Choosing business insurance coverage is a tall task. It must meet state or industry requirements, address specific risks, and be affordable. Many factors impact coverage and costs, making insuring a business a complex task.
In this guide, you’ll learn, step by step, how to compare insurance products for your industry alongside average costs and limits. Explore tips for avoiding mistakes and ways to work with brokers or use online comparison tools to find the best small business insurance plans.
How to choose business insurance in 5 steps
Find the right policies by reviewing your risks and requirements, then requesting multiple quotes for small business insurance coverage. If you’re strapped for time or need specialized plans, consider working with an independent broker.
Follow these steps to choose insurance coverage for a small business.
1. Review small business insurance requirements for your industry or location
Learn what types of business insurance are required for your company. Federal and state regulations may mandate coverage for health insurance, workers’ compensation, and commercial auto. Property leases or client contracts may require certain coverage or limits.
You can review state insurance laws via the National Association of Insurance Commissioners. Industry associations and networking groups may recommend insurance products or providers who specialize in your business size or sector.
2. Assess your risks, liabilities, and assets
Insurance covers losses you can't pay out of pocket. Understanding your risks and how they impact your finances can help you choose the right insurance coverage options and limits. Examine your business model and revenue-generating activities to identify where liabilities exist.
A good way to assess risk is to list the types of products or services you sell, where purchases occur, and what work is involved. This exercise can highlight risks related to property damage, bodily injury, and cyberthreats.
Evaluate your business’s value and take inventory of its physical assets. Include everything that stays at your business location, as well as tools, equipment, or supplies in company vehicles or in off-site storage units.
3. Create your business insurance coverage checklist
To stick to a budget, create a business insurance coverage checklist and prioritize options and limits based on your risk analysis. Include property valuations, payroll estimates, and an employee headcount.
Make a note of the specific policies you need, such as commercial auto or life insurance. Otherwise, insurers or brokers can look over your requirements and suggest insurance coverage options.
Also, consider how much cash you have on hand for deductibles. Higher deductibles can reduce monthly or annual premiums. Choose a reasonable out-of-pocket amount that doesn’t overextend your bank account.
4. Find the best business insurance providers for small businesses
Shop around and get several quotes from local and national insurance companies in addition to ones that specialize in small business coverage or your industry. You can request quotes directly from some insurance providers or work with agents or brokers.
When choosing business insurance companies or advisers, look for the following:
- Insurance licensing credentials via your state’s independent insurance agents and brokers association.
- Financial stability and reliability through third-party rating agencies, like AM Best or S&P Global.
Alternatively, you can explore human resources and insurance benefits through a professional employer organization (PEO). This co-employment partnership may offer better health coverage and workers’ compensation rates, but it requires a different type of commitment.
5. Compare commercial insurance products and policies
Verify that each business insurance quote satisfies your coverage requirements. Then calculate coverage costs per employee. After reviewing individual options, see how the plans differ between insurance companies.
Here’s what to look at when comparing policies and providers:
- Limits per occurrence and policy term.
- Deductibles.
- Exclusions and limitations.
- Discounts for bundled business insurance policies.
- Reputation for handling claims and providing customer service.
What is small business insurance?
Small business insurance is a broad term for a range of commercial policies that financially protect companies from various risks, such as employee injuries, property damage, and lawsuits. The business (the policyholder) pays a premium, and the insurer covers claims that meet the plan's conditions and terms.
According to the Insurance Information Institute, a business owner's policy (BOP) is the most common type of coverage for SMBs. Standard insurance policies also include general liability (known as commercial liability), workers’ compensation, and professional liability (also called errors and omissions).
Who needs small business insurance?
There isn’t a set rule as to when a startup, freelancer, or limited liability company (LLC) needs business insurance. Experts suggest obtaining coverage required by state or industry regulations, then adding commercial policies when your business model or activities create legal or financial liabilities.
State laws generally mandate who must have workers’ compensation and commercial auto insurance. Most states also require restaurants and bars that serve alcohol to have dram shop insurance, whereas healthcare businesses may need medical malpractice coverage. In addition, certain companies must show a certificate of insurance to obtain licenses or secure client contracts.
Aside from property and casualty policies, licensed brokers or direct insurers can help you choose suitable business insurance coverage for owners and employees, such as health, life, or disability plans.
What are the different types of small business insurance?
There are insurance products for nearly every small business risk. Many carriers provide several options, allowing companies to bundle policies for additional savings. Small, low-risk companies can combine coverage under BOP plans, while larger or higher-risk businesses can customize a commercial package policy.
Common types of insurance for small businesses include:
- Commercial liability insurance: General liability business coverage pays for third-party bodily injury, property damage, or advertising injury claims.
- Professional liability insurance: E&O policies cover claims of actual or alleged errors, incorrect advice, or failure to complete a service that caused financial harm.
- A business owner's policy: This comprehensive business insurance includes general liability, commercial property, and business interruption coverage.
