What is small business insurance? Here’s what you need to know

Editorial Team

6 min read
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Even with an engaging product and a ready market, there’s no guarantee that your small business will thrive in today’s competitive environment. An estimated 20% of new ventures fail within the first 12 months, and only 50% of small businesses make it to year six.1

Although competition and other market forces may be responsible for many of these closures, a surprising number of small businesses go under due to theft, property damage, injuries, and lawsuits. This is why every startup should consider investing in small business insurance.

What is small business insurance?

Small business insurance is a special type of insurance that an entrepreneur can use to protect themselves, their business, and their business’s assets. Most small business owner policies (BOPs) include three broad categories of protection:

  • General liability coverage
  • Business property coverage
  • Business interruption coverage

However, depending on your niche or industry, you may need additional levels of protection. For example, a day care center may face more liability risks than an eCommerce retail merchant who runs business from home. The day care center’s or eCommerce merchant’s respective commercial insurance policies would reflect these differences.

Why is small business insurance important?

While selling goods or providing services, any number of risks can emerge, from fire to injury to litigation. Although some might consider these incidents one-off events, 36-53% of small businesses are involved in some type of lawsuit in any given year.2

Purchasing small business insurance doesn’t prevent these occurrences from happening, but it can help shield you from the worst consequences of catastrophic events:

  • If there’s a fire, insurance can provide you with money to rebuild your business.
  • If you’re being sued, insurance can help cover legal fees and settlements.

In addition, some types of small business insurance are mandated at the local, state, or federal levels. For example, the moment you hire an employee, you may be required to add unemployment insurance and workers’ compensation insurance to your business owner policy.

What are the types of insurance for small business owners?

Although BOPs come in all shapes and sizes, the following are some of the most common types of insurance for small business owners.

1. Business interruption insurance

Could your business survive if your storefront suddenly burned down or if your warehouse was destroyed by flooding? With business interruption insurance, you would receive the necessary liquidity to help keep your operations afloat following severe events such as these. Some policies also provide compensation so that you can continue paying employees a percentage of their salaries until you’re back on your feet.

Whether a pandemic, hurricane, tornado, or wildfire, those who have interruption coverage may be better equipped to weather the storm, literally, or any other disaster.

2. Key person insurance

Key person insurance is similar to business interruption insurance. The main difference is that the interruption stems from the loss of a “key” member in the organization, such as the owner or co-founder. When an owner dies or becomes ill, for example, it may be difficult to keep the business going. With this type of insurance, the remaining owners or beneficiaries will receive a payout; they can use this money to either phase out the business (pay off debts, provide severance packages, distribute money to investors), or hire and train a potential replacement for the key person.

3. Workers’ compensation insurance

Mandated in most states, workers’ compensation covers injuries and illnesses stemming from work-related responsibilities. For example, if an employee slips at the office and breaks his or her leg, workers’ compensation would normally cover:

  • The employee’s medical bills
  • A portion of the employee’s salary
  • Legal fees if the employee files a lawsuit

Note that workers’ compensation is different from disability insurance and unemployment insurance:

  • With disability insurance, employees receive compensation for illnesses or injuries not stemming from work-related duties. For example, new mothers sometimes use their employer’s disability insurance during maternity leave.
  • With unemployment insurance, employers contribute to state unemployment taxes (SUTA) and federal unemployment taxes (FUTA) to help ensure that employees can receive financial assistance following a job loss.

4. General liability insurance

General liability insurance covers potential injuries or property damage customers might face as a result of the products and services you sell. For example, a landscaper might accidentally damage a sprinkler system while mowing a client’s lawn. General liability insurance would help cover repair bills, legal fees, and even potential settlements.

If you sell physical goods, it might be a good idea to also purchase product liability insurance. This protects you from potential legal action across the product’s lifecycle.3

5. Business property insurance

Also known as commercial property coverage, this type of insurance is designed for small business owners who manage physical locations, including offices, stores, warehouses, and equipment yards.

With business property insurance, you can protect your space, equipment, and inventory from damage or loss. Most policies cover fire, flooding, and weather-related events. However, be sure to read the fine print, since damage stemming from “Acts of God” may not necessarily be covered.

6. Cyber liability insurance

As data breaches and cyberattacks continue to happen, many small business insurance guides have started featuring a relatively new type of policy known as cyber liability protection. This type of insurance is designed to help businesses recover following a data breach and other types of cyberattacks. Having cyber liability protection, for example, can help provide you with the financial resources needed to:

  • Restore electronic data
  • Notify customers and vendors
  • Hire professional services (attorneys, forensic accountants, public relations experts)

However, cyber liability insurance is not a silver bullet solution. It’s still important to try to help prevent data breaches from occurring in the first place.

If you accept credit or debit cards, for example, becoming PCI-compliant helps reduce your risk of payment fraud and abuse. Adding security protocols, such as tokenization and point-to-point encryption (P2PE), can help protect your customers’ sensitive data.

To learn more tips on how to start a small business, follow our blog or schedule a consultation with a Clover Business Consultant today.

This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.

1. “What Percentages of Businesses Fail and How to Improve Your Chances of Success,” LendingTree, 7 August 2020

2 “4 Small Business Lawsuit Statistics,” Small Biz Daily, 2 February 2021

3 “The 9 Types of Small Business Insurance Coverage You Need,” Fundera, 12 February 2021

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