Additionally, it protects businesses from potentially devastating financial liabilities and lawsuits.

Unlike other types of business insurance, workers’ compensation is legally required in most states. However, requirements can vary based on which state your business is located in. Generally, if you have at least one employee, you will likely need to insure them with workers’ compensation.

Not purchasing this coverage could lead to penalties, depending on the state. For example, failing to provide workers’ compensation in California is a criminal offense punishable by a fine of up to $10,000, up to one year in jail or both.

Professional liability insurance, or errors and omissions (E&O), protects businesses against negligence claims, mistakes or inadequate work. This is particularly relevant for service-based industries such as consulting, accounting and health care. These policies cover legal defense costs and any settlements or judgments up to the policy limits.

There are three common types of professional liability insurance to consider:

• Directors and Officers (D&O) Insurance: This coverage protects a business’s directors, officers and family members against claims made by other stakeholders, such as employees, vendors or competitors, for breach of fiduciary duty or mismanagement.
• Cyber Liability Insurance: This covers the financial losses and legal fees associated with data breaches and cyberattacks.
• Malpractice Insurance: There are different kinds of malpractice insurance depending on the profession, such as health care, law and other fields where mistakes can result in injury or harm to clients or patients.

Costs for professional liability insurance vary widely based on the profession and the amount of coverage needed. High-risk professions, such as health care providers, might face higher premiums. Customizing your coverage to align with specific risks can help manage costs effectively.

Businesses that use vehicles for deliveries, transportation or client visits can benefit from commercial auto insurance, protecting against accidents, theft and other damages. If, for instance, an employee driving a company truck gets into an accident, commercial auto insurance can cover the other party’s injuries or damages.

Most states legally require commercial auto insurance, with each state having different coverage requirements. Generally, if you travel to another state with higher coverage requirements and have an accident, your auto policy will adjust to meet those requirements. Still, it’s wise to research before purchasing a policy: Some states have interstate coverage requirements that you must meet to cross state borders with your goods and drivers.

You should consider commercial property insurance if your business has significant physical assets, such as buildings, equipment and inventory. It protects your business property against damage from fire, theft and natural disasters. It also helps cover repair or replacement costs, minimizing financial disruption to your business.

However, commercial property insurance does not cover damages from floods or earthquakes. These calamities will require a separate policy each. Despite this, it’s beneficial to have commercial property insurance if you’re renting an office or retail store. Some landlords will even require it before letting you lease their property.

The cost of commercial property insurance is influenced by the property's value, location and level of coverage. However, businesses in high-risk areas, such as those prone to natural disasters, may face higher premiums.

Business income insurance, or business interruption insurance, covers the loss of income a business suffers after a disaster. It helps pay for ongoing expenses like rent, payroll and utilities during recovery. This insurance is particularly relevant for companies vulnerable to natural disasters or other catastrophic events that could halt operations.

For example, if the building you’re leasing is damaged by fire, business income insurance will cover the cost of renting a new location and compensate you for other losses. This can provide peace of mind in case of unexpected disruptions. However, it does not cover all types of events, so it's wise to clarify with your provider which events are covered before purchasing a policy.

Product liability insurance specifically covers risks related to the products a business manufactures, sells or distributes. This type of insurance for small business owners protects against claims arising from injuries or damages caused by defective products. For example, suppose a product you sold causes injury to a customer due to a manufacturing defect. In that case, product liability insurance helps cover legal fees, medical expenses and any settlements or judgments.

The cost of product liability insurance depends on various factors, including the type of products you sell, the volume of sales and the potential risks associated with your products. Higher-risk products, such as those in the medical or food industries, may incur higher premiums.

Commercial umbrella insurance provides additional liability coverage beyond the limits of your general liability, commercial auto and other liability policies. It helps cover large claims that exceed the primary policy limits. This type of insurance is ideal for businesses seeking extra protection against major lawsuits.

For instance, commercial umbrella insurance can cover the excess if a customer has a severe accident at your store and their medical bills exceed your general liability limit of $1,000,000. Generally, if you have multiple liability coverages but are uncertain about your limits, commercial umbrella insurance can provide the peace of mind you need.

Data breach insurance, or cyber liability insurance, protects businesses against the costs associated with data breaches, including legal fees, notification costs and credit monitoring for affected customers. It also covers public relations efforts to restore your business's reputation. This insurance is crucial for businesses handling sensitive customer information, such as financial services and health care providers.

Imagine discovering that your customer's personal information has been stolen, and you need $1,000,000 to cover legal fees, notify clients, restore the system and more. In such a case, data breach insurance will cover the costs up to your policy limit. While it cannot recover the stolen information, having data breach insurance can help minimize damage and protect your business's reputation.

Key person insurance provides financial protection if a vital business member, such as a founder or top executive, dies or becomes disabled. It helps cover the costs of finding and training a replacement and compensates for lost income. This insurance is particularly useful for businesses that are highly dependent on specific individuals.

For example, if your co-owner, the primary chef at your restaurant, passes away, your business would receive the death benefit from the key person insurance policy. This benefit should provide enough time to find a replacement. This coverage is designed to help ensure the business's continued operation despite losing a key individual.

Before you get business insurance, determine what type to purchase based on the risks and liabilities associated with your business and industry.

• Assess Your Risks: Identify potential risks specific to your business and industry. Consider factors like business size, location and operational activities to help you determine the types and levels of coverage needed.
• Prioritize Legally Required Insurance: Workers’ compensation and commercial auto insurance are legally required in most states, but the limits can vary. Find out how much liability insurance you legally need for your business, then evaluate if you need more based on your industry and business.
• Consult With an Insurance Agent: Seek advice from a professional to understand the best coverage options for your business needs. They can help tailor a policy to fit your budget and risk profile, ensuring you don’t overpay for your premium.
• Compare Quotes: Obtain multiple quotes to compare coverage options and prices. Look for policies that offer the best value rather than the cheapest price.
• Review Policy Exclusions: Carefully read the exclusions in each policy to ensure you understand what is not covered. This will help avoid surprises during the claims process.
• Avoid Opting for the Cheapest Coverage: When selecting liability insurance coverage, it may be more tempting to purchase minimal coverage, which is often more affordable. But it’s better to ensure your business is fully insured to avoid out-of-pocket expenses in the future.

Use these tips as a starting point to determine what coverage you need and how much to buy to protect your business's future.

To provide you with financial insights, we answered some questions that frequently come up when learning about the most common types of business insurance.