What is a small business insurance policy?
Last updated: October 2023
Small business insurance, sometimes called commercial insurance, helps protect a business's assets, property, and income. A business owner’s policy (BOP) is the most common insurance product for small businesses, according to the Insurance Information Institute (III). A BOP typically includes three basic types of coverage to help protect a business: business property coverage, general liability coverage, and business interruption coverage.
If you're a small business owner, you may also be able to buy additional insurance coverages to customize your policy based on your business’s specific needs. These additional coverages may include commercial auto coverage, errors and omissions coverage, key employee coverage, and more.
What is considered a small business?
The U.S. Small Business Administration (SBA) defines a small business as an independent business that has fewer than 500 employees. However, this definition can vary by industry.
For insurance purposes, only small- to medium-sized businesses that meet certain requirements are eligible for a BOP, according to the III. Insurers may consider several factors when assessing whether a business is eligible for a BOP.
Number of employees
One of the primary factors used to classify a business as small is how many people it employs. Typically, businesses with fewer than a certain number of employees are considered small. The threshold is determined by the insurance provider, and can range from a handful of employees to several hundred, depending on the industry and the specific insurance policy.
In addition to the number of employees, the SBA considers the annual revenue of a business when determining its size. Similarly, insurance providers may set a maximum revenue threshold for small businesses.
Certain industries have their own unique standards for defining small businesses. For example, the SBA sets industry-specific size standards based on the number of employees or annual revenue. These standards help determine eligibility for government programs and contracts.
The ownership structure of a business can also impact its classification as small, according to the SBA. In some cases, insurance providers may consider factors such as whether the business is independently owned and operated or part of a larger corporate entity.
It's worth noting that the definition of a small business may differ among insurance providers, so it's essential to carefully review your policies and consult with your insurance providers to ensure you meet the specific requirements for coverage.
What does a small business insurance policy cover?
Depending on the coverage you choose, a small business insurance policy helps protect your business from things like financial losses, property damage, and more. Covered incidents may include theft, fire, wind, falling objects, and lightning, among others. It's important to read your policy documents carefully to understand which coverages are included and what perils are covered by your insurer.
Similar to other types of insurance, each coverage in your BOP has its own coverage limit. This is the maximum amount your insurer will pay for a covered claim. Some coverages may also require a deductible. The deductible is the amount you pay out of pocket before your insurance kicks in to pay for a covered claim.
Business property coverage
The property coverage in a small business insurance policy helps ensure that your business's property is well protected. For example, if there’s a fire at your business, a BOP may help pay for building repairs (if you own the building), as well as replacement costs for things like furniture, computers, and machinery.
Keep in mind that business property coverage will be subject to a deductible and limits. You can typically choose your limits based on the estimated cost to repair, rebuild, or replace your business's property. But, if your losses exceed the coverage limit you chose, you'll need to pay the remaining costs out of pocket to get your business up and running again.
It's also important to note that having insufficient policy limits could result in a penalty, depending on local regulations. To avoid fines, work with your agent to make sure you purchase enough insurance to cover your business and its contents.
General liability coverage
A BOP usually includes general liability coverage (sometimes called commercial general liability, or CGL). If a visitor is injured at your business, or one of your employees damages someone else’s property and you're found liable, general liability coverage may help pay for the injured party's medical expenses or property repairs. It may also help pay for legal costs if you're taken to court over an accident that occurred at your business.
Commercial general liability insurance is also subject to a coverage limit. That means if an injured person's medical bills exceed your coverage limit, you may have to cover the rest on your own.
Business interruption coverage
Business interruption coverage, sometimes called business income coverage, is also typically part of a business owner’s policy. This coverage helps replace lost income and extra expenses if your business is affected by a covered peril.
For example, say a tornado or fire makes your office unusable. Business interruption coverage may help pay for rental costs at a temporary office while repairs are made. Business interruption coverage may also help replace lost business income due to a covered incident.
Similar to other coverages in a BOP, your coverage will have a limit. You may also be subject to a restoration period. This means that your coverage may come to an end if your business hasn’t returned to normal operations within a specified time period. Be sure to ask your insurer about specific limits.
Commercial auto insurance
As a small business owner, if you or your employees drive vehicles for business purposes you may need commercial auto insurance to help protect your commercial vehicles, the tools, equipment, and other cargo it carries, as well as the people who drive those vehicles and serve your business every day. Commercial auto insurance helps protect against liability and physical damage that may occur when using vehicles for your business. This includes pickup trucks, vans, cars, and small commercial vehicles.
Commercial auto insurance is important because vehicles for business purposes faces a different kind of risk and personal auto insurance policies typically exclude many commercial uses. Make sure to inform your insurance agent if you or your employees ever use vehicles, including their own, for things like meeting with clients, making deliveries, transporting equipment, or traveling between job sites. And if you are transporting items, just like your vehicles, when those items are on the move, your coverage should follow. Your provider can make sure you have the proper protection when you are on the road, on the job and everywhere in between.
Additional business insurance coverages
If you’re looking for additional protection for your business, you may qualify for a few additional coverages. Some coverages to consider adding to your BOP include:
- Errors and omissions insurance
- Data compromise coverage
- Commercial auto insurance
- Employment practices liability coverage
- Equipment breakdown coverage
- Outdoor property coverage
- Inland marine coverage
Talk to your insurer about your specific small business insurance needs. They can help you customize your policy with coverages that work for your situation.
How much does small business insurance cost?
The cost of a small business insurance policy depends on many factors. These factors may include what kind of business you're insuring, the types of optional coverage you choose and the deductibles and limits you select for each coverage. When assessing your policy, insurance providers consider factors such as the size and nature of your business, industry risk, location, coverage types, desired policy limits, deductibles, and claims history, according to Insurance Business America.
Do I need business insurance for a home-based business?
Running your business from home does not eliminate the need for business insurance. While your homeowners insurance policy may provide limited coverage for a home-based business, it’s unlikely to offer comprehensive protection for your business assets and liabilities. You may need the added coverage of a BOP to ensure you’re sufficiently protected. That’s why it’s essential to review your homeowners insurance policy and consult with an insurance professional to make certain that your business has the protection it needs to thrive.
Is it required for small businesses to have insurance?
The short answer – it depends. Small business insurance is often not legally required for all businesses; however, certain types of insurance may be mandatory depending on the nature of the business and local regulations. For example, workers' compensation insurance is a critical coverage that is federally required when a small business has employees.
Additionally, some industry-specific regulations may mandate certain types of insurance coverage. Therefore, regardless of industry, obtaining a small business insurance policy is highly recommended to shield business owners and employees from personal liability in the event something goes wrong.
It’s important for small business owners to research and understand the specific legal and regulatory requirements in their location and industry to determine small business insurance requirements.