Business Insurance Types
Popular Commercial Insurance Coverages Briefly Explained
Business insurance is designed to protect a company against the risks that it faces during the normal course of operation. This includes coverage to the physical property owned by a business (including building, inventory, machinery, office equipment, etc.), as well as protecting against liabilities it faces while conducting business (i.e. third party bodily injury due to product faults, damages/injuries to third parties due to an action of the business or its employees, etc.).
It is vital that you not only have the right policies in place to protect your operation, but that you have the right policy limits to provide the correct coverage in case something happens. Once it is determined that a specific type of policy needs to be purchased, the amount of coverage (policy limits) and deductible amounts (portion your company pays should there be a claim) need to be determined. This is why it is critical to have commercial coverage discussions with a professional agent that is familiar with your industry and fully understands (and is able to communicate) the risks your company faces, so that the right policy types, and amounts, can be obtained.
Below, you will find a brief explanation of the various types of coverage available to the entrepreneur and small business owner. While this is not an exhaustive list, it gives a good representation of the types of policies available. Every company is unique and every situation requires different levels of coverage. Again, always discuss your coverage needs with an experienced agent who is familiar with your industry and is willing to help you find the coverage your operation needs.
Remember, you can request FREE, no-obligation quotes to compare your coverage options. This is a great way to find agents who specialize in the policies your company needs and to compare cost and coverage options without being obligated to actually purchase a policy.
Property Insurance - Property insurance provides protection for the actual business property owned by a company, including office equipment, computers, documents, building, etc. This policy covers losses due to events such as fire, theft, vandalism, natural disasters, etc., and only protects property owned by the company itself, not a third party's property.
There are a couple of different types of property policies available: all risk policies and peril specific policies. All risk coverage offers protection for a large number of incidents, and is fairly broad in scope. An all risk policy might cover just about any peril, unless it is specifically excluded. Peril specific coverage protects against what is specifically named on the policy, and may provide coverage for something that is specifically excluded from all risk coverage.
Small Business Liability Insurance - General liability insurance protects a company against damages it causes to third parties (customers, etc). Coverage generally includes protection against bodily injury, property damage, libel, slander, medical expenses, and such, when a company is found liable for these types of damages to a third party. A general small business liability policy will offer just that - general coverage against a certain set of liabilities. This general policy is often times enough for many small operations, but there will be companies that require additional, specific coverage for liabilities that are not covered by their general policy.
Home Based Business Insurance - A vast number of entrepreneurs base their operation out of their home without using a separate facility to run their enterprise. Many people in this situation erroneously assume that their homeowners policy will provide the coverage they need for the business activity they run out of their home. This is generally not the case as a homeowners policy will provide extremely basic commercial coverage, if any at all.
While it may be possible to purchase riders to a homeowners policy to provide limited commercial coverage, there are many entrepreneurial situations that require a separate business policy. Home based business insurance coverage provides the protection an operation run out of a private dwelling requires, and serves as the foundation for any additional coverage to be based off of (assuming additional coverage types are required for a particular situation).
Business Owners Insurance - A business owners policy (commonly abbreviated as BOP) offers a basic level of coverage for an entrepreneur. Most times, a business owners policy is a combination of the basic coverage types a typical smaller company will need, including basic property and liability coverage. Because the coverage is bundled together, it is frequently available at a discount, when compared to buying the coverage separately. For many smaller organizations, a BOP is all the coverage needed. Other times, additional coverage types can be purchased to complement a business owners insurance policy.
Professional Liability Insurance - See Errors and Omissions Insurance below.
Errors and Omissions Insurance - A company or individual that offers a service or professional advice should have errors and omissions (E&O) insurance coverage. Also known as professional liability insurance, this type of policy offers protection against errors, negligence, poor advice, etc., when providing a service to customers.
Here are examples of certain professionals that need this coverage: Accountants or financial advisors need this protection because they may make a mistake, or give poor advice, that results in a client suffering a financial loss. Computer programmers need this type of policy in case they make an error in their software code that results in a loss, or downtime, experienced by their client. In the medical professional, this coverage is known as malpractice insurance and is usually required by the specific location which the medical professional is practicing.
Product Liability Insurance - Any company involved in the supply chain of consumer or commercial goods needs to have some level of product liability coverage. This includes companies that manufacture, distribute, and retail, products that end up in the hands of individuals, or other commercial operations. A product liability policy offers protection against bodily harm or property damage that results from a defective product. Any business that has a part in getting a product to market needs this type of policy as they can become a target for a lawsuit should something happen as a result of the use of said product.
The product that is being manufactured, distributed, or sold, will determine the amount of coverage that needs to be purchased. A company involved in the automobile manufacturing field most likely will face a higher level of exposure than a retailer of paper goods, as an example. Of course, the cost of coverage will be reflective of the amount of potential exposure.
Workers Compensation Insurance - A company with employees usually is required to have coverage in place to pay for on-the-job injuries suffered by its workers. Workers compensation insurance is a no-fault coverage, which means that regardless of who is responsible for the injuries, an employee can seek medical care and be compensated for the injury. In return for this no-fault coverage, employees are not allowed to sue their employer as a result of the injuries they suffer on the job.
Every state has different requirements for workers comp coverage, and not every company will be required to carry it. Some states run their workers comp coverage through private insurance companies, while others have state run programs. Depending on the state, coverage may not be required in certain circumstances. For example, a company whose only employee is the entrepreneur themselves, or the entrepreneur and a spouse, may not be required to have a workers comp policy.
