The 9 Types of Small Business Insurance Coverage You Need

As with health insurance or car insurance, small business insurance is hopefully something you never have to use. But when something unexpected happens, having business insurance can be the difference between your business’s continued success or failure.

Unfortunately, a lot of businesses aren’t covered. According to Next Insurance, 44% of small business owners have never purchased business insurance, even after operating for at least one year.^[1] By purchasing the right types of business insurance, you can protect your company’s assets against damage and legal claims.

Many small business owners give up on purchasing business insurance because of how confusing the process can be. Every business will need a slightly different insurance package depending on the size of the company, the location, and the industry—and the choices can be overwhelming, especially if you’ve just started your business.

In this guide, therefore, we’ll break down the different types of business insurance, how much they cost, and the purchasing process to find the best small business insurance coverage for you.

Now that we know a little more about what business insurance is and why it’s important, let’s talk about the different types of small business insurance.

Although there are additional types beyond our list, these are the nine types that you’ll likely want to consider first and foremost when you’re thinking about what kind of business insurance you need.

In the chart below, you’ll find these nine types of business insurance summarized—including what the insurance covers and roughly how much each type of policy will cost your business:

One of the three types of business insurance that, if you have employees, may be required by law is workers’ compensation. States require most employers to carry workers’ compensation insurance in case employees are hurt on the job. This is definitely a requirement that you don’t want to take lightly. Failure to purchase the required amount of coverage can result in fines and, rarely, even in criminal penalties.

If an employee experiences a work-related injury, workers comp will cover their medical expenses and pay them with a portion of their wages while they recover. For example, workers comp would cover an employee’s back pain that stems from poor ergonomic desk setup. If an employee sues your company for work-related injuries, workers’ compensation insurance usually covers the cost of defending the lawsuit.

You can purchase workers’ compensation insurance through a broker or private carrier. Business insurance quotes for workers comp typically run from $0.75 to $3 per month per $100 in employee wages.^[3]

Many states, such as New York, offer a state-run insurance fund that sells workers comp insurance at regulated rates.^[4] Larger businesses might even have the option to self-insure. You can learn more information by contacting your state’s insurance department or workers’ compensation board.

Unemployment insurance is another government-required type of insurance coverage. This small business insurance covers your employees in case of a job loss or termination. Unlike workers comp or many of the other types of business insurance we’ll discuss, unemployment insurance is not something that you purchase from an insurance carrier.

Instead, along with other payroll taxes, employers pay federal unemployment taxes (FUTA) and state unemployment taxes (SUTA). The state administers this program for employers and employees. Your tax burden depends on the number of employees you have, your employee turnover, and whether you’re a new or established business. While an individual is out of work, they can apply to receive unemployment benefits.

Employers can calculate and make SUTA or FUTA tax payments on their own, but it’s often easier to let your HR software or payroll service take care of the calculations for you. Just don’t forget to contact your state’s unemployment agency and sign up for an employer account when you hire your first employee.

Disability insurance provides guaranteed payments to employees at a percentage of their income if they’re unable to work due to an illness or injury. Unlike with workers’ compensation, the illness or injury does not have to be work-related. For instance, a pregnant employee can receive disability benefits after giving birth.

Currently, five states—New York, California, Hawaii, New Jersey, and Rhode Island—require employers to provide some level of short-term disability insurance (SDI).^[5] SDI covers employees for three to six months after they’ve been injured or fallen ill.

Even if you’re not in one of those five states, short-disability coverage can provide peace of mind to your employees and make you a more competitive employer. Long-term disability coverage, which is more rarely provided, lasts until the expiration date stated in the policy or until the employee is able to return to work. The typical cost of disability insurance is 0.25% to 0.50% of your payroll.^[6]

Although businesses are not legally required to purchase general liability insurance, this is one type of small business insurance every company should have. General liability insurance protects your business if a third party—such as a client, vendor, or customers—get injured from your business’s property, products, or services.

The following specific types of losses are covered:

• Physical injuries on business property
• Property damage to another individual or business while carrying out your work
• Advertising injuries (libel, slander, misappropriation, etc.)

This is a must-have type of coverage, particularly if you’re in an industry where accidents are more likely to occur—e.g. landscaping businesses, manufacturing companies, and construction companies. Typically, business insurance quotes for a general liability policy range between $400 to $600 per year, although this cost can vary significantly based on the level of risk in your industry.^[7]

Commercial property coverage insures your business’s inventory, equipment, office space, and other property against loss or damage. Commercial property insurance is a must-have for many types of businesses, especially those with a brick and mortar location.

