In most areas, business insurance isn’t legally required, but it’s often considered a practical necessity if you want to run a successful company. Unfortunately, with the dozens of different sub-types of business insurance, and thousands of variables that could shape your policy, most new entrepreneurs feel overwhelmed when considering their options.
So just how important is business insurance to the success of your company?
Types of Business Insurance
Business insurance exists to mitigate risk, in all its forms. These are some of the most common and important types of business insurance to consider:
- Workers’ compensation. Workers’ comp insurance exists to compensate employees for injuries they may sustain on the job, regardless of how they happened or who is at fault. This policy usually covers healthcare costs associated with the injury, as well as the cost of rehabilitation and lost wages. It’s legally required in many areas.
- Property damage. You’ll also want to consider a policy to protect your business’s assets from external damage. For example, if you own a retail store and someone drives a car into the front of it, a property damage policy could feasibly cover the cost to make repairs (if the driver’s policy doesn’t kick in).
- Machinery damage or deterioration. If your business depends on specialized machinery to produce large quantities of products, and that machinery breaks down, your business won’t be able to make money until they’re replaced—and the cost of replacement can number in the millions of dollars. This type of policy will protect you against machine failure, and in some cases, your machinery’s deterioration over time.
- Natural disaster damage. Natural disasters are a bit of a gray area, since they’re not always covered by a property-based insurance policy. However, almost any business can get coverage for specific natural disasters like floods, fires, earthquakes, and tornados, especially if you live in a high-risk area.
- Damage to goods. If you’re shipping a large volume or value of goods to a vendor or customer, you’ll want those goods to be protected; a single accident could otherwise cost you hundreds of thousands of dollars. Some policies specifically cover your goods during defined periods, like during shipment.
- Personal liability. You may also want to have a personal liability policy. If you own a home improvement business and your busy workspace results in the injury of the homeowner, how would you pay for the damages? Most retail spaces will also need a personal liability policy to protect them from slip and fall claims and similar events.
- Product liability. If your business creates and distributes a product, you’ll be liable for any damages associated with that product. If it poses a choking hazard, increases susceptibility to injury, or simply doesn’t do what you claim it does, it could cost you millions of dollars. Even a basic product liability policy can help shield you from these claims.
- Business interruption. There are dozens of ways your business could be interrupted, bringing your revenue stream to a crashing halt. Business interruption insurance will grant you a steady stream of income while you make repairs, recover, or otherwise get back in shape to run your business.
- Cyberthreats. The rise in data breaches and other cyberthreats has prompted the development of cyber insurance, which can protect your business against hacking attempts, the loss of customer data, and other events. The average cost of a data breach is now $3.86 million, so you’ll need to protect yourself in some way. Better defenses, such as higher encryption standards, can help you, but there’s no system that’s entirely unhackable.
Knowing Your Legal Requirements
To get started, you should become familiar with your business’s legal requirements. There aren’t many limitations here, but it can provide you with a necessary foundation. In most states, if you have employees, you’ll be required to hold workers’ compensation insurance. Depending on your industry, you may also be required to have personal liability insurance or product liability insurance.
Knowing Your Risks
From there, the importance of your policy depends on your risks. For example, if you don’t own an office building or a physical retail space, you probably won’t need property damage insurance. If you produce a product you plan on selling nationwide, you may have a need for product liability insurance, especially considering product liability claims average more than $5,000,000, with a median cost of $3,000,000.
The short answer here is that business insurance is extremely important—some types are legally required, and others can shield you from multi-million dollar claims. Your exact policy breakdown and cost basis will depend on your specific needs, but you can bet that the monthly costs of your policies will be more than worth it the first time you face a liability claim, property damage, or other expense that requires excessive compensation.