There are so many expenses associated with launching a new business that many first-time entrepreneurs are eager to cut any that seem unnecessary. And too often, business insurance falls by the wayside.
It’s tempting to cut this cost and invest the funds into more upfront aspects of your new business. However, neglecting business insurance can expose your growing business to significant risk. Ultimately, this risk could cause catastrophic failure for both you and your organization.
Whether you’re a business owner looking to save money or a budding entrepreneur, cutting out business insurance is never a good idea. In my decade’s experience in business consulting, I’ve watched multiple fantastic organizations fall from grace due to a lack of risk protection.
Let’s make sure that doesn’t happen to you. To demonstrate the importance of small business insurance, here is a guide to business insurance so that all entrepreneurs will prioritize insurance — and the right kind of insurance — in their budgets.
Key Takeaways
What is Business Insurance?
Business insurance is a type of insurance for entrepreneurs that protects both the owner and their business from financial losses due to unexpected events. It’s important not just because it provides security but also because some types of business insurance are required by law.
Business owners must pay out-of-pocket for damages and legal claims that harm their company without business insurance. Incidents like these can easily become financial disasters and signal the end of your business.
Who Needs Business Insurance?
All business owners, whether their business is a startup or enterprise, need business insurance.
There are caveats, however. For example, if you’re the sole employee of your company, you generally don’t need workers’ compensation insurance. This type of insurance mainly applies to injuries your employees suffer while working. Your personal healthcare should cover you alone.
What Does Business Insurance Cover?
Business insurance covers all sorts of risks, particularly those facing all businesses.
Business insurance, generally speaking, covers:
- Property damage
- Lost or stolen income
- Lawsuits
- Natural disasters
- Costs that go to employees while they’re unable to work or injured
- Auto incidents
- Data breaches
Most business owners purchase multiple types of business insurance to cover all of these things, as there isn’t one umbrella insurance to safeguard you from everything.
However, commercial umbrella insurance exists to offer additional coverage if other policies have reached their limits. This type of insurance can be a game-changer for extremely devastating lawsuits.
Why is Business Insurance Important?
No business is immune to risk. Though some companies are notoriously prone to many significant risks, all businesses are subject to some degree of risk — and insurance helps companies to protect themselves from exposure to certain types of exceedingly costly risks.
As I mentioned, without insurance, business owners must pay out-of-pocket in case of a crisis. Business insurance works to cover the fees of unexpected events and threats to your business’s success.
Risks of Being Uninsured
Some significant risks of not having business insurance include the following:
- Natural or manmade disasters, like floods, fires, hurricanes, and tornadoes.
- Theft, including embezzlement or fraud by employees.
- Employee illness or injury, as long as the illness or injury is work-related.
- Negligence or malpractice, which can result in expensive lawsuits.
- Data breaches, an increasingly common risk that all small businesses need to be wary of.
Does Business Insurance Cover Everything?
No single policy of business insurance covers everything. Your business may need several policies to be adequately covered. Speak with an insurance expert or financial advisor to ensure you’re getting the right coverage for your business’s needs.
What Insurance Do I Need for My Small Business?
I mentioned earlier that there are different types of business insurance for different risks. In this section, I’m going to be covering the three main types of insurance that every business should have.
It’s worth noting that these insurance types are not only my recommendations but are also usually legally required for each state in the United States. If your business has these insurance types, you can avoid the threat of imprisonment and losing the legal right to conduct business in its state of operation.
General Liability Insurance
General liability insurance protects you and your business against claims that involve injuries and property damages. You can use this insurance to help cover medical fees and attorney expenses as long as they relate to injury/property damage situations that your company is legally responsible for.
Business Income Insurance
Business income insurance is sometimes also known as business interruption insurance. It helps cover a loss of income if a crisis or peril halts your business’s normal operations. Such incidents mainly include natural disasters, fire, or theft.
Certain factors will determine how your business income insurance works in moments of crisis. These factors include:
- “Actual loss sustained,” or the payment you receive from your insurance covering your lost income
- “Business income,” which is the income you’d be making under normal business operations
- “Period of restoration,” or the amount of time your business is shut down
- “Waiting period,” or the amount of time while your business is shut down before you receive insurance coverage
Workers’ Compensation Insurance
Workers’ Compensation Insurance covers medical and financial benefits to employees who are injured or contract illness at work. The terms of this type of insurance, including the amount of coverage and benefits, vary by state in the United States.
These terms depend on which “class” your business lies in. In the U.S., similar companies are grouped into classes. Rates are then determined by workplace injury patterns and cost patterns from these businesses. The rates are calculated according to the prior five years.
This type of insurance is commonly considered social insurance. This is because it’s based on a “social contract” between an employee and their management: by paying for workers’ compensation, business owners can protect themselves and their company from civil suits from their employees.
Is Business Insurance Always Required?
Many types of personal insurance are all but mandatory for specific actions or asset ownership. For example, a vehicle must be insured for it to be allowed on public roadways, and most residential real estate must have homeowner’s insurance before financial institutions fund mortgages for owners. However, most forms of business insurance are not required by state governments or other organizations responsible for supporting businesses as they grow and thrive — so why should business leaders bother with insurance?
Unfortunately, many business owners have this opinion. Roughly 40 percent of small businesses are uninsured, as leaders opt to cut costs rather than protect themselves from risks. Regardless of how careful a business leader is to mitigate risks as much as possible, accidents will always happen, and mistakes will always be made. Lacking insurance in the event of a disaster will cost a business more than the monthly premiums it will pay to stay protected.
It is worth noting that one type of commercial insurance is required of businesses across the U.S.: workers’ compensation insurance. This type of insurance protects employees who have suffered work-related illnesses or injuries; it ensures that workers will acquire the wages they would have lost due to their inability to work. It can cover medical bills and other expenses related to their injury or disease. Still, just because this is the only insurance required of businesses does not mean it is the only type worth pursuing. There are many different policies that business owners should explore to ensure that their organization is fully protected from the worst possible risks.
Business Insurance Wrap Up
No two businesses are exactly alike, and no two businesses will have identical insurance policies. Business leaders should talk to insurance professionals to understand their options and assemble insurance plans that offer comprehensive coverage now and into the future.
Launching a small business is expensive, but day-to-day expenses can pale compared to emergency spending. Business insurance helps mitigate the impact of emergencies, allowing businesses to continue growing even as they experience risk.
I hope this article made you think twice about canceling or opting out of your business insurance. It’s better to spend some now than a life-ruining amount later — this is a crucial part of insurance and wealth management.
Thanks for reading this article. If you have any questions or think I missed anything important, please leave a comment. Until next time!
The post Why Do I Need Business Insurance? (2023) appeared first on Tweak Your Biz.
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