If you’re a first-time entrepreneur just starting out, you might think of most insurance as a luxury safety net. Or maybe you think of it as something you pay a lot for and never use. Maybe you feel you’d be better off by policing your own behavior and keeping a healthy savings account. And for individual consumer insurance, you might even be right in some cases.
However, if you carry that mentality over to your business, you’re setting yourself up to fail. Society is more litigious than ever, and in your business, your own behavior doesn’t significantly impact the overall liability exposure your business faces. And the more business you do, the more statistically likely it is you are to run into situations where insurance coverage is the only thing that keeps you in business.
Studies show anywhere between a third and half of businesses face a lawsuit each year, which can cost anywhere from a few thousand dollars in legal fees to six-figures or even millions of dollars in settlements. Natural disasters are also devastating to the financial health of uninsured or underinsured businesses. Business insurance can often be the difference between staying in business or closing your doors. There are a lot of reasons your business needs insurance, So, let’s explore how to shop for business insurance, and what kinds of policies exist.
Thanks to our Partner, USAA Small Business Insurance
To create this article, Bunker Labs leaned on the good faith and expertise of the fine people at USAA Small Business Insurance. USAA has been serving the military community for a century, helping veterans and military families find insurance, and also banking and retirement services. They’ve also been a great supporter and partner to Bunker Labs, working with us to put on their 100-Year Anniversary Pitch Competition. Their first-hand expertise in the world of small business insurance was vital in the researching and creation of this piece.
How-To Shop Business Insurance
Shopping business insurance isn’t usually considered one of the most fun parts of entrepreneurship, but after an accident, disaster, or nightmare-scenario customer interaction, you’ll be glad you have it. We’ve outlined a simple four-step process below that can give you some structure to get started shopping insurance coverage, and we’ve incorporated some tips and best practices along the way.
Step 1: Assess Risks
Every industry has a unique risk profile. If you’re selling food, your primary risk is someone getting sick from your food. If you make a physical product, then someone being injured while using the product is your main concern. If you have a physical location where customers interact with your business, then you worry about people becoming injured within or doing damage to that location.
Think about your business and where the top three to five areas of risk are, based on current operations, assets, and locations. A good way to think about this is “Which potential lawsuits against my business scare me the most?” Getting coverage in these areas should be a priority, and you should consider upgrading those policies to enhance your coverage, or purchase a Commercial Umbrella policy to extend their coverage.
Areas of low risk are probably fine with cheaper policies (though if your risk is truly low, the policies can be so reasonably priced that upgrading the policy is prudent).
Step 2: Learn Legal Requirements
Most insurance requirements for businesses are decided at the state level, but currently, many states have some similar, baseline requirements. There are also coverages for property and liability that many insurers bundle together under a “business owner’s policy,” which can simplify the shopping process and reduce overall price by including these basic needs in a single product.
- Worker’s Compensation, Disability, and Unemployment Insurance: If you have employees, at some point these policies are required, though when may vary based on the number of employees and how many are full-time.
- Professional Liability: If you are in certain industries, or sign on some loan or leasing agreements, this insurance may be required. Some industries have specific professional liability requirements, like medical malpractice insurance for doctors.
- Commercial Auto Insurance: If your company operates vehicles, some form of commercial auto insurance must cover those vehicles.
Each state might have separate thresholds for these requirements, or additional required policies to legally operate.
Further, you may find that in your industry, certain licenses, leases, loan agreements, or permits require insurance policies to obtain, and some clients may require liability protection policies for large contracts. While a trusted insurance agent or broker can walk you through the legal requirements for your region and industry, it is a good idea to do some research on your own first, to set your expectations before shopping.
Step 3: Shop Licensed, Reputable Brokers and Agents
You can generally acquire commercial insurance three separate ways: shopping online, approaching an agent, or approaching a broker. Because commercial insurance is so industry specific, purchasing “one-size-fits-all” packages online can provide ill-fitting coverage, which might mean you’re paying too much or you’re not well-covered when it’s time to make a claim.
Agents tend to work for a single insurance provider. While their products are generally limited to a single company (meaning you’d have to approach several agents to shop price), it is often easier to find an agent that has other clients in your industry, and specializes in selling insurance to businesses with similar needs. We recommend starting with Bunker Labs’ Small Business Insurance partner, USAA.
