Business Insurance 101: What You Need to Know

A refresher in business insurance is beneficial for both beginner and veteran business owners. It can be a complicated topic, so we hope this deep dive will help clarify what every business owner should know when it comes to insuring a business.

What is business insurance?

Business insurance is one of the best ways for business owners to manage risk. It's a useful tool that can help companies manage losses arising from unplanned or unforeseen events. Indeed, a natural disaster, cyberattack, or just one personal liability claim can wipe out a business — especially one that has recently begun operations.

By evaluating and understanding the unique risks to a company, owners and managers can determine which type of insurance policy works best. Speaking with an experienced insurance professional who is familiar with business risks can help you find the best and most economical insurance coverage.

Top 3 reasons why business insurance is important

Owning and operating a small business can be a risky process. To protect against potential threats to your bottom line, having business insurance is crucial. Consider these compelling reasons:

• Sometimes business insurance is legally mandated.
• Business insurance can cover the unpredictable. It addresses possible threats and accidents that often occur within the realm of small business: everything from property damage caused by weather or human actions to employee theft, to a data breach affecting sensitive business information, to potential lawsuits filed against the business by an employee, customer, vendor, etc.
• Business insurance helps you look safe to investors, customers, and potential employees. It can demonstrate the solidity of your enterprise and enable you to close big deals and cultivate stronger business relationships.

Types of business insurance

As a business owner, you need ample insurance protection for the various risks you face just by opening your doors. You may need insurance protection for employees. You may need insurance in place to protect your assets and even the business itself. Liability insurance may be necessary to protect your personal finances as well. With numerous types of insurance necessary to operate a business safely, business owners overlook it at their own peril.

The 4 primary types of business insurance you need for protection

Here's a quick look at the four primary types of insurance every business should consider:

Property insurance for businesses

Owning property as a business means that there is a need for insurance to cover it — in fact, it's mandatory. Property insurance for commercial buildings should include protection from weather events such as wind and hailstorms, as well as damage from fire, smoke, vandalism, theft, and civil disobedience. This insurance should cover the building as well as business interruption, assets, company papers, money, and lost income.

A strong commercial property policy can cover repair or replacement costs of physical assets, including:

• Buildings
• Equipment
• Furnishings
• Fixtures
• Inventory
• Computers
• Valuable papers
• Records
• Personal property of others in your care, custody, or control

Liability insurance for businesses

Both general liability and product liability insurance may be necessary for your business operations. General liability insurance helps cover legal hassles due to the claims of customers or others that are the result of accidents or injuries. Claims of negligence can be very costly for a business to cover outright, but this type of policy covers property damage, bodily injury, libel, slander, and defense against lawsuits. Product liability, also important for businesses selling products, helps to protect a company against damages resulting from defects that can cause bodily harm to the consumer.

A third type, called professional liability insurance, provides protection from risks such as errors, negligence, and malpractice. Some state laws may require you to have this type of insurance, especially if you are a doctor or a dentist.

Workers' compensation

Workers' compensation insurance provides wage replacement and medical/rehab benefits to employees injured in the course of employment. This is different from disability insurance, which pays benefits to workers who become injured or ill due to non-work-related circumstances. It is mandatory for many businesses with employees to carry workers' compensation insurance.

Before workers' comp laws were put into place, many employees either couldn't afford to take legal action against their employer or would run out of money as they waited for the case to be tried. As a result, individual states stepped in and created workers' comp insurance to pay for qualified expenses, and ultimately to avoid having to determine who was at fault.

Workers' compensation helps employees pay for qualified expenses related to workplace injury or illness. Depending on state laws, these may include:

• Medical services
• Rehabilitation services
• Lost income
• Vocational training

Currently, every state in the union except Texas requires employers to carry workers' comp coverage, and each state determines the amount and duration of workers' compensation benefits and how those benefits are administered. Most employers are now required by state law to carry this type of insurance. However, some states have their own plan, which discourages competition from private insurers. Several other states require workers' compensation insurance only for employers with more than a certain number of employees.

