What is Business Insurance? A Comprehensive Guide

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Contributor, Benzinga
Updated: March 8, 2022

Building a business from the ground up takes a lot of hard work and persistence. So it makes sense to protect your hard work by investing in business insurance. Several factors go into choosing the suitable types of insurance for your specific business. Keep reading to learn more about business insurance, and select the coverage that is right for you.

What is Business Insurance?

Business insurance is a form of risk management designed to protect your business from financial losses resulting from fires, theft, accidents or some other type of loss. You may also hear business insurance referred to as commercial insurance. Without business insurance, you may not have the necessary financial resources to continue operating after a loss.

3 Key Components of Business Insurance

Business owners seek protection for these 3 main components:

Property Damage

Business property insurance covers property damage to your business if personal property, tools, equipment, inventory, computers, documents or outside landscaping is damaged, stolen or destroyed. 

Liability Protection

No business should be without liability protection. It protects you against liability claims for property damage or bodily injury that can occur during your regular business operations. Without liability protection, you would have to cover these liability claims out of pocket.

Contract Disputes

As a  business owner, you could face a breach of contract lawsuit if you provide services to a client and the client claims you failed to meet the requirements outlined in a contract both of you signed. For example, a lawsuit could result if you miss a deadline listed in a contract or if you deliver a faulty product.  Breach of contract is covered by professional liability insurance. Not only does professional liability insurance cover breach of contract, it also covers negligence claims or work errors and oversights.

Is Business Insurance Required by Law?

The legal requirements for business insurance vary by state. The federal government requires all businesses to provide some form of coverage for workers’ compensation, disability and unemployment insurance. Depending on your state, there may be additional insurance requirements for businesses. You can visit your state’s department of insurance website to find out more about your state’s insurance requirements.

Important Business Insurance Terms and Definitions

Insurance terms can be confusing, so we have included some standard terms you may hear on your journey to find the best insurance coverage for your business. You can visit the National Association of Insurance Commissioners (NAIC) insurance terms glossary for a more complete list of insurance terms and definitions.

Premium

The premium is the money you pay for insurance coverage.

Aggregate

The aggregate is the maximum amount the policy will pay for any single loss or multiple losses during the coverage period.

Deductible

An insurance deductible is the amount you pay out of pocket before the insurance company pays anything toward a claim.

Exclusions

An exclusion is an item expressly excluded from coverage. For example, if you intentionally cause harm to someone, your business liability policy will not cover it. In addition, intentional acts are excluded from coverage.

Endorsement

An insurance endorsement adds coverage to your policy for something that would otherwise be excluded or omitted from being covered.

Named perils

Named perils are those specifically listed in the policy contract as covered.

Open perils coverage

Open perils coverage means that a type of loss is covered unless it is specifically excluded from coverage.

Certificate of insurance (COI)

A certificate of insurance is a document showing proof of coverage. For example, contractors may have to show project managers a COI before they can begin work.

Subrogation

Subrogation is when the insurance company brings a liability suit against a 3rd party on behalf of the insured after it has paid a claim when the actions of the 3rd party caused the loss. It is a way the insurance company can be reimbursed for the amount paid for the claim.

Actual cash value

Actual cash value is a form of repayment for losses based on the value of the property minus and depreciation costs.

Replacement cost

If your policy pays replacement costs, it means the insurance company will replace your property based on today's value without any depreciation for everyday wear and tear.

Types of Business Insurance

Business insurance is not one size fits all, but no matter what type of business you own, you will need some form of insurance protection. Here are some of the most common types of business insurance.

What is a business owner’s policy (BOP) business?

A business owner’s policy (BOP) is one of the most common types of business insurance because it combines several types of coverage most businesses need into one policy. For example, the BOP package policy provides coverage for property damage, business interruption insurance and liability protection.

The BOP does not cover workers’ compensation, professional liability, commercial auto, health or disability insurance.

What is general liability insurance?

General liability insurance protects against financial loss for property damage, bodily injury, libel, slander, medical expenses, and legal expenses if you are sued. 

What is professional liability coverage?

Professional liability insurance is coverage for businesses that provide professional services and advice to customers. The professional liability policy protects your business assets if you are sued for professional errors, negligence or malpractice.

What is commercial property insurance?

Commercial property insurance covers your building and its contents and any outside fixtures, attached or unattached structures like garages, signs or fences. Basic commercial property insurance coverage protects businesses from losses caused by fire, theft, explosions, vandalism, vehicle damage and other similar causes of loss. If a type of coverage is not listed in the policy, it can often be added by endorsement.

What is business income insurance?

Business income insurance, also known as business interruption insurance, protects you from unexpected losses if your business should have to close because of an unforeseen event such as a natural disaster. The business interruption policy covers company operating expenses like employee salaries, utilities or loan payments.

The policy will also pay for relocation expenses if you temporarily move to a different location while your building is repaired. Lost income payments are one of the essential features of a business income insurance policy. 

Business interruption insurance does not cover some things, including flood damage, glass breakage, or losses resulting from theft or vandalism. However, in some cases, this coverage can be added through an endorsement. For example, suppose your business is closed for an extended period. In that case, you may add an extended coverage endorsement that allows you to replace your lost income while you get back on your feet and rebuild your business.