Brokers tend to be independent of any single carrier, offering products from many different providers. Independent brokers can often find you some savings on your premium costs because they can shop price for you. However, finding a broker that specializes in your industry can be more difficult, particularly if you’re in an emerging industry that doesn’t have a well-understood risk profile. If they sell you policies from multiple carriers, it can also complicate the claims process (though many brokers provide some support in that arena).
It’s not a terrible idea to shop a mix of agents, brokers, and online quotes. Most agents and brokers are happy to educate, so if you have questions (or maybe a print-out of an online quote) and want to understand the difference between policies or products, you should feel empowered to ask.
It’s Not Just About Price
While your instinct might be that price is the most important feature to shop, it’s just one of a few vital metrics. The coverage (situations when the policy pays out, and the maximum pay out), deductible (the amount you pay out of pocket before insurance coverage kicks in), and the complexity and reliability of the claims process (the steps taken to receive a check from the insurance provider when needed) are all at least as, if not more important. Insurance policies that don’t pay out or are extreme hassles to make claims against aren’t typically worth saving a few dollars in premiums. Checking the company’s rating with the Better Business Bureau (BBB) and “AM Best” rating via a google is an easy way to get a sense of their claims practices.
However, once you do find a broker or agent you trust, quoting a price that sounds affordable, you should run most or all your commercial insurance through them. It makes the claims process when disaster strikes easier when it’s all through a single agent or broker, rather than making claims on policies from half a dozen different insurers yourself. It also reduces the risk of unintentional gaps in coverage, and tends to save a lot of time on your end. It can also save money, as a lot of business insurance bundles three or more policies into a single product at significant savings.
Step 4: Re-Assess Annually
Your commercial insurance policies renew annually, and there is a window to change coverage or your agent or broker. If you have a broker or agent you trust, for a price you can afford, with a carrier that has an easy-to-access claims process, it’s generally not worth the worker hours to entirely re-shop your commercial policies every single year if your operations have been relatively static. However, bringing in another broker or agent to make a sales pitch and give a quote ahead of your renewal isn’t a bad practice.
While you don’t necessarily have to re-shop price every year, it is vital you re-evaluate your business insurance coverage needs annually and whenever there is a major change at your business. You also need to consider how your coverage needs change when adding new assets, services, employees, and more as your business grows or adapts to market conditions. While some changes can wait until your renewal period, others are worth calling your agent or broker as they occur to ensure proper coverage.
Basic Business Insurance Coverage
There are roughly twelve different types of insurance most businesses use, five of which are fundamental to having coverage. Most of these are protection from paying out on Tort laws, which is to say, when your business causes harm to a third party and is subject to a civil lawsuit. Insurance doesn’t typically apply to criminal penalties, only civil suit claims.
All cost estimates below come from howmuch.net and are just an estimate.
Commercial Property Insurance
- Also Known As Business Property Insurance
- What’s it Cover? If your business property (real estate, equipment, furniture, etc.) is damaged, destroyed, or lost due to a fire, storm, natural disaster, vandalism, riot, theft, explosion, or other unforeseeable occurrence, this insurance pays to replace or repair the business property.
- Average Cost in US $1,000-$3,000/year per 1 million dollars of coverage
General Liability Insurance
- Also Known As Third-Party Insurance
- What’s it Cover? If, through the course of business operations, your business causes damage or injury (of any kind, including bodily harm, property, reputation, etc.), this insurance pays the claim to the aggrieved party, or disputes the claims in court if need be.
- Average Cost in US $300-$750/year, based on industry and years in business
Product Liability Insurance
- What’s it Cover? If you are sued because you manufactured or sold a defective product, or a product that caused an injury or damages, this insurance pays out that claim or disputes the claims in court.
- Average Cost in US $2-$3/year for every $1,000 in revenue, modified by product risk
Professional Liability Insurance
- Also Known As Professional Indemnity Insurance, Errors & Omissions Insurance
- What’s it Cover? If your company gives bad advice, fails to advise as contracted, or performs a service that results in harm or damages to a third party or their property, this insurance pays that claim or disputes the claims in court.
- Average Cost in US $900-$2,000/year based on industry and number of employees
Workers’ Compensation Insurance
- Also Known As Workman’s Compensation Insurance
- What’s it Cover? If your employee becomes sick or injured as a result of their work or workplace, this insurance covers their wages, medical bills, funeral costs, and any civil settlements that result.
- Average Cost in US $800/year. Note that this varies wildly based on your industry risk, number of employees, and payroll amount. Your annual rate might be anywhere from 0.1% to 10% of your annual payroll.