Not having workers' compensation insurance where mandated is a criminal offense, and the penalties can be severe. Fines can reach thousands of dollars per day for noncompliance, as well as any loss of revenue due to business closure, until coverage is in place. In the event of an accident, the penalties can be even more, as the employer is responsible for all medical bills, lost wages, and potential litigation.

Workers' compensation insurance can involve large payments that could potentially cause serious cash flow problems for your business. That's because payments are often based on an estimate of wages paid to employees based on risk (e.g., it's more expensive to cover electricians than to cover clerical workers). Because premiums are based on estimated payroll and not on actual wages paid, insurers may require a large upfront payment. And if the estimate is found to be low at the end of the year, you'll have to pay the difference in one lump sum.

However, a licensed insurance agency can provide you with competitive quotes, possibly secure you with discounts when purchased with other types of insurance with the same carrier, and help you manage your plan more efficiently. Furthermore, integrating your workers' compensation policy with payroll services can provide increased benefits such as no upfront deposits, billing based on actual payroll instead of estimates, and minimized risk of paying additional year-end premiums.

Commercial auto insurance

Commercial auto insurance covers the vehicle used for your business, protecting you and your business from liabilities and claims that may not be covered under a personal auto policy. If your business uses vehicles, whether they're owned by the company or by you or your employees, it's important — and often required — to carry commercial auto insurance because your personal auto policy will likely not cover substantial damage or loss.

If an accident is caused by a driver with no insurance or not enough insurance to cover damages to you or your property, uninsured/underinsured motorist coverage can help fill the gap. If you or an employee is involved in an accident in a commercial vehicle, personal injury protection (PIP) insurance can help pay the costs related to injuries, regardless of who is at fault.

Most states require a minimum amount of commercial auto liability coverage for vehicles used for business purposes.

What is a Business Owner's Policy?

It doesn't take a natural disaster to wipe out your business. Even a single personal liability claim could close your doors forever — the actions you've taken to prepare will make all the difference. With that in mind, you might consider a standard Business Owner's Policy (BOP).

A BOP can cover a range of property and liability exposures with a single policy, acting like a homeowner’s policy to protect your business and simplifying the need to buy coverages separately. Buying business insurance policies individually is inefficient and expensive. BOP insurance bundles the coverages you need into a single, convenient package — typically at a lower cost. In most cases, coverage may be added to meet additional needs and industry requirements.

A standard Business Owner's Policy typically offers the following baseline coverage:

• Property insurance: This includes protection against losses from theft or damage to buildings and equipment.
• Liability protection: A Business Owner's Policy reimburses costs related to property damage or injury to persons arising as a result of errors made in the course of doing business.

A Business Owner's Policy combines coverage for standard property and liability insurance risks into one convenient package, making it particularly economical for your business insurance needs.

Finally, understanding specialized risks can help ensure that the correct insurance policy is purchased. Individual state insurance requirements for businesses may also be a factor when choosing coverage.

Other types of business insurance

Depending upon the nature of your business, it's advisable to evaluate other types of insurance for your business. These include:

Errors and omissions insurance

Errors and omissions (E&O) insurance is a form of liability protection to address losses that traditional liability insurance doesn't cover. Should you be sued by a customer for some negligent actions or specific errors and omissions that occur as a result of business activities, E&O insurance can guard against significant financial penalties.

This type of insurance may be appropriate for businesses that serve clients for a fee, such as contractors in the building trades. The policies often cover the business owner, salaried and hourly employees, and subcontractors.

Employment practices liability insurance

This form of insurance is designed to safeguard businesses against employee claims regarding violations of their legal rights as workers.

Among the claims covered by employee practices liability insurance (EPLI) are wrongful termination, breach of employment contract, charges of sexual harassment, failure to promote, and mismanagement of employee benefit plans.

Costs of EPLI coverage vary, depending on your industry, size of your workforce, and whether there's any history of similar employment-related litigation in the past. Often, the policies cover legal expenses, regardless of the outcome of the lawsuit. In general, they do not compensate punitive damages or a criminal or civil fine.

