There is a lot riding on your small business. You have invested your money, time, and sweat equity to build a company that will be successful for years to come.
Even if you make all the right business moves, unexpected costs can arise at any time. Accidents, natural disasters, data breaches, and other unexpected occurrences are an ever-present risk to business owners. Small business insurance provides additional protection for your enterprise and could be the difference between a bump in the road and a door-closing catastrophe.
Small Business Insurance Can Increase Resilience
Businesses that were operating during the COVID-19 pandemic do not need a reminder of how a disaster can strike out of nowhere and inflict a potentially fatal blow.
Many small businesses survive on razor-thin margins. A typical business with more than $10,000 in monthly expenses has only about two weeks of cash on hand. This financial fragility makes small businesses susceptible to any unexpected change from business as usual.
Although many businesses were beginning to bounce back from pandemic shutdowns and restrictions, they are now grappling with new challenges caused by price increases and a tight labor market. At a time when there are significant known risks to business, the threat of the unknown looms even larger. For example, an unexpected disaster or cyberattack could result in significant loss that threatens a business’s continued existence:
- The Federal Emergency Management Agency (FEMA) claims that an estimated 40 percent of businesses fail to reopen following a disaster such as a hurricane. Another 25 percent of businesses fail within a year of a disaster.
- By some estimates, at least 25 percent of businesses that close in the wake of a common disaster (e.g., a structure fire) do not reopen. 1
- More than half of small businesses that suffer a data breach or cyberattack go out of business within six months.2
Common Types of Business Insurance
Is your business prepared for an unexpected cost or operational interruption? It might not be if you do not have business insurance.
While most types of business insurance are optional and simply provide an extra layer of protection, others may be required by law:
- If your business has employees, the federal government requires you to carry workers’ compensation, unemployment, and disability insurance.
- Some states also require additional types of insurance, such as commercial auto insurance, professional liability insurance, and cannabis business insurance.
- Cities and counties may have their own insurance ordinances on top of state and federal laws.
Businesses that are just starting up should consult with a local business attorney to ensure that they have purchased all legally required insurance policies. Beyond that, small businesses should consider these common types of business insurance:
- General liability insurance. This type of insurance protects businesses against loss resulting from injuries to a person or their possessions, for example, bodily injury, property damage, and reputational harm. It is a must-have for in-person businesses and is highly recommended for those that advertise or own intellectual property, because it generally covers judgments arising from libel, slander, or copyright infringement. General liability insurance may be required in some industries or if you rent a commercial space.
- Malpractice insurance. Malpractice insurance, or professional liability insurance, is often necessary for physicians and other professional service providers. Malpractice insurance protects the business if a professional is found to be negligent in delivering their services. Professional liability insurance can cover lawsuit damages, legal defense costs, loss of earnings, and more.
- Property insurance. Commercial property insurance covers damage that occurs to an owned or rented building and the equipment inside it. It usually covers damage from fire, smoke, wind, hail, vandalism, and civil disturbances but not from earthquakes or floods.
- Home business insurance. A growing number of small businesses are started at home, and many established businesses continue to operate out of the home. Home-based businesses are usually not covered under a homeowner’s policy. Home-based business insurance solutions, such as general liability insurance or an endorsement, can be added to a homeowner’s policy.
- Business interruption insurance. Also known as business income insurance, this type of insurance covers costs related to an interruption of the business’s operations resulting from property damage. Business interruption insurance pays for losses like lost income, rent payments, employee payroll, and tax and loan payments. It supplements property insurance, which pays for physical damage to the building but not the secondary costs of a temporary shutdown.
- Data breach insurance. The internet opens new doors for small businesses, but those doors can sometimes admit unwelcome visitors. Small businesses are targeted in cyberattacks with alarming frequency. And these attacks cause billions of dollars in damages per year.3 Data breach insurance can cover costs associated with a cyberattack, including the costs of sending out notices, hiring a PR firm, offering credit monitoring services to affected customers, replacing lost income, and even paying ransoms.
The insurance coverage most beneficial to you will likely depend on whether any of the following factors apply to your business:
- you have employees
- you have a physical location
- you have valuable equipment
- the business is in a dangerous location or entails dangerous work
- you provide in-person products or services
- you perform contract work (contractors may require specific insurance policies)
- you are at risk of being sued
- you rent your workspace
- you plan to apply for a business loan
In addition to mandatory or recommended policies for your business, you may just feel more secure if you have certain kinds of insurance. Everyone has a different risk tolerance. If you feel that the extra peace of mind is worth the added cost of insurance, that alone can make business insurance a worthwhile investment.
The following types of insurance are also available for small businesses:
- Commercial flood insurance
- Employment practices liability insurance
- Management liability insurance
- Commercial auto insurance
- Commercial umbrella policy
Opening a business is inherently risky. There is no guarantee that things will go as planned. The thrill of striking out on your own, with few assurances, might be part of why you decided to open your own business. But there is a difference between taking calculated risks and recklessness. Not having the right insurance coverage arguably falls in the second category. While insurance cannot insulate you from all risk, it is a fail-safe that most businesses cannot afford to go without.
Call Us for Help with Your Business’s Legal Needs
We cannot prevent natural disasters or other unexpected challenges, but we can assist you in optimally structuring and maintaining your business to protect it against legal risks. To discuss any legal questions you may have regarding your business, reach out to our office to schedule a meeting.
1 Diana Farrell & Chris Wheat, Bend, Don’t Break: Small Business Financial Resilience after Hurricanes Harvey and Irma, JPMorgan Chase Inst. (Feb. 2018), https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-bend-dont-break.pdf.
2 Robert Johnson III, 60 Percent of Small Companies Close within 6 Months of Being Hacked, Cybercrime Mag. (Jan. 2, 2019), https://cybersecurityventures.com/60-percent-of-small-companies-close-within-6-months-of-being-hacked/.
3 Maddie Shepherd, 30 Surprising Small Business Cyber Security Statistics, Fundera (Jan. 23, 2023), https://www.fundera.com/resources/small-business-cyber-security-statistics.