- Business interruption insurance: Available as a BOP or property insurance rider (add-on), it reimburses operating expenses during temporary business closures. Optional provisions include civil authority, contingent, and extended coverage.
- Workers’ compensation insurance: Most states require employers to carry specific coverage for work-related illnesses and injuries.
- Commercial property insurance: This plan reimburses policyholders for damage or loss of physical property at a fixed location from qualifying events like natural disasters, theft, and vandalism.
- Inland marine insurance: Often referred to as tools and equipment insurance, these policies cover assets you transport or store off-site, with coverage options for construction projects, client property, and specialized assets, like art or computers.
- Commercial flood insurance: Businesses in mid- to high-risk flood zones or those with a federally backed loan can get coverage from private insurers or the National Flood Insurance Program.
- Product liability insurance: “Products completed operations” is often (but not always) included in general liability policies. Product recall coverage is a separate rider.
- Cyber liability insurance: Business cyber policies cover data recovery costs and liabilities from claims due to a data breach involving sensitive customer data.
- Commercial auto insurance: Companies that use trucks, vans, and cars can get coverage to meet state requirements and endorsements for extra services.
- Employment practices liability insurance: Policies cover employment-related lawsuits, such as sexual harassment or discrimination.
- Intellectual property insurance: This type of liability insurance covers claims arising from trademark, patent, trade secret, or copyright disputes.
- Key person insurance: The company is the policyholder for essential employee life or disability policies. Plans pay disability or death benefits and can provide buy-sell agreement funding for succession planning.
- Legal expense insurance: This type of insurance helps companies manage the costs of legal disputes and litigation.
- Critical illness coverage: Unlike health insurance policies that pay medical providers, this plan gives policyholders a one-time lump-sum payment if the covered person has a qualifying illness, such as a stroke or cancer.
While choosing the right amount of coverage is vital, there's no point in buying insurance policies you don't need. When in doubt, an impartial, third-party adviser can help your company sort through your choices.
An independent broker represents your interests. They request quotes from the best small business insurance companies and recommend plans.
How your business type affects the insurance you need
Insurance policies should meet regulatory or customer requirements and reflect risk types and levels. Choose business insurance coverage based on how and where your company operates and what you produce or sell.
Let’s go over how insurance needs differ by business type.
Industry and types of work, services, and products
Some industries and activities are inherently riskier than others. General liability and workers’ comp plans are common policies. Other business insurance coverage options, like umbrella or activity-specific policies, provide additional protection.
Ask the following questions about your operations:
- Can someone get physically hurt because of what we do? Higher-risk industries and activities, such as climbing ladders or working with chemicals, increase risk. Umbrella policies cover excess liabilities, while a pollution rider reimburses for damages, injuries, or cleanup costs.
- Could someone else’s property be damaged? Repair techs, contractors, delivery, and event vendors could damage client property stored at their location or the customers’. General liability extensions or commercial policies, like inland marine (bailee’s coverage), cover specific types of damage or loss.
- Would a cyberattack shut down revenue immediately? Manufacturing, financial, insurance, healthcare, retail, and transportation sectors face greater threats, according to an IBM X-Force report. Policies should cover business interruption, social engineering, ransomware response, data restoration, and public relations support.
- Can a product we sell injure a person or damage property later? General liability policies may include product liability, but some goods require higher limits, product recall coverage, or umbrella insurance. Higher-risk items are children’s products, medical devices, tools or machinery, and food or beverages.
- Could our advice cost someone money? Consulting or services, including design and build contractors, need professional liability policies. Cyber liability and regulatory defense coverage can provide more protection when handling sensitive financial, health, or client data.
Insurers review industry classification codes when calculating commercial property or casualty premiums and may check them again after a business files a claim. When getting quotes, list all types of work you do. Doing jobs that fall outside of your class code could result in uncovered claims or retroactive premium adjustments.
Business legal structure
Your business structure can affect the types of coverage and the benefit payouts. Sole proprietors are personally responsible for debts and legal claims, while LLCs and corporations typically shield personal assets. To protect private assets, sole proprietors may need more comprehensive business insurance coverage than similarly sized LLCs or corporations.
Meanwhile, LLC members or corporate shareholders can hold leaders and managers responsible for judgment errors, mismanagement, or breach of duty. Directors and officers (D&O) insurance may cover legal defense costs and judgments.
Any type of entity can purchase key person coverage for an essential employee. Unlike standard life or short and long-term disability insurance, where the policyholder is an individual, key coverage payouts go to the business. But structuring a policy to fund a buy-sell agreement can be less complicated for LLCs and corporations.
Commercial property location and condition
Commercial property, liability, and business interruption insurance coverage should factor in physical work environments. Insurers look at building construction, the size of indoor and outdoor spaces, security features, and fire hazards.
If your property is in a higher crime area or you run a high-risk business, you may want additional coverage. The same goes for companies with outdoor features, like signs or monuments. These aren’t always covered under basic policies.
How much does small business insurance cost?
