Entrepreneurs and small business owners need at least some insurance. Below are some common types of insurance with a description of each. Some are necessary or required by law; others help with attracting and retaining employees and other situations. Many of these types of insurance can be bundled together into an “umbrella” policy or purchased separately. Talk to a licensed insurance agent with expertise and experience with the type of insurance you are searching for to determine appropriate coverage for your situation and get at least three comparable quotes before making any decisions.
General Liability. Every business needs general liability insurance to cover legal damages and costs that arise from claims of negligence, injury, and property damage. Typically, this type of coverage protects the business from medical expenses, lawsuits, bonds, and judgements. Without this type of insurance, your business assets and perhaps personal assets are at risk. It protects against most legal hassles and adds to the protection provided to you by your business’s legal structure.
Product Liability. Businesses can be held liable if their product or service causes harm to others. Product liability provides protection from injuries or damages caused by a faulty product or service, negligence, or a breach of expressed or implied warranty. Small businesses that manufacture and distribute products, and retailers, including internet selling companies need this protection.
Professional Liability (Errors & Omissions Liability). Some professions that use intellectual property or provide skilled services need to have some form of professional liability. This type of insurance protects the individual from claims of harm due to negligence or unsuitable advice or malpractice or professional services that caused harm. Examples of professionals that need this type of insurance include physicians, pharmacists, accountants, insurance agents, brokers, engineers, and the list goes on. Also, be careful (i.e., read the insurance contract) of employer paid professional liability insurance because ultimate loyalty may be to the employer, not the employee. Exclusions include claims arising from criminal, fraudulent or dishonest acts, bodily injury or property damage, employment related claims and punitive damages.
Worker’s Compensation. Workers' compensation is a publicly-sponsored system that pays monetary benefits to workers who become injured or disabled in the course of their employment. This type of insurance is required and covers employees’ medical expenses for on the job injuries and missed compensation. Some businesses may be exempt from this type of insurance and cost of coverage greatly depends on the probability and degree of injuries while on the job (think of the TV show Deadliest Catch versus office workers). By agreeing to receive worker’s compensation, workers may be agreeing to give up their right to sue their employer for negligence.
Business Property. Regardless of whether your business owns or rents property, you should have insurance to replace damaged or stolen property. Business property insurance can cover inventory, furniture, fixtures, vehicles (business auto insurance), and equipment.
Business Interruption Insurance. What is a small business owner to do if an earthquake, tsunami, volcano, tornado or riot interrupts their ability to generate sales? Well, this type of coverage helps protect against these types of situations and other like it. It reimburses your company while it can’t produce sales and may include coverage for rent or mortgage payments, utilities, payroll and other items as well. Although not required, it’s not such a bad idea to have at least some coverage. Business interruption insurance is usually not sold as a separate policy, but is either added to a property/casualty policy or included in a comprehensive package policy.
Group Medical, Dental, and Vision Insurance. In general, businesses are not required to provide this insurance, however, it does help attract and retain high-quality employees. It is a major benefit offered by many employers but small businesses find it challenging to afford the costs. Premiums for group insurance are generally less than similar plans for individuals.
Group Life, Disability, and Long Term Care Insurance. Group life covers your employees and protects their dependents against mortality risk (dying too young). It helps cover burial costs and replaces lost income that spouses and children depend on to pay for living expenses. Disability insurance covers you and your employees by providing replacement paychecks when someone is no longer able to earn a paycheck by working. Long term care coverage provides nursing-home care, home-health care, personal or adult day care for individuals above the age of 65 or with a chronic or disabling condition that needs constant supervision. Although not required, long term care can be very expensive, which is why this is becoming more popular.
Business Buy/Sell Agreements and Key Employee Insurance. A buy/sell agreement is an approach used by small businesses to divide business interests. The owner of the business interest being considered has to be disabled, deceased, retired or express an interest in selling. The buy and sell agreement requires that the business share is sold according to a predetermined formula to the company or the remaining members of the business. Before the interest of a deceased partner can be sold to the company or remaining partners, the deceased's estate must agree to sell. In order to ensure the availability of funds to execute the buy/sell agreement in the event of a partner's death, most parties will purchase life insurance policies on others who have business interests. In the event of a death, the proceeds from the life insurance policy are used to purchase a portion of the deceased's business interest. It is important to note that when a sole proprietor dies, since he/she has no partners, a key employee is the buyer or successor.
Thinking about insurance is not the most exciting topic for entrepreneurs and small business owners, nonetheless, don’t be “penny wise and pound foolish.” Investing small sums of money on insurance could help save you and your business from unforeseen events. Any entrepreneur or small business owner who wants or needs to know more about any form of business insurance should contact SCORE.
Written by: Paul Newsom, Ph.D. USC Aiken Associate Professor of Finance SCORE Counselor