Umbrella coverage for businesses

What happens if your commercial property and general business policy limits fall short when you need them most? Your finances may still be safe if you extend your coverage with commercial umbrella insurance. This policy covers you and your business for losses above and beyond your existing insurance, effectively extending your coverage once the liability limits for your existing policies have been met. It can help you:

• Avoid out-of-pocket costs. If the cost of a covered claim exceeds the limit of underlying coverage, an umbrella policy can pick up the difference.
• Protect business assets. An umbrella policy can provide added protection from having to sell critical business assets to cover the costs of an unforeseen claim.

Many small business owners find renewed confidence once their companies have a safety net in the event of an unexpected event.

Cyber protection for businesses

Businesses of all sizes face significant cyber threats, including:

• Breach of a social media account
• Leaking of confidential client information
• Compromised data security due to employee errors
• Identity theft, computer viruses, or phishing scams

Any of these cyberattacks can have a devastating effect on a small business. Hackers could siphon off a business's capital and ruin the owner's credit. Worse still, they could gain access to sensitive customer information (social security numbers, credit card numbers, home addresses, etc.), wreaking havoc on those individuals' lives and tarnishing your business's hard-earned reputation.

Most traditional business insurance policies don't cover the range of expenses incurred by a cyberattack. These can include interruption of business operations, customer notifications and discounts, and security upgrades.

As with any insurance coverage, policies differ in what may be covered. When looking into what's best for your business, keep these elements in mind:

• Coverage of all devices that could be stolen or lost (mobile phones, laptops, tablets)
• Protection against hacking and viruses
• Liability for slanderous blog content
• Data corruption and/or theft
• Crisis management (public relations assistance, brand-rebuilding efforts)

A customized cyber liability policy may make the difference between recovering from a cyberattack and losing everything you've worked so hard to establish.

Group health insurance

Group health insurance plans cover groups of two or more people: typically, an employer, two or more employees, and their families. Group insurance is a particularly effective option for helping businesses attract qualified job candidates and reduce employee turnover.

Depending on the needs of the business, its employees, and the offerings of the carrier, group insurance plans can include a range of coverage including, but not limited to, medical, dental, vision, life, and long- and short-term disability insurance. Group insurance typically does not refer to coverages a business owner would have to protect themselves, their business, and their property (commonly referred to as property and casualty insurance).

Unlike individual insurance, where employees pay separately for 100 percent of their own premiums, group insurance allows employers and employees to share the costs, with employers covering some part of the premium cost for a single employee or dependents. Businesses that offer group health insurance may also be eligible for federal and state tax credits, depending on their size and situation.

While group insurance is an effective, and in many cases, less-expensive option for many small businesses, in some cases individual insurance may be the better choice. By reviewing your situation and options with a licensed insurance agent, you can determine which type of insurance is the best choice for you and your business.

There are many complex tasks that must be done to select the right group insurance plan and keep it running smoothly. These steps include:

• Research carriers in your area.
• Select plan offerings.
• Obtain quotes.
• Compare the results to find coverage that fits your needs and budget.
• Manage employee enrollment, from submitting application forms to the carrier, to enrolling employees, and setting up payroll deductions.
• Continuously coordinate with employees and your carrier to stay on top of enrollment changes, remove terminated employees from coverage, and track eligibility of new hires.
• Maintain regular communication with employees at different stages of the plan year, including notifying them of open enrollment and providing enrollment assistance.
• Make premium payments on time, stay compliant with IRS regulations, and set up and administer a COBRA or state continuation program for employees who have lost coverage.

Obtaining the necessary quotes, enrolling employees, and monitoring the plans can be time-consuming and, if you're thinking of doing it yourself, may result in costly errors or oversights that prevent you from getting the right coverage at the right price while staying in compliance with the law. A full-service, experienced employee benefits agency can dedicate time and expertise to your situation so you can take the guesswork out of finding and administering a group health plan.

Health benefits accounts

With health care reform and retirement security in the news, the importance of health savings accounts (HSAs) has gained simultaneous momentum. Congressional Republicans, in their efforts to repeal and replace the Affordable Care Act, include expanded use of HSAs because they increase consumer control over health care spending and offer major tax advantages.