Additional Business Insurance Coverage
There are many other types of insurance businesses buy, but the following types are viewed as only necessary for certain kinds of businesses, or growth stage companies moving beyond the startup stage of the business.
Business Income Insurance
- Also Known As Business Interruption Insurance
- What’s it Cover? If unforeseen disaster interrupts your ability to generate revenue, this insurance covers the costs of keeping you in business, covering bills, profits, and more.
- Average Cost in US $750-$1,250/year, with high-risk disaster regions (such as Tornado Alley) as high as $10,000/year
Commercial Auto Insurance
- What’s it Cover? Similar to personal auto insurance, it covers liability if a driver of your company vehicle has an accident and damages people or property, and also covers repairing or replacing the vehicle itself.
- Average Cost in US $750-$1,200/year, but varies widely with coverage, desired deductibles, driver history, and expected usage
Commercial Umbrella Insurance
- Also Known As Excess Liability Insurance
- What’s it Cover? This blanket policy extends the coverage of most of your existing liability policies, creating extended coverage in the event your business is found liable for damage exceeding pay-out limits.
- Average Cost in US $900-$1,500/year per 1 million dollars of coverage, but varies widely by risk, from as low as $200/year to $2,500/year
Cyber Liability Insurance
- Also Known As Data Breach Liability Insurance
- What’s it Cover? If privileged data escapes your company’s possession and is then used to commit fraud, identity theft, or otherwise scam a third party, your business could be held liable to pay damages, which this insurance then covers or disputes.
- Average Cost in US $750-$8,000/year for small businesses based on risk
Employment Practices Insurance
- Also Known As Employment Practices Liability Insurance
- What’s it Cover? If an employee or former employee sues your company over wrongful termination, sexual harassment, retaliation, being passed over for promotions, or other accusations related to unfair or hostile work environments, this policy pays legal fees and settlement cost, or disputes the claim.
- Average Cost in US $1,200-$2,400/year for most small businesses, but can vary widely based on number of employees and coverage amount
Home-Based Business Insurance
- What’s it Cover? Home-Based Business Insurance is a General Liability Insurance and Commercial Property Insurance bundle, often added as a rider to your existing Homeowner’s Insurance policy to protect some business equipment and liability coverage for third-party injuries, usually at a lower price than a standard Business Owners Policy.
- Average Cost in US $250-$500/year based on amount of coverage
- Also Known As Key Man Insurance, Key Person Insurance
- What’s it Cover? If a key employee or one of the business owners suddenly died, this insurance can be a tool to either compensate lost revenue while seeking a replacement. Also, a policy can be set up alongside a legal will to automatically buy out the deceased owner’s share of the company from their beneficiaries. Note that for this latter case, legal paperwork that is included with an updated will is often required to ensure the insurance money is paid out to the deceased’s family and the business ownership transfers to the deceased’s business partner(s).
- Average Cost in US $600-$1,200/year for 1 million dollars of coverage for a single person, but varies widely based on individual health, and other factors.
Industry-Specialized Business Insurance
There are dozens of specialized kinds of insurance policies. Don’t be intimidated by the long lists of industry-focused insurance products. Most of them are simply specially priced bundles of existing types of polices tuned for risk in specific industries, or unique policies for very specific kinds of risk most businesses don’t face.
For example, Medical Malpractice Insurance functions the same as Professional Liability Insurance, but because of the risk involved and additional laws governing the practice of medicine, it is a distinct policy. Similarly, other industries like food service have insurance products aimed at them, like Restauranteur Insurance. Generally, these are often bundles of General Liability Insurance, Commercial Property Insurance, and some specialty insurance (like Food Contamination Insurance).
This is often done to separate these specific groups from the general business insurance risk pools, either to give a low-risk group a better price, or to keep a high-risk group from raising the rates on other customers, and just to tailor coverage to the needs of different industries.
Next Steps for Finding the Right Insurance for Your Small Business Needs
Take some time to re-evaluate your coverage. If you’ve decided you want to shop, USAA is a good place to find a licensed and credible agent today, or talk with your Bunker Labs Veterans in Residence, CEOcircle, or Breaking Barriers in Entrepreneurship cohorts about who they use for their business insurance needs. Not part of a Bunker Labs cohort? Check out our programs and see which one fits you best, and begin your entrepreneurial journey today!