Insurance for Small Businesses & Legal Concerns
When forming a business entity, business owners should consider whether to purchase insurance for the business, as well as which types of insurance to obtain. Insurance should be factored into the business budget.
Property Insurance
Most business owners should buy property insurance, which protects the physical location of the business and its interior, as well as any items of value in the business. A policy may cover furniture, equipment, computers, inventory, essential company records, and fixtures on the property like landscaping or signage. Some commercial leases may require a tenant business to carry property insurance. The policy language will specify precisely which events are covered, such as a fire, vandalism, or certain severe weather. It is important to consider any risks specific to the geographic region, like earthquakes. Some potentially damaging events, like flooding, might be excluded from a basic property insurance policy. It may be a good idea to obtain separate flood insurance if the property is at risk for flooding.
Property insurance coverage is usually one of two varieties: replacement cost coverage or actual cash value coverage. Replacement cost coverage will pay enough to rebuild or replace lost or damaged business property. Actual cash value coverage, on the other hand, will pay the actual present value of the lost or damaged property. Since this kind of coverage takes depreciation into account, this means that the payment will most likely not be enough to rebuild or replace the property by itself. However, actual cash value coverage will probably be less expensive.
The cost of property insurance can be influenced by a variety of factors, including the types of businesses run on the property, the location of the property in relation to firefighting resources, security measures on the property, and the potential for severe weather. Before building or remodeling a structure on the property, owners might consider talking to a commercial property insurance agent about what kinds of discounts are available if they take certain steps like using fire-resistant materials.
Property insurance may be combined with casualty insurance, which covers losses stemming from injuries and crimes occurring on the property.
General Liability Insurance
Business owners should also obtain general liability insurance. General liability insurance protects against liability for personal injury and property damage arising from normal business operations, like a customer’s slip and fall. It may also cover things like copyright infringement and advertising injury. Some business structures, such as LLCs and corporations, have limited liability. Nonetheless, protection from liability is not absolute. General liability insurance can help protect both the business' assets and an owner's personal assets. Sole proprietorships and partnerships must carry general liability insurance, or they will be at risk of losing all of their assets. It can also be important to get an umbrella liability policy that fills any gaps in your coverage. For example, if your business is involved in pharmaceuticals, this is a type of business that carries a high risk of litigation, and it is important to obtain coverage to fill in areas where a general liability insurance policy may not.
Business Interruption Insurance
Business interruption insurance helps business owners replace income lost from things like a fire or fallen tree causing an interruption in business operations. It can cover mortgage or rent payments, taxes, payroll, and temporary relocation costs, among other things. Business interruption insurance is often bundled with commercial property insurance and general liability insurance as part of a business owner’s policy.
Workers’ Compensation Insurance
Businesses with employees are usually required to obtain workers’ compensation insurance or become self-insured for workers' compensation claims. Workers' compensation protects employees in case they are injured or get sick on the job. It may also shield employers, since many state laws prevent employees from suing their employers for work injuries and illnesses unless no workers' compensation insurance has been obtained.
Other Forms of Insurance
Businesses that have employees must also obtain unemployment insurance. This is insurance that is paid in case an employee is terminated. When a business has vehicles that it uses as part of its business operations, it will need to obtain auto insurance. For example, if a pizza restaurant owns a vehicle for the purpose of delivering pizzas, it may need a commercial automobile insurance policy. Other policies to consider include disability insurance, life insurance, cyber liability insurance, product liability insurance, and umbrella insurance.
Insurance for Home-Based Businesses
Many sole proprietorships are run from home. Home-based businesses must be insured as well. Some people are surprised to find out that homeowners' insurance and renters' insurance policies will not cover risks associated with a home-based business. The kind of coverage needed may depend partially on the industry. Types of insurance that may be appropriate include liability insurance, business property insurance, professional liability insurance, product liability coverage, commercial crime insurance, and business automobile coverage. Liability insurance can be especially important for a home-based business that has clients or visitors who come to the premises. A homeowners' policy would not cover business visitors' injuries, like a slip and fall suffered by someone repairing business equipment, but liability insurance could.
Other coverage guards against certain contingencies affecting home-based businesses. Professionals working inside their homes, such as attorneys who see clients in home offices or psychiatrists who see patients in home offices, will need professional liability insurance to protect against claims of professional negligence. People who invent or design products from their homes should have product liability coverage to guard against the possibility of injuries to a consumer caused by a product that was designed, manufactured, or supplied from their home. People who use their cars to deliver or pick up items as part of their home-based business will need business automobile coverage, since their personal automobile policy would not cover the business use.
