Entrepreneur Insight

Commercial Insurance 101: What Business Owners Need to Know

Learn how to safeguard your business from common risks.

Many business owners often underestimate the risks that come with success. If a disaster strikes and your business is not prepared, all of your efforts and hard work may go down the drain. That’s why it is important to mitigate your professional liability exposure and protect your business from unwanted disruptions and unforeseen events with the help of commercial (also known as business) insurance.

Choosing the best comprehensive business insurance policy is crucial. After all, you don’t want to spend all this money just to find out that you don’t have enough coverage, or that you may have overlooked the type of insurance that your business really needs. So, how do you make sure that you get good business insurance? “You have to do two things,” says Ashley Liang, assistant vice president and sales executive at HUB International Insurance Services Inc., in Pasadena, Calif. “First, as a business owner, you need to have a basic knowledge of the insurance coverages. Second, you have to make a smart decision to choose a good insurance broker.”

What kind of business insurance do you need?

When it comes to business insurance, there is no such thing as “one size fits all.” Business owners need to choose insurance and coverage tailored to their needs and business operations. Running a restaurant versus running a warehouse carries different risks and liabilities and, therefore, requires two different insurance packages.

Additionally, insurance coverage varies based on the industry and the state that a business resides in. Each specific industry is unique and may require business owners to have specialized insurance coverage to fully protect their business. At the same time, some states require more coverage than others. To make sure you meet your state’s insurance requirements, please visit your state’s official website for more information.

To figure out which insurance coverage you need, familiarize yourself with different types of business insurance and then talk to a licensed insurance broker who understands your business and your potential exposures. Together, you can discuss your business needs, compare terms and prices, and choose an insurance package that best suits you and your business.

Below are the common types of business insurance to look for:

1. General liability insurance

General liability covers liability claims for accidents that occur on your premises or that are caused by your products. More specifically, it helps protect a business if physical injury, property damage, personal or advertising injury happens as a result of business operations. For example, someone slips and falls in your restaurant and injures themselves. They can take you to court for not taking care of the floor and sue you for up to $50,000. Or, you are a distributor of LED lighting, and a light bulb explodes and hurts your customer’s eyes—there could be a $1 million lawsuit on your hands. General liability insurance will cover those types of risks.

When seeking out general liability insurance, you should first evaluate the potential risks and hazards that surround your business, and then asses what you need coverage for, as opposed to what you don’t. Additionally, when choosing general liability policy limits (total amount that the insurance company will pay in the case of a claim), you need to make sure that the policy limits are high enough to provide you with adequate protection in case your business gets sued.

If you want additional coverage, consider adding on specialized products or endorsements under your general liability policy. Examples of such add-ons include pollution liability, liquor liability, fiduciary liability, etc. The endorsements extend the general liability policy to provide coverage for different liability exposures and are unique to each business.

2. Commercial property insurance

Commercial property insurance covers losses when the physical assets of your business, such as your building and everything that’s inside, either owned or rented, are stolen, damaged or destroyed in a fire, theft, vandalism, or natural disaster. For example, your warehouse with $5 million worth of inventory inside catches on fire and all your inventory gets destroyed. Your commercial property insurance will cover the losses, and will pay to repair or replace your business property. Without commercial property insurance, companies (especially startups and small businesses) run a risk of losing their business.

Commercial property insurance covers everything that could be described as a “physical asset,” as long as you can prove that the item was purchased for business purposes or is essential to the business operations. If you are not sure which “physical assets” can be insured, your insurance broker or agent can help you determine the full list of items that your business owns that can be covered. It’s important to remember, however, that commercial insurance does not cover commercial vehicles; you need a separate policy for that.

The cost of your commercial property insurance premium will depend on the value of the building and the physical assets inside of it. The rate is often determined by calculating the total value of your assets, plus a risk factor, which depends on the nature, as well as the location, of your business.

3. Businessowners policy

Businessowners policy (BOP) typically combines general liability and commercial property insurance into one package. Small to mid-sized businesses will especially benefit from having BOP, as it is cost-effective, includes important coverages, and can be modified to fit your industry and your business needs. Additionally, when you get a loan, a bank or lender will often require you to have a businessowners policy. BOP, however, does not cover professional liability, auto insurance or workers’ compensation.