What is workers’ compensation insurance?

Business owners are responsible for providing workers with a safe work environment, but accidents can happen even in the safest workplaces. Workers’ compensation is insurance coverage designed to provide medical benefits to ill or injured employees regardless of fault. Most states require employers to carry some form of workers’ compensation insurance.

Workers’ compensation covers injuries and illnesses that happen during the employee’s regular work activities. Coverage is also provided for unnatural events while an employee is at work, such as workplace violence, terrorism or a natural disaster.

Every state has its own workers’ compensation laws determining which companies must purchase workers’ compensation and the amount of benefits each injured worker is entitled to receive. To determine your own state’s requirements, you should visit your state’s workers’ compensation department website.

Premiums for workers’ compensation are based on the type of business and how much payroll the company has. In addition, each business has a class code for its specific industry. The location also plays a factor in workers’ compensation premiums, as does the company’s loss history. 

What is cyber security/data breach insurance?

The need for cyber protection for businesses both small and large is greater than ever before as the incidences of data breaches continue to increase. According to Insurance Information Institute (III) statistics, losses from identity theft cases rose 42% to $712.4 billion in 2020. Without data breach insurance, the company is legally liable for all the damages resulting from cyber attacks.

When a business suffers a data breach, the related expenses can be enormous. Cyber liability insurance covers expenses for data destruction, data theft, hacking, extortion, legal claims for defamation, privacy violations and defense costs if the company is sued and has to go to court.

What is commercial auto insurance?

Commercial auto insurance provides coverage for vehicles you use to carry out your business operations, including coverage for transporting materials and goods, coverage for auto dealers and other similar auto businesses. In addition, the business auto policy provides liability coverage for owned, nonowned, hired or borrowed vehicles, physical damage coverage, collision and towing. Coverage for medical payments, personal injury protection, and uninsured motorist coverage can be added by endorsement.

What is business interruption insurance?

Business interruption insurance (BI)  provides coverage for your business income if your business operations are temporarily suspended. For example, your business may have to temporarily stop operations if building repairs are needed because of a covered peril like theft, damage from a vehicle or a natural disaster. BI can help keep your business going by helping with these types of expenses:

  • Employee payroll
  • Lost income
  • Loans
  • Mortgage payments
  • Taxes due

What is business health insurance?

As a business owner, you can purchase a policy to provide medical coverage to your employees. The policy may cover all your eligible employees and their dependents or just the employee depending on the type of group health insurance policy you purchase. The insurance company you buy employee group health insurance from will determine the cost based on several factors of the group of employees you insure, including age, gender or underlying health conditions.

What is errors and omissions insurance?

Errors and omissions (E&O) liability insurance is designed to protect businesses from negligence or professional mistakes when giving advice, consulting or making recommendations to clients.

If your business involves giving professional advice, you need liability protection if you provide professional advice that causes your client harm. For example, bad investment advice could cause a client with an extensive investment portfolio to lose thousands or hundreds of thousands of dollars. In such a case, the client may bring a liability lawsuit.  E&O coverage offers protection for business owners against these types of expensive lawsuits.

What is malpractice insurance?

Malpractice insurance is a type of E&O coverage, but it is specifically designed for physicians and other types of healthcare providers. It protects doctors or other healthcare providers from negligence claims if healthcare treatments cause injury to a patient. The policy does not cover injuries caused by: 

  • Intentional acts
  • Acts while under the influence of alcohol or drugs
  • Unauthorized disclosure of a patient’s medical records
  • Sexual misconduct
  • Fraudulent or illegal acts
  • Injuries resulting from loading or unloading patients

What is pollution liability insurance?

Pollution liability insurance is essential coverage for contractors. The pollution liability policy provides liability protection from damages caused by the exposure of hazardous materials waste emissions. 

Businesses that can benefit from pollution liability protection include excavation/construction contractors, manufacturing businesses, asbestos abatement and agricultural industries, just to name a few. In addition, the pollution liability policy pays damages for bodily injury and property damage and environmental cleanup costs resulting from toxic waste contamination.

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Protect Your Business With the Right Coverage

Business insurance is necessary to protect your company’s financial assets after a loss. In addition, you can arm yourself against life’s unexpected surprises with business insurance. Come back to Benzinga often for more insurance tips and financial advice to help you grow your business.

Frequently Asked Questions

Q

How much is business insurance?

A

The price of business insurance will vary based on the types of coverage your business needs. Not every business needs the same types of coverage. Several factors go into determining your cost for business insurance, including the type of business you own (hazardous industries like asbestos abatement may pay more for insurance), your claims history and the location of your business.

 

Q

Who needs business insurance?

A

If you depend on your business income to live, you should protect your business with insurance coverage. Without insurance, a loss could bring catastrophic financial losses that may force your business to close.

 

Q

Do all businesses have to offer health insurance?

A

The law does not mandate business owners to offer insurance. However, under the Affordable Care Act (ACA),  businesses with at least 50 full-time employees may face tax penalties if they do not provide health insurance for at least 95%  of these full-time workers.