Created by Congress and signed into law in 2003, the HSA combines a high-deductible health insurance plan with a tax-advantaged savings account. It resembles a personal savings account, but the funds are used to pay health care costs. The account holder owns the money and the interest it earns. They control how HSA money is spent. Contributions, up to specific limits, are tax-free, earnings accumulate tax-free, and distributions are tax-free for qualified medical expenses.

Money in an HSA:

• Can be used to pay the health insurance policy deductible and qualified medical expenses, including costs for dental and vision services, which may not always be covered by health plans.
• Is taxed if withdrawn for non-qualified expenses. These funds are taxed at the account holder's income tax rate, plus 20 percent if the individual is younger than 65.
• Earns interest, , depending on the deposit amount. Interest earnings are not taxed.
• Once an account balance exceeds an established threshold, funds may be invested, and investment returns are also not taxed.

Because of an HSA’s structure and requirements for use, businesses must take care to educate employees about these plans, ideally during open enrollment for workplace benefits. For instance, if you choose to match a portion of workers' contributions, communicate this incentive as a way to encourage participation. With the right HSA in place, employers can use financial planning education to help employees understand the complementary role that these accounts and other 401(k)-type savings plans can play in a long-term saving strategy.

Individual and voluntary health insurance

Individual insurance policies are purchased by an individual on a case-by-case basis; voluntary insurance is employer-sponsored and offered to all eligible employees through payroll deductions. A voluntary benefits plan allows you to offer specific benefits for your employees at little or no cost to you. Voluntary insurance allows your employees to help determine their own insurance benefits, which they pay for out of pocket. It can supplement your company's group health plan or stand on its own, and any employer contributions are purely voluntary.

Voluntary insurance covers a wide range of benefit options, and is often used to help employees secure individual life and disability coverage, regardless of their medical histories.

Coverage options include:

• Short-term disability insurance — replaces partial income for several months or longer, depending on the policy agreement.
• Life insurance — both term and permanent life plans.
• Dental and vision insurance — two popular employee coverage options.
• Hospital indemnity and critical illness — specific coverage for cancer treatments, home health care, and other supplemental health insurance.

These types of insurance offer similar coverage options, and many employers opt to offer group insurance to their employees as well as voluntary insurance. By evaluating your current stage of business growth along with your budget and employee needs, you can decide which type of insurance is right for your business at this time.

How to find the best insurance policy for your company's needs

Business insurance is a useful tool that can help small companies manage losses arising from unplanned or unforeseen events. By evaluating and understanding the unique risks to a company, owners and managers can determine which type of policy works best.

The first step is to determine whom and what you want to cover. There are many factors to take into account, some of which include certain government-mandated lines of insurance, business stage, and whether you want to pay for your employees’ benefits. Evaluate whether you want to utilize insurance as a way to attract and retain employees. Although some decisions on a purchase of coverage are resolved immediately, there are many factors that need to be evaluated and acted upon on an ongoing basis.

As you research the right insurance for your business, consider the following:

• Shop around. Request multiple quotes and compare depth of coverage between policies before making a final decision.
• Ask for a multi policy discount. If more than one policy is covered with the same carrier, ask about a multi policy discount when adding business insurance.
• Understand the value of the business. Know the type of property that must be insured and the value of assets to select the right policy.
• Re-evaluate on a periodic basis. As a business grows, there may be a need to re-evaluate insurance coverage to avoid future loss.

The best way to help yourself is to speak with an experienced insurance professional who is familiar with business risks and can find you the best and most economical insurance coverage. For example, Paychex Insurance Agency's licensed agents can help you shop and compare policies. We can help:

• Integrate your business insurance policy with your existing Paychex payroll service to improve your cash flow and help you avoid year-end balloon payments and audits, through our Workers' Compensation Payment Service.
• Gain access to A-rated carriers that offer comprehensive packages.
• Compare affordable plans from nationwide carriers, matching features and affordability to the needs of your business.
• Communicate with insurance carriers so policies get approved faster and certificates of insurance arrive more quickly.
• Combine key business policies for stronger coverage at reduced rates.

Still have questions about how you can protect what you've worked so hard to build? Talk to a Paychex licensed agent to discuss your options.

It is important to read and understand your insurance coverage.