But why, when, and what type?
When you work in bookkeeping, part of the job is fielding questions about operating a small business from friends and acquaintances. Really, it’s one of the best parts! There is one question that always leads to an awkward moment. People ask apologetically because they already know the answer. They doubt all the sales-sounding advice they’ve seen online and believed they will get a different response from a friend. The question is, “Do I really need insurance?”
There is only one answer. YES!
Insurance is a vital investment for small businesses but wading through the bevy of policies out there can feel overwhelming. Let’s review why owners need insurance and identify the types that are most relevant to you.
There are several different types of business insurance. Getting them straight can feel complicated, especially since insurers bundle them differently. The easiest distinction is between liability insurance and everything else.
If a lawsuit ever comes knocking on your door, this is the policy you need.
For most companies, the first and most important purchase will be Commercial General Liability (CGL) insurance. The exact coverages vary by insurer, but these policies tend to offer the broadest set of protections. General liability insurance covers a business for bodily injury, personal injury, and property damage, caused by faulty goods, services, or injury on company property. For some company’s commercial general liability is viewed as comprehensive coverage.
Commercial Liability Insurance: The Good, the bad, and the Catastrophic
The most common objection to purchasing commercial liability insurance is, “How could I get sued? I don’t do anything worth suing over!” Off the bat, let’s make clear that I write this based on my 15+ years of business experience. But I am not a lawyer, and this is not legal advice. Got it?
That said, on the face of it, the “I’m not worth suing” argument seems to sense.
In the United States, plaintiffs can only sue for damages incurred. Very few breaches of contract cases, for example, are worth very much. If the primary damage is the aggrieved party had to find someone else to do the job, then there is little they can sue for in court.
Your incorporation status can provide some protection, although not as much as people think. Filing companies promote LLCs as the “safe” way of starting a business, but they mainly serve to protect your assets from an employee’s misconduct—not your own—and only under some conditions.
That’s where the good news ends.
The bad news is way worse.
First, defending lawsuits is expensive. The average cost for a liability suit is $54,000, and the price tag is higher for contract disputes, at $91,000. Of course, these numbers are inflated by the small percentage of cases that go to trial.
But just because there is not much money in lawsuits does not mean you cannot get sued. It can sometimes be in a competitor’s interest to make you spend money. Plus, as my father used to say, “there are a lot of crazies out there.”
Second, your potential liability as a business owner is higher than you think. If an IT consultant crashes a website, they may be on the hook for their client’s lost sales. Mistakes in food production could create a public health crisis. Slip-and-fall accidents regularly lead to six- and seven-figure claims. Imagine the worst-case scenario for your business. Then, imagine something even worse. That is the protection commercial liability insurance provides.
Depending on the nature of your work, professional liability insurance may also be appropriate. Also called Errors & Omissions insurance, this type of policy covers claims from the advice you give. It would protect, for instance, a personal trainer whose client suffers a heat stroke and sues based on the time they were told to “push it to the limit!”
It is vital to purchase workers’ compensation insurance as soon as you hire your first employee. Workers’ compensation is not just for companies in industrial or other high-risk sectors. Costly accidents can happen even in the most harmless office setting.
Commercial auto insurance can cover the damages that arise from the use of company vehicles. If you or your employees use personal vehicles, then be sure to include non-owned auto liability to your general liability package.
A business owner’s policy (BOP) can protect your property and business assets. Almost all policies allow you to recoup damages from crime or natural disasters. Look for a policy that also offers business interruption insurance. Should an event out of your control, such as a tree crashing into your showroom, interrupt your ability to do business, then this policy can replace the lost earnings.
Companies that keep or collect sensitive data may wish to data breach protection. A data breach is a key concern for tech sector companies, but other businesses are not exempt. If you keep private information about your employees, or customers, on company computers, data breach coverage will provide peace of mind in the event of a hacking.
Larger organizations may consider directors’ and officers’ insurance, which will protect members of your board or C-suite against lawsuits arising from their actions on the job.
Insurance can seem like an easy corner to cut. As someone who has helped businesses through the growth stage for decades, I know that finances can be tight, and liability insurance can feel like an unnecessary expense.
But the difference between having coverage and not is your company’s ability to weather the storm of a bad mistake or serious accident. Finding the budget space available to purchase general liability insurance (at the least!) should be a top priority for the owner of any growth-stage business. The importance of proper business insurance cannot be overstated. It is a vital investment in the longevity of your company.