Small business insurance costs range from $30 to over $100 per month. The cheapest coverage type is usually general liability, while cyber insurance is the most expensive, averaging $145 per month, according to Insureon.
However, the cost of business insurance varies greatly between industries. In fact, an Insureon analysis of general liability rates found, “your industry has the biggest impact on your premium.”
Here are the average ranges of small business insurance rates, based on data from The Hartford, Ergo Next, Pogo, Insureon, and the Wall Street Journal:
- General liability coverage: $45 to $166 monthly ($540 to $1,992 yearly).
- Business owner’s policy: $40 to $141 monthly ($480 to $1,692 yearly).
- Professional liability plan: $45 to $76 monthly ($540 to $912 yearly).
- Commercial property insurance: $60 to $140 monthly ($720 to $1,680 yearly).
So, how do insurance companies calculate prices? Agents consider your industry, number of employees, and annual revenue. Higher-valued properties or operating costs increase liability insurance rates. Your claims history, business location, and coverage options also impact insurance costs.
How much coverage does a small business need?
For base coverage, many small businesses opt for a $1 million policy. This provides $1 million per occurrence and $2 million in aggregate (total) during the policy period, which is typically one year. However, the actual insurance types and limits depend on your company’s location, industry, and risk profile.
The U.S. Small Business Administration said, "You should insure against things you wouldn't be able to pay for on your own." In most cases, a small business owner doesn't have enough savings to cover a million-dollar lawsuit or rebuild their store after a natural disaster. Small business brokers, agents, and PEO services can assess your risks and value to determine how much insurance your business needs.
To give you an idea of the average insurance coverage for a small business, here are popular options based on data from Insureon:
- General liability insurance: Most small businesses choose $1 million per occurrence and $2 million aggregate limits. This coverage provides up to $1 million per claim and $2 million for the plan’s lifetime, which is typically one year.
- Professional liability coverage: Policy limits vary substantially by industry, from $250,000 to $2 million. The average small business coverage is $1 million per occurrence and a $1 million aggregate limit.
- A business owner's policy: Many small businesses select a $1 million per-occurrence limit and a $2 million aggregate limit. The next most popular options are $2 million and $4 million limits.
- Cyber liability insurance coverage: Industry, business type, amount, and type of customer data handled determine the amount of coverage businesses need. Per occurrence and aggregate limits range from $1 million to $5 million.
Common mistakes small business owners make when buying insurance
Small business insurance plans aren’t a one-size-fits-all solution. Nor do policies automatically adjust when your operations change or grow. Understanding what’s covered and excluded for each type of commercial policy helps prevent surprises.
Here are the top mistakes to avoid when buying business insurance:
- Thinking your business size or sales volume limits liability: Even unprofitable companies, home-based businesses, and sole proprietorships can be liable for intellectual or physical property damage and bodily injury.
- Believing electronic systems are secure: Fraud and virus prevention tools don’t stop all cyber crimes. Yet, nearly 4 in 10 owners in a Hiscox survey said cyber coverage isn’t needed because their websites or payment systems are secure.
- Forgetting to review and update coverage: You can be over or underinsured if you don’t inform insurers when revenue or payroll changes by 20%, you add new equipment or locations, or sell different services or products.
- Confusing general liability with property or professional insurance: In the same Hiscox survey, many owners believed commercial liability covered damage to their property and protected them against lawsuits arising from incorrect client advice.
- Misrepresenting or not fully disclosing work activities: If you submit a claim resulting from activities outside of your class code, insurers may not cover it. For example, trimming trees differs from landscaping or lawn maintenance, and warehousing goods you sell differs from storing other people’s items.
How can small businesses get insurance?
Small businesses can buy insurance policies directly from carriers, agents, or brokers. Federal or state options may be available for certain types of coverage, such as workers’ comp, flood, or health insurance.
According to Ergo Next, 63% of respondents bought company insurance directly from carriers, while 36% used an insurance broker or agent. Owners were more likely to buy policies online or in person than over the phone. Let’s go over your options.
Get quotes from top small business insurance companies
Talk to several providers or agents to get quotes and review the terms and limits. Insurance agents work for providers and should demonstrate an in-depth understanding of how their insurance products can protect your business.
To narrow your list of insurers, ask for recommendations from industry groups, check out customer reviews, and read guides on the best small business insurance providers.
Work with an independent insurance broker
An independent broker represents your interests. They request quotes from the best small business insurance companies and recommend plans. Brokers should explain the differences between policies and providers to ensure you understand your coverage, limits, and costs.
Reputable brokers will be transparent about how many quotes they received and how they select recommendations. The best way to find a broker is to ask colleagues and professional networking groups for referrals.
Partner with a PEO
Alternatively, you can outsource human resources, including payroll and benefits administration, by partnering with a PEO. This organization becomes a co-employer and insurance plan sponsor, allowing your company to offer high-quality, lower-priced PEO health insurance. However, you maintain control over day-to-day operations.
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