What Types of Insurance Does a Small Business Need?

6 Important Types of Insurance for Small Businesses

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Running a business, even one with few or no employees, comes with certain risks. But don’t let these potential issues scare you away from entrepreneurship. Instead, use business insurance to protect yourself and your business against many common threats. 

Business insurance policies are divided into five to seven basic types, but you don’t need to buy all of them to protect your company. The type of business insurance you should buy depends on the nature of your business. For instance, all companies need general business liability insurance, but a home-based business may not require commercial vehicle insurance. 

Knowing what type of insurance your small business needs can help you find the right policies to effectively safeguard your company, your personal property, and the safety of any employees. Here are some common types of business insurance to consider. 

Key Takeaways

  • Every business needs insurance to safeguard it and your personal assets from potential threats. 
  • General and professional liability insurance are important for most businesses. 
  • Industries with risky working conditions can benefit from having health insurance. 
  • Commercial property insurance can protect against damage and theft. 

Business Liability Insurance

Business liability insurance is divided into two types: general liability insurance and professional liability insurance. Here are the common differences between the two:

General liability insurance Professional liability insurance
Also known as Commercial general liability (CGL) insurance Errors and omissions (E&O) insurance
Useful for  All types of businesses  Businesses that provide services, such as doctors, financial advisors, and lawyers 
Protects against Financial losses due to bodily injury, medical expenses, property damage, defending against lawsuits, etc.  Financial losses due to malpractice, errors, and negligence

All businesses should have general liability insurance, and businesses that provide specialized services to others should also have professional liability insurance. 

Data Breach Insurance

Businesses with a digital presence may face cybersecurity threats such as hacking or data breaches. The risk of these incidents can be mitigated by purchasing data breach insurance. 

Also known as cyber liability insurance or simply cyber insurance, this type of coverage is useful for businesses that operate online. Companies that frequently store sensitive information (for example, payment processing firms, health providers, and matchmaking apps) can benefit from having data breach insurance to protect themselves against virtual threats, particularly data leaks, hacks, and identity theft. 

Health Insurance

Health insurance can be a tricky area to navigate for small business owners, as it doesn’t actually cover the company itself. However, offering health insurance to employees can help your business attract and retain talented staff.

Health insurance options for small businesses include group health insurance plans like the Small Business Health Options Program (SHOP), health reimbursement arrangements (HRAs), and health savings account (HSA) programs. To be eligible to offer SHOP, your small business must:

  • Have 1 to 50 full-time equivalent employees (FTEs) other than your spouse and family members
  • Offer coverage to all employees who average 30 hours of work per week
  • Enroll at least 70% of your employees in the insurance plan
  • Have a work location within the state whose SHOP plan you want to offer 

Offering a SHOP plan could help your business qualify for the Small Business Health Care Tax Credit.

If you’re a small business owner without any employees, or an independent contractor, freelancer, or consultant, it’s important to get your own health insurance. Self-employed individuals can choose a plan from the Health Insurance Marketplace, apply for Medicaid, or find group insurance policies through unions and other professional organizations. 

Product Liability Insurance

Product liability insurance protects your company by covering lawsuit costs if a customer complains that a product you sold caused them bodily harm. For instance, if a customer experiences skin irritation after using your handmade soap, product liability insurance protects you against the financial losses if they file for damages. 

While it’s not required, this type of insurance is useful for manufacturers, retailers, wholesalers, and distributors of various types of products. 

Property Insurance

If you have a physical working space, you can protect your investment with property insurance. This type of insurance covers the costs of damage from natural disasters like earthquakes, as well as human-caused issues like theft. 

There are two types of property insurance: commercial property insurance and home-based business insurance.

Commercial Property Insurance

Commercial property insurance covers a physical space where you do business, like an office or warehouse, as well as the contents, such as products, furniture, computers, and equipment. It comes in three types: 

  • Basic form: Covers losses and damage from natural and unexpected catastrophes like storms and fires 
  • Broad form: Includes basic form coverage and offers coverage for additional hazards like roof collapses and damage due to riots 
  • Special form: Includes coverage offered by both basic and broad form, as well as all other direct physical losses

Home-Based Business Insurance

Self-employed people who run their businesses from home likely can’t rely on their personal home insurance to cover business items in case of loss or damage. In fact, running a business from your home without notifying your insurer could put you in violation of your policy, which could leave you without home insurance coverage at all—not a good scenario.

Home-based business insurance covers loss and damage to your business equipment, such as a computer, as well as products and other business property. 

Depending on your insurer, you may be able to purchase an endorsement on your home insurance policy, or you may need to buy separate in-home business coverage. 

Commercial Vehicle Insurance

Business vehicle insurance, also known as commercial auto insurance, covers vehicles used for work purposes. It protects your business against losses from damage and injuries due to collisions and other covered incidents, such as if your work truck is stolen from a jobsite. Depending on your state’s requirements, commercial vehicle insurance may include:

  • Bodily injury liability
  • Property damage liability
  • Medical payments or personal injury protection
  • Uninsured motorist

Some policies allow you to add non-owned auto coverage, which protects your business if your employees sometimes use their personal vehicles for work-related errands.

It can be tough to tell whether you need commercial auto insurance. One factor is who owns the vehicle: If it’s registered in your business’s name, you likely require this coverage. If you’re the registered owner and use your car for both personal and work-related driving, it gets a little more complicated. In this case, it’s a good idea to check in with your insurance provider about what is and isn’t covered. You may be able to add an endorsement to your personal car insurance policy, or you may need to purchase a separate commercial policy.  

Frequently Asked Questions (FAQs)

What small business insurance would I need if I’m just getting started?

Start with the types of insurance that might be required for your business. For example, some states require specific coverage—check your state’s official website to learn more. The federal government also requires certain coverage for businesses with employees.

Beyond what’s required, general liability is a good option for many new business owners. Businesses that own buildings or large amounts of product might benefit from having commercial property insurance, and those that own vehicles likely need commercial auto insurance. If you’re not sure what kind of insurance your small business needs, you can speak with a counselor from the U.S. Small Business Administration.

Do I need my business license to get general liability insurance?

Rules about licensure differ from state to state, so it’s best to ask your insurance provider or local small business association whether you need a license to get insurance.

If I’m an independent contractor, do I need insurance?

Independent contractors need insurance because they are not protected by an employer’s coverage like a typical W-2 employee would be. Insurance helps protect them from financial losses and risks. For example, independent contractors typically need general liability insurance, as well as individual health insurance.