If you are looking to get this insurance package, first check with your broker to see if your company qualifies for BOP coverage. Usually, the class, size, and revenue of your business, as well as the location where the majority of business operations takes place, determine your eligibility. If you own a small to mid-sized business, have fewer than 100 employees, make less than $1 million in revenue, and don’t have a large office or operate in high-risk industry, you are more likely to qualify for a businessowners policy.

As with general liability insurance, you can customize your policy and add necessary protection through endorsements. An experienced insurance broker or agent who specializes in your industry will guide you through the different types of BOP endorsements, and make sure that the coverage and policy limits you choose are sufficient and fit your business needs.

4. Workers’ compensation

Workers’ compensation (comp) insurance provides benefits to employees for injuries or illnesses that happen as a result of and during the course of employment. Workers’ comp can pay for employees’ medical bills, recovery costs, missed wages, as well as death benefits and funeral expenses. Most states require employers to have workers’ compensation coverage as soon as they hire their first employee. However, each state has their own spin and requirements that vary by industry, size, business structure and payroll.

There is no universal limit on the amounts that can be paid to an injured employee. The amount is set by the worker’s compensation board in each state, and takes into consideration such factors as employee’s salary and the severity of the injury. Employer liability coverage, on the other hand, has its set limits. The basic policy limits required by law range from $100,000 to $500,000 per employee for bodily injury. However, these limits do not apply if your business operates in “monopolistic states” (North Dakota, Ohio, Washington, Wyoming, Puerto Rico, and U.S. Virgin Islands), where workers’ compensation coverage must be purchased from the state’s workers’ compensation fund.

If you think that you will exceed the liability limits, you can purchase an increased liability coverage for a nominal cost. Depending on the insurance company, a 2 or 3 percent premium increase can boost your coverage from $500,000 to $1 million.

5. Professional liability

Professional liability insurance (PLI), also known as errors and omissions (E&O) insurance, covers lawsuits that claim professional negligence, undelivered services, or mistakes made by people who make a living off their expertise. Accountants, lawyers, doctors, dentists, IT consultants, architects, general contractors, and others count as experts who perform professional services, whose errors and omissions will not be covered by general liability insurance. E&O insurance covers the costs of legal fees, attorney’s fees, and settlements and judgements against your business.

The policies for professional liability vary depending on the products or services, or the professional advice that your business provides. If you want to be extra safe, there are several types of professional liability protections that you can choose, such as architect and engineer liability, data compromise liability, banking and broker liability, technology liability, etc.

Even if you have a limited liability company or professional limited liability company (LLC or PLLC), which are the types of business entities geared towards licensed professionals, you still need professional liability insurance. While your personal assets will be protected in the case of a lawsuit, you will still be liable for the debts and obligations of the business itself. And, if things go wrong, your business could be forced into bankruptcy. By having E&O insurance, you can minimize the risk and protect the future of your livelihood.

6. Employment practices liability

Employment practices liability insurance (EPLI) provides coverage to employers against claims made by employees over discrimination (e.g. based on race, age, sex, nationality, visa status), sexual harassment, failure to pay overtime wages, wrongful termination, and similar issues that general liability insurance will not cover. Employee practices lawsuits are becoming more and more common these days and can cost employers thousands of dollars (the average cost of an EPLI settlement is $125,000), making EPLI insurance a hot commodity and a necessity for businesses that want to protect themselves.

Since policies for employment practices liability vary, it’s important to learn how EPLI works and then figure out what you need, insurance-wise.

How much you pay for employment practices liability insurance will depend on the size of your staff, type of business, hiring and firing policies, as well as prior history of any legal actions taken against your company. Sometimes, EPLI policies can be offered as endorsements to a general liability insurance policy or a businessowners policy.

7. Cyber liability

Cyber liability insurance covers data breaches and data thefts. Any business, regardless of size, that accepts credit cards, stores customer information (customer names, email addresses, bank accounts, social security or driver’s license numbers, etc.) or does business online is at risk. Let’s say, you run a CPA office; your computer system gets hacked, and you lose all of your data, including customer information. Your customers can sue you for leaking private information and for an increased risk of identity theft. To reduce the negative impact of a data breach, you need cyber liability insurance, which will pay for recovery expenses, legal fees, and rebuilding and restoring your computer systems.

