Does your business need insurance for business liability? The short answer is yes! All small businesses need insurance for liability and to protect continuity, employees, and customers. As you grow your business, your need for insurance will be even greater.
You might think that creating a limited liability corporation (LLC) or a corporation may be doing everything you need to protect yourself from liability. But the truth is that your structure offers minimal protection. Here are the basics of insurance for business liability that every business owner needs to consider.
Insurance premiums for small businesses
An insurance premium is what you pay on a monthly, semi-annual, or annual basis to keep your insurance policy active. Premium amounts vary because there are significant differences in the risks that businesses face and the amount of protection needed. For example, an external window cleaning business for high-rise buildings faces much more risk of employee injury than a marketing agency. To determine your budget for insurance costs, do some research on your industry’s average insurance cost as a percentage of their annual revenue and build this into your projections.
Many insurance companies will offer monthly premiums, but you’ll also find many insurance plans that require annual or semi-annual premiums. For these insurances, your pre-paid annual or semi-annual premium should be treated as an asset (like a deposit) on your business’s balance sheet. Each month, your business’s accounting team will deduct a small portion of this asset and treat it as an expense for using the pre-paid insurance premium.
Insurance for business liability
When you think about insurance for business liability, you’re likely referring to general liability insurance, which protects businesses from various cases.
In most situations, it’s used to resolve claims against your business made by customers for not performing services as agreed or for unfulfilled agreements. This is the most basic type of insurance, and every business should have an active policy. If a claim is made against your business, the general liability insurance company will help you reach a settlement.
Product liability insurance is often treated as an add-on to general liability insurance policies. If your business makes and sells products, you’ll need a product liability insurance policy. It covers the costs related to products not working as intended or causing harm to consumers when they use those products.
What is professional liability insurance?
Professional liability insurance is for businesses that provide professional, legal, and medical services. It’s unique because it protects the businesses as well as the individual that provides those services. This insurance offers protection for errors that might be made in professional service, omissions made by professionals, malpractice, and other issues that cause harm.
Professional liability insurance is known to be expensive, but it’s essential in the medical, legal, and financial industries.
As previously mentioned, structuring your business as an LLC or a corporation only provides so much protection. It doesn’t fully protect the assets of the owners. In fact, your personal assets will be on the line for any claims against your business.
While we won’t go into the legal aspects of how this happens or the risks associated with it in this article, securing professional liability insurance may provide additional personal protection for situations like this. As always, consult with your lawyer when you’re setting up your business to discuss your operation’s unique risks.
Here are a few other insurance types that may be bundled with professional liability insurance:
Cyber liability/loss
Cybersecurity is one of the biggest risks for businesses in recent years as more and more companies have their confidential client information hacked, altered, or stolen. Cyber insurance covers the cost of investigating, recovering lost data (if possible), and compensating victims for their compromised information. This can be sold as its own insurance policy, but lately, it’s been bundled with professional liability insurance.
Directors and officers insurance
Like professional liability insurance, directors and officers (D&O) insurance protects the individuals who run and own the business from claims against them as individuals. Consider this type of insurance if you have more than just a handful of investors. Importantly, D&O insurance doesn’t protect against fraud or other malicious actions.
Does my business need hazard insurance?
Before Hurricane Sandy impacted the northeast U.S. in 2012, many businesses didn’t have proper hazard insurance, and they never thought they would need it. Hazard insurance is a broad category that covers damages and business interruption due to external events.
The devastation experienced by many businesses during Hurricane Sandy prompted lenders to make proper hazard insurance a requirement for borrowers if their business is in an at-risk area. It’s a good idea to look into options for your business given the external risks in your area and, as always, to have a preparedness plan in place should the unexpected occur.
Business interruption insurance is designed to compensate your business for lost revenues and/or expenses that you can’t afford because of a business shutdown beyond your control.
This insurance can be tricky. It’s challenging to show economic losses in the way that business interruption insurance requires, and the “interruption” needs to qualify based on the insurance company’s terminology.
For example, some restaurants in lower Manhattan had business interruption insurance at the time of Hurricane Sandy. The widespread power outages caused serious business interruptions for these businesses, causing them to be shuttered for days or weeks. However, many soon discovered that their business interruption insurance wouldn’t cover their losses.
As it turned out, the power outage was caused by an issue at the power company’s facilities. Because the “interruption” didn’t directly happen to the policyholders’ businesses, they weren’t covered. Despite this, business interruption insurance is important for business continuity, especially if your business has slim profit margins and high expenses.
Key man life insurance for owners
Life insurance is important for your business operations in case an important owner or director passes away. Without life insurance, losing this key person could devastate the business. The insurance policy provides a settlement that helps your business weather the economic interruptions caused by key individuals passing away.
For this reason, when you apply for certain types and amounts of business loans, your lender will usually require you to take out a life insurance policy. The policy will be in the amount of the loan and name your lender as a beneficiary.
Pursuit is here to support your funding needs
As your business grows and evolves, you may need financing to take it to the next level. That’s where Pursuit comes in. We offer more than 15 different business loan programs that can support nearly any business need, and our team of expert lenders can assist you every step of the way. Reach out to us with any questions or get started on your application today.
