There are some risks that are an inescapable part of doing business. Your business could be involved in a lawsuit, face trouble when a natural disaster strikes, or have to cease operations because of events beyond your control. When these risks become a reality, they can be costly and even a profitable business might not have the resources to manage the expenses. That's why the protection of business insurance is essential for any company.
Here are six business insurance "must-haves" that will ensure your company weathers serious but common problems and continues to prosper.
1. Commercial General Liability Insurance
Legal experts say most businesses are sued at least once, even when they follow best practices (see Insurance and Lawsuits: What Happens When You Are Sued? to learn more about the process). Commercial general liability insurance protects your business from the repercussions of liability due to your business’s negligence. Negligence, in this case, means the failure to exercise the required amount of care to prevent injury to others, such as a customer, an employee, or even an innocent bystander, due to your business's actions, services, or products.
For example, if a truck driver strikes another vehicle and injures a passenger in part because the company scheduled him to work 60 hours that week, that may be construed as company negligence. It could be argued that the company overworked the driver, which created an unsafe situation. If someone sues your business, general liability insurance will kick in to cover legal fees, medical expenses, settlements, judgments, or appeals. It also protects your business against libel and slander.
And there's another reason you need liability insurance. Some clients won't work with your company unless you have it. This is a way for them to manage their own risks: they don't want to rely on a company that may not be able to deliver because of a lawsuit.
2. Business Interruption Insurance
Disasters befall many businesses. Water tanks burst, structures weaken, and personnel make costly mistakes. Unpredictable natural events like flash floods, tornadoes, hurricanes, and fire can unexpectedly shut down a business too. They can wipe out stock, ruin equipment, and even topple buildings (learn bout insuring Building, Contents, and Stock). Although commercial property insurance pays to fix or replace equipment, buildings and your inventory, it does not cover the money lost because you cannot continue operations. If your building is under three feet of water, or every piece of specialized machinery needs replacement, it could take months to start up again (find out How to Protect Your Business from Coverage Gaps Related to Equipment Breakdowns).
You could lose valuable staff members because they can’t afford to stick around once their paycheck stops coming. As time drags on, customers will need to look for another company to supply them with what they need. Without the proper insurance, your business finances could stretch to the breaking point.
Business interruption insurance provides you with funds to compensate for your loss of income immediately after a forced shutdown and while your business cannot operate. This income includes your net loss, your operating expenses and your payroll. It pays your mortgage payments, utilities, and taxes even though your business has temporarily ground to a halt. Business interruption insurance is especially important for if you carry a substantial amount of stock or you need specialized premises to operate.
3. Commercial Property Insurance
Commercial property insurance protects business property from loss or damage. Environmental forces, such as hail, lightning, fire, smoke, and wind, can strike quickly and harshly. Other threats like vandalism, theft, and civil disobedience may wipe out operations if you lack coverage.
Two basic types of commercial property insurance exist: named peril and all-risk. Named peril insurance policies only cover the specific risks listed in the policy. Earthquake and flood insurance are two examples. They are less expensive, and the insured must prove that the peril caused the damage. On the other hand, most commercial property insurance policies are all-risk policies. They cover any risk, except those listed as exclusions in the policy. Common exclusions are war, earthquake, flood or sewer backup, seepage, boiler explosion, governmental restrictions or interventions, as well as ordinary wear and tear. As these policies include most damage, insurance companies must prove that damage is due to exclusion to avoid a paying out a claim.
4. Commercial Auto Insurance
Commercial auto insurance protects your employees, equipment, and products if drivers have collisions or damage company vehicles. If your employees drive their own vehicles while doing business for the company, you need non-owned auto liability insurance. This protects you in case the driver does not have insurance or their coverage is inadequate.
5. Workers' Compensation
According to law, businesses with employees must carry workers' compensation insurance. You have the option of obtaining coverage yourself, or you can buy it through your state insurance program. This insurance provides medical benefits and wage replacement to employees if they are injured while working, and it provides you with peace of mind. Employees receiving benefits under workers' compensation insurance cannot sue so you avoid legal expenses and complications (see An Intro to Workers' Compensation to learn more).
6. Data Breach
You might be surprised to see this on the "must-have" list, but times have changed. A serious threat to any business, hacking isn't restricted to information either. While hackers tend to focus on companies that store private or sensitive information, they also hack money. Indeed, in recent years hackers breached the security of Adobe, eBay, Target, and even JP Morgan Chase. Ryanair, a U.K. budget airline, lost $5 million because of hackers.
U.S. data giant Intel estimates the annual cost of cyber crime at between $375 and $575 billion globally, including what criminals take and the cost to companies. Cyber crime is on the rise as returns are great and risks are low. A data breach policy is a low-cost way to protect against electronic and paper file breach.
These six forms of insurance will protect you against the most common business risks. You can also buy a business owner’s policy (BOP) that bundles many of these policies into one at a lower cost (find out how a BOP differs from general liability insurance). Don’t be left in a lurch without the coverage your business needs. Discuss your business needs with your agent or broker and look for tailored insurance coverage.