This type of small business insurance covers incidents of small business theft, fires, vandalism, and some weather-related damage. Most commercial property insurance will cover flooding damage and damage from accidents, like a burst pipe. However, not all policies will cover natural disasters like earthquakes or tornadoes.

Depending on where your business is located and the specific likelihood of different types of disasters there, you might have to add on specific coverage for these at an additional cost. Generally, however, this commercial property coverage will range from $1,000 to $2,000 annually.^[8]

With this in mind, you might also look for business interruption insurance as a rider or add-on to your commercial property policy. This type of business insurance protects against lost income when you experience property damage or an accident.

For instance, if your shop burns down from a fire, you’ll lose a lot of income while rebuilding it. Business interruption insurance, therefore, will cover that loss of income. Along these lines, cyber insurance coverage is also an important add-on to any online business that handles customer data.

Professional liability insurance, also known as errors and omissions insurance or malpractice insurance, is a type of business insurance that people normally associate with doctors, lawyers, and other professional service providers. For example, if a doctor makes a mistake during surgery, their malpractice insurance will cover the costs associated with an ensuing lawsuit.

This being said, however, doctors and lawyers aren’t the only ones who should have errors and omissions coverage. It’s possible for many types of business owners to commit professional negligence. For instance, a designer could fail to have a website ready to go for a client’s launch date. As a result, they lose thousands of dollars in sales and sue for the damages. The designer will be protected if they have professional liability coverage.

Therefore, if you offer professional services of any kind, you should plan on purchasing professional liability insurance. You’ll want to remember, though, that even if you have professional liability insurance, you’ll also want to have general liability insurance as these two types of small business insurance cover different things.

A general liability policy covers physical injury, property damage, and advertising injury. The professional liability policy, on the other hand, covers a client or other third party’s financial losses. Business insurance quotes for professional liability coverage tend to range from around $900 to $1,800 per year.^[9]

Any small business owner who sells a tangible product should consider purchasing product liability insurance. You can purchase product liability insurance as a stand-alone policy or as an add-on to your general liability policy.

One of the best reasons to purchase product liability insurance is that it covers the full product lifecycle. For instance, if your manufacturer defectively makes the product, or your packager defectively packages the product, a customer could still sue you since it’s your brand on the label. However, you’ll be protected if you have product liability insurance.

In the grand scheme of things, this type of business insurance is quite affordable, costing 25 cents for every $100 of retail sales.^[10] This means, for example, if you sell $50,000 worth of goods in one year, your annual premium for product liability insurance will be approximately $125.

Employment practices liability insurance (EPLI) covers your business against a variety of employment discrimination or wrongful termination claims brought by employees. For example, the policy would insure against the cost of defending a claim of sexual harassment or racial discrimination.

The annual cost of EPLI coverage generally ranges from $800 to $3,000, but the expense ultimately depends on the size of your workforce, the level of turnover, industry, and whether you’ve been sued for wrongful termination in the past.^[11]

Of course, every small business owner tries to maintain a fair and equitable working environment, but that doesn’t make employment practices liability insurance coverage any less important. According to Hiscox, the average out-of-pocket cost to resolve an employee lawsuit without insurance is about $110,000.^[12] This being said, small businesses are typically the most vulnerable to wrongful termination suits because they don’t have a full-scale HR team or legal department. Therefore, EPLI can save your business thousands of dollars.

Key person insurance is designed to ensure that a business can survive its owner. If an owner, or another key executive in the business, dies or becomes disabled, the ensuing toll on the business can be heavy. The business will lose income during the transition, as well as clients that the key person brought into the fold.

To stem these losses, therefore, small business owners can purchase key person insurance. With key person insurance, the business will receive a payout that helps the business stay on its feet after the owner or other key person passes away or becomes disabled. This type of business insurance makes your company more durable, and less dependent on the skills or charisma of a few people.

This being said, your business can use the proceeds of key person insurance to hire and train a replacement for the key person, pay employees, pay off debts, or take other steps to weather the blow of the loss. In order to figure out how much coverage you need, you’ll want to determine who’s essential to your business, how much money they bring into the business, and how long it would take to replace and train the key person. Generally, a rule of thumb is to purchase coverage equal to eight to 10 times the key member’s salary.^[13]