Though many small-business owners don't realize it, small businesses face many of the same risks as larger enterprises, and failing to plan for an adverse event can have serious financial consequences.
Business owners can be sued by dissatisfied clients, have their equipment damaged by a fire or face litigation if someone is injured on their property.
Kevin Kerridge, director for Hiscox Small-Business Insurance, states that, "virtually every small business should have insurance. Defending against claims is time-consuming and expensive and most business owners don't have the time, resources or expertise to do it on their own. In 2011, small businesses are projected to incur $152 billion in tort liability costs, according to the U.S. Chamber Institute for Legal Reform. Still, most small businesses are unprepared. Many home-based businesses do not carry business insurance, even though the costs for small-business insurance coverage can be less than $25 a month."
Business Insurance from Day One
Kerridge offers the example of Bruce Katz, who runs a law and accounting office in Westport, Conn. Katz has a small office with no employees but hundreds of clients. He knew he needed business owner's insurance as soon as he had assets to protect. For Katz, who is cautious, that was day one. "Many owners don't have the accounting, financial and legal background I do, so they might not understand business risk to the extent that I do," he said. "I am lucky in that regard."
One common misconception by smaller or home-based business owners is that a homeowner's policy will cover business-related losses. That's often not the case, and in fact, running a business from one's home could even create unanticipated coverage issues under that policy.
To truly protect themselves and the businesses they've worked so hard to establish and nurture, small-business owners should be aware of two key factors: 1) Common triggers for becoming a small business and 2) The risks they face and how they can protect themselves with the right insurance.
Becoming an 'Official' Small Business
The first step for entrepreneurs is to determine their status. If they are subject to self-employment tax and have to file a schedule C, they are filing a small-business tax return and are technically a small business.
Essential Insurance Coverage for Small Businesses
While policies need to be tailored for individual businesses, two types of coverage are essential for solo shops - general liability and professional liability. Owners with one or more employees should also consider adding workers' compensation coverage.
If business owners are ever faced with a claim, the insurer will provide a legal defense and pay any damages up to the policy's limits, for covered claims. A thorough risk assessment and the descriptions below can help business owners determine what type and level of coverage they need.
General Liability
General liability, also called commercial general liability, is one of the most common types of small-business insurance, covering physical damage to equipment or property of others or injuries to people, as well as protection against libel and slander claims. In many cases, landlords will require this coverage of their tenants who rent office space, and clients will also require their vendors to carry this coverage before they will do business with them.
Small businesses should consider this coverage, especially if they or their employees visit clients or their clients visit them. It's also a good coverage to have for businesses that visit off-premise locations, such as training, conference or event spaces.
General-liability coverage is also recommended for people who have access to a client's equipment, such as IT systems or technology, since they may be liable for any physical damage they cause.
Any small business that is involved with writing or speaking about another business also needs general-liability coverage to protect it in case is is ever accused of libel or slander.
Professional Liability (E&O)
Professional-liability insurance, which is also referred to as errors-and-omissions coverage, protects against claims that the business was negligent in its performance of services or failed to provide services. For example, a business may develop a new inventory or invoicing system for a client that then claims the finished product doesn't have the functionality it expected. Unintentionally disabling a client's firewall, for instance, could open the door to extensive damages, should that client suffer a data breach. For example, technology businesses can request that software copyright-infringement coverage is included as part of their professional-liability policies.
Some professional-liability policies will even provide "retroactive" coverage. This means you are protected for unknown claims made during your policy period from work completed in the past back to an agreed date (usually the date your business started).
Finally, businesses should check to ensure that the policy covers all work by permanent and temporary staff and even subcontractors.
Similar to general-liability coverage, many firms require their small-business partners or vendors to carry professional liability coverage and now include this as a contractual requirement.
Workers' Compensation
Any business with one or more employees must carry workers' compensation coverage. That's the law in every state except Texas. Although Texas doesn't require the insurance, businesses are still liable for any job-related illness or injury, and many employers do cover their employees.
Insurance Offers Certainty, Peace of Mind
"When shopping for insurance," Kerridge says, "it's important to take into account the financial health of the insurer as well as its particular strengths. While many aspects of starting and growing a small business are uncertain, protecting the business and its owner's personal and professional assets for covered claims should be a sure thing. With the right insurance coverage, small-business owners can gain peace of mind and focus their attention on what they do best - running a successful and sustainable business."
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