To reduce the cost of the cyber liability insurance premium, as well as to reduce the risk of a data breach, you can take preventative measures, which range from providing proper training to employees and installing advanced security software, to implementing internal procedures for handling customer data and providing a VPN (virtual private network) for remote employees to access company servers.

It’s a good idea to regularly review your policy with your agent to check what you are covered for and to make sure that you are getting the best value out of your policy. Upon review, you may add or opt out of certain inclusions, which can save you money or give you better protection.

As data breaches become more common, cyber liability insurance is bound to become just as vital to businesses as other types of business insurance.

8. Umbrella and excess liability

Umbrella and excess liability insurance policies add another layer of protection to your business by providing coverage above the limits of underlying coverage. Although the terms are often used interchangeably by insurance professionals, these two policies are not the same.

Excess liability insurance can only be applied to a single primary policy and provides coverage when an underlying policy’s limits are reached. For instance, your general liability coverage is for $1 million and someone sues you for $1.5 million. Since the claim exceeds your general liability limits, you would have to pay the uncovered expenses out-of-pocket. Now, if you have an excess liability for your general liability insurance, it will cover the amount in excess of your coverage limit, but you can’t use it toward any other policy. Excess liability policies are a great resource for small to mid-sized companies that are not purchasing full insurance packages. It’s important to note, however, that excess liability insurance is more restrictive and doesn’t offer any broader protection than that of the underlying policy.

Umbrella liability insurance, on the other hand, is a type of excess insurance that provides additional limits and can be applied to multiple underlying liability policies, such as general liability, employers’ liability and commercial auto insurance. Umbrella liability insurance usually provides broader coverage than an excess liability policy, and it may cover claims not included in the underlying policies. Umbrella liability insurance is usually geared towards larger companies.

While umbrella and excess liability policies are not mandatory for businesses, there are some situations where business owners may find these types of protection especially advantageous. For example, if you want to expand your existing coverage limits on multiple policies, it would be more cost-effective and convenient to expand them all at once through umbrella liability insurance; or, if you operate in a high-risk industry where the chances of being sued are greater, you may want to invest in this type of insurance. On the other hand, if you bear a high risk in one particular area (e.g. employees sue you for negligence), you may prefer to choose excess liability coverage.

The premium costs for these two coverages will vary widely based on what policies you have in place, the size of your business and the coverage limits that you choose.

When should you review your insurance coverages?

“Since a commercial insurance policy is a 12-month contract, we usually don’t recommend our customers to jump from one carrier to another, midterm. That could actually hurt their record,” says Liang. “However, during the 12-month period, you should review your policy and reevaluate your coverages whenever your circumstances change or if you have a major change in business operations.” For example, if your sales increased, or you purchased new equipment, hired or let go of employees, added or removed locations, etc. If that’s the case, she urges business owners to let their insurance brokers guide them on how to react. “Whether it results in a new policy or insurance endorsement, ask insurance professionals to handle it for you,” says Liang.

An experienced insurance broker will help you choose an insurance package that best suits your business needs. (Photo credit): Gettyimages.com/pixelfit

"You should review your policy and re-evaluate your coverages whenever your circumstances change or if you have a major change in business operations."

- Ashley Liang

How much does business insurance cost?

Many factors will determine the annual insurance premium your carrier will charge: the blend of coverage you choose, the size of your company, your sales, your experience, your loss history, the number of employees you have, the risks your business has, etc. Every case is unique, and the rates for business insurance may differ dramatically for companies of the same type and size, and from carrier to carrier.

As a business owner looking for commercial insurance, you should have a basic understanding of the common coverages so that you can anticipate what you will get from insurance brokers. In addition, you should shop around and get competitive quotes from several different brokers. Compare rates, terms, and benefits for insurance offers and find a carrier that best meets your business needs.

But remember, cost is just one of the factors: having a good insurance broker is equally important. After all, business insurance is never just a one-year policy. You have to renew it every year. “Finding an experienced and good-reputation agency, or a broker that would do their due diligence to re-shop for you every year, provide you with different services, and give you an expert advice is crucial,” Liang says.