Small Business Insurance Policy Basics: Liability and Property Insurance

8 MIN READEditorial Policy

No matter how well you run your small business, there is always a chance something will go wrong. It might be an issue with a product, a service or even a typo in a contract. Even small business oversights can lead to lawsuits from customers, vendors, or investors and can rack up thousands in legal fees and hours of your time. And that’s before you consider risks to your physical location – what if there’s a disaster that forces you to rent another, temporary office and lose items and stock of physical value? These scenarios are more common than you’d think: About 4 out of 10 small businesses will have to file an insurance claim for a property loss or a liability loss over the next 10 years, according to the Hartford Financial Services Group. Small business insurance can help protect you (the business owner) and your company (the business entity) from the unexpected. We’ll talk about the two main types of small business insurance – property and liability – and how they can be vital safeguards against surprise costs.

Property Insurance

Property insurance, as you probably guessed, covers loss or damage of company property due to a variety of events, ranging from weather to vandalism. Depending on your policy, the definition of “property” may include everything from the building itself, to computers and other supplies inside the building, to lost income. There are two main types of property insurance: All-risk policies, as the name implies, cover a broad range of incidents. Peril-specific policies, on the other hand, address specific events like fires or floods. Depending on your business and its location, you may choose to only cover specific risks. The most common small-business insurance claim is for a type of property loss: burglary and theft, according to the Hartford report. The average loss due to burglary and theft is $8,000. By the way, if your business is based out of your home, don’t automatically assume that your homeowner’s insurance will cover business losses. You may be able to add riders to your homeowner’s policy, but as a general rule, it won’t cover home-based businesses.

Liability Insurance

Liability insurance is far more wide-ranging, including general, product, and professional liability policies. General liability insurance covers costs due to accidents, negligence, and a broad swath of other legal challenges. According to the Hartford report, the most expensive small-business claim, averaging $50,000, is for harming someone’s reputation. That would be covered by basic liability insurance, which includes libel and slander. Product insurance is most relevant to you if you manufacture a physical consumer product. This will cover financial losses due to product defects that cause injury. Professional liability insurance, also known as errors and omissions insurance, protects you against errors, malpractice, or negligence. You may be legally required to have professional liability insurance, depending on your industry. If you’re thinking that general liability insurance is a bit of a catch-all for legal costs, you might be on to something. The Chubb Group lays out several gut-churning scenarios showing how a small business could benefit from what it calls “miscellaneous professional liability insurance”. In one example, a store contracted a printer to print sales flyers. The printer missed its deadline, and the flyer didn’t make it into the local weekly paper in time for the sale. The store owner sued the printer for lost revenue, among other things. The case settled for nearly $50,000, and the printer faced another $15,000 in legal fees. In another case, a temporary staffing firm placed two temporary bookkeepers at a client company. They bungled tax filings and it turns out they had previously been fired for incompetence. The case settled for $325,000, and the staffing agency paid an extra $100,000 in legal fees. And if you’re a consultant, this one will chill your blood: an auto parts distributor sued a consultant for negligence and damages for recommending a major reorganization strategy that hurt profits. Settlement costs hit $150,000 and defense costs reached $75,000. Liability insurance may be costly, but it can also save you from unexpected and expensive legal challenges.

Combined: Business Owners’ Policy (BOP) Insurance

Many small businesses don’t have to deal with specific risk factors, like medical malpractice for physicians, but may want to protect against common adverse events. In that case, a combination of business insurance, known as a Business Owners’ Policy (BOP) might be the right choice. Open to small businesses (typically fewer than 100 employees and under $5 million in revenue), BOP can be cheaper than the total cost of several separate insurance policies. This package deal includes property and liability insurance, as well as business income insurance (also known as business interruption insurance). It doesn’t include professional liability insurance, although some insurance companies will let you add coverage for additional cost. Industry-specific coverage also can be added, including food contamination or liquor liability insurance for restaurants.

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Where can you get small business insurance?

You can buy insurance for your small business directly from an agent or broker, or from a third party like your trade association. Trade associations often partner with an insurance company that specializes in its industry, and can offer a discount to members. If you decide to work with an agent or broker, be sure to ask about conflicts of interest: You want to know they are recommending a product because it’s best for your business, not because the insurer offers the biggest commissions. If you already have insurance, shop around at least once a year to make sure you are still getting the best price for the coverage you need. And, of course, be sure to read the fine print to understand exactly what is and isn’t covered or any prep work needed (documentation) so that you’ll be prepared in advance of a disaster. Don’t wait for an emergency to dust off your current policy or look for your first business insurance policy. You risk draining all the resources you’ve invested in starting and growing your small business or worse, bankruptcy. Small business insurance can be a valuable shield against unpleasant surprises.

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Cyndia Zwahlen, a former small-business columnist for the Los Angeles Times, is a freelance business writer and editor for media, academic and business clients. She founded the Small Biz Mix blog.

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