Employers Liability Insurance - Workers compensation insurance pays for the medical care and disability benefits for employees that are injured on the job, regardless of fault. But, what happens when an employee is injured due to workplace conditions, rather than just a plain accident? Well, workers comp will still pay for medical coverage, but an employee, or their family, may want to seek additional damages. This is where employers liability insurance coverage comes in.
When an employer is sued by their employees, the family of an employee, or a third party because the worker was injured, or became ill, due to workplace conditions, employers liability coverage comes into play. Because this type of policy offers coverage when employees are injured, or become sick, on the job, it is often times part of a workers comp package and may be a state requirement.
Business Interruption Insurance - If disaster should strike a company and it is put out of operation for a period of time, it will not be able to be make money as it normally does. For example, if a manufacturer's building suffers fire damage resulting in the inability to produce a product, the business will suffer. While a property policy should pay for the damage to the building and contents itself, the company will still be out the money it would potentially make if its manufacturing ability was still there.
Business interruption coverage pays in cases such as the one illustrated above. Anytime a company's ability to function is interrupted (assuming the reason is covered by the policy), its interruption policy should kick in and provide the necessary cash flow the company would otherwise see (up to policy limits, of course!).
Commercial Auto Insurance - Any vehicle that is operated commercially will need to have the right coverage. In all likelihood, your personal auto policy will not provide protection for business use of a vehicle, even if it is your personal car or truck. A commercial auto insurance policy offers the protection that commercially operated vehicles need. While a commercial policy offers similar protection you will find on a personal policy (such as liability, physical damage, and medical payment coverage), it is specifically tailored to the needs of business operators.
Directors and Officers Liability Insurance - Upper management (directors and officers) of a company or corporation are often times held liable for their actions if they result in actual, or perceived, damages to a third party. This includes actions taken by management that results in a lower valuation of a company (i.e. stock price), or negligence while performing their duties. Competitors can also sue if they feel that there are unfair business practices or anti-trust situations. This policy can protect the directors and officers of both publicly held companies, as well as privately owned businesses.
Because of the potential for a person holding an upper management position to be sued for their actions, directors and officers insurance is often times used to entice, and keep, the best talent. The policy is usually purchased by the company itself, but benefits the directors and officers that run the business.
Contractor Liability Insurance - Contractor liability insurance is generally considered to be coverage for companies or individuals in the construction business, not independent contractors that hire out their talents to different companies. As such, contractors insurance can include liability and property coverage specifically tailored to those in the construction field, as well as bonds that many contractors are required to have before they are allowed to bid on a project, or before they can start tearing into someone's prized dwelling.
Surety Bond - Surety bonds are used to guarantee the performance of an individual or company. For example, a general construction contractor may use a surety bond to show that they will finish a remodeling job. Or, a professional may use surety insurance as a way to ensure they will fulfill their contractual obligation. If the person or company holding the surety insurance coverage fails to perform up to their contractual obligations, the surety provider will financially compensate the customer so that they can find someone else to finish the job. It acts as a reassurance tool so that companies or individuals feel comfortable entering into a contract or agreement with the service provider.
Fidelity Bond Insurance - Anytime a business has employees, there is the potential to have a few bad apples that will not think twice before doing something dishonest. A fidelity bond guards against employee dishonesty, much like a property policy guards against damage to a physical structure. In the case that an employee causes financial harm to a business, the fidelity bond will cover the loss, up to policy limits. This is especially important coverage for a company with employees in position to steal directly from the company itself, or from its clients.
Key Man Coverage - Key person, or key man insurance, is designed to compensate a company should the named insured die or become incapacitated and unable to perform their job duties. Such a policy is usually taken out against a person who is vital to the success of an operation, and whose absence would have a profound affect on the ability for the business to continue operating, or to be profitable. Generally, such a policy is intended to compensate a company for the costs associated with finding a suitable replacement for the insured, or to train a suitable replacement.
Small Business Health Insurance - Whether a company has 1 or 100 employees, health insurance coverage is a factor. Small business health insurance coverage can be an individual policy that covers just the entrepreneur themselves, or a group plan for multiple employees. The number, and type, of eligible employees will determine the coverage that should be purchased. For example, a one-person operation will not be eligible for group coverage purchased through the company since there is no group to cover, so they would need to purchase an individual plan. However, a company that employs multiple people (other than immediate family members) may consider offering a group health plan as an employee benefit that is much appreciated and much sought after.
Additional insurance coverages an entrepreneur might need are found below. While these are not traditional, commercial coverages, they do represent important policies a business owner should consider for the financial well-being of their families.
Disability Insurance - Disability insurance can provide money if the policy holder is unable to work due to a sickness or injury that leaves them disabled. There are different types of disability coverage, including short-term disability and long-term disability, that will pay out for a specified amount of time, or after the insured is out of commission for a certain time period. If a family relies on an individual to be working, then disability insurance can provide a source of income should something happen where that individual is unable to work on a permanent, or temporary, basis.
Life Insurance - If someone, other than yourself, depends on your income to survive, then consider purchasing life insurance. This type of policy pays the amount specified on the policy upon the death of the named insured and can allow survivors to continue the lifestyle they are accustomed to. There are different types of life insurance including term, whole, and universal life insurance, each with their own advantages and disadvantages. Consider a life policy if your family would be at a financial disadvantage if you suddenly died. This is especially important coverage for an entrepreneur that is yet to build up a large enough nest egg for their family to survive on should something tragic happen.