What Are The Different Types of Business Insurance Policies?
Below are the most common types of business insurance policies available for business owners to purchase to protect their business. Currently, there is no one universal policy you can purchase to cover all of your business risk. Each type of policy has a specific risk it protects your business from. Each business is different from one another and has different risk factors. It is important to select a combination of policies that will best protect your business in totality. This may be confusing to figure out on your own. If you need help you can lean on BeemaBroker! We can help you determine which policies are the most critical for your business to have and which are nice to have at no cost. You can reach out to us at hello@beemabroker.com for help. Below are the most common types of insurance policies for startups and small businesses. If you don’t see a type of policy you would like to learn more about below, let us know and we’ll add it with a full description + pro tips!
Workers Comp: A workers comp policy protects your employees and your business. The policy provides benefits to employees who become injured or ill on the job due to a work-related incident. If an employee passes away due to a work-related injury or illness, the benefits can pass on to his/her family. By employers providing this benefit, employees forego their right to sue the employer for their injury. In the majority of the states carrying a workers comp policy is mandatory for businesses with 1+ employee(s). Paid interns can potentially be included in workers comp coverage as well. If you have interns, paid or unpaid, it is important to consult with your insurance carrier if the interns need to be included in your worker’s comp payroll estimates for the workers comp policy. Each insurance carrier has their own rule on this. If your a business is in CA, independent contractors can now also be eligible for workers comp benefits. This means if the independent contractors you are working with do not pass the new “ABC” Test then your business needs to provide workers comp for them. You can learn more about this here.
Occupational accident insurance: For states in which workers comp is not mandatory, employers can purchase an occupational accident insurance policy to provide benefits to their employees for work-related injuries or if they are killed in a job-related accident. Major differences compared to workers comp are employers are allowed to choose the policy limits/deductibles and the policy only covers medical expenses and lost income up to the policy limits. Some argue this type of policy can increase employer liability since legal fees are subjected to the policy limits, and if an employee’s expenses exceed the policy limits, the employer must cover the excess costs. In states where workers comp is a not mandatory an employer can still choose to carry workers comp to lower their liability risk.
General Liability: A general liability policy protects your business against any third party bodily injury or property damage claims. A common use case is damage to other property caused by your business, or if a client/vendor slips and falls in your office, even if it is a co-working space. A general liability policy can cover claims related to:
- Bodily injury: A claim that your business caused someone bodily injury harm.
- Property damage: A claim that your business caused property damage.
- Reputation harm: A claim against your business of any libel, slander, wrongful eviction, malicious prosecution, violation of the right of privacy, etc. It is important to read your insurance carrier’s definition of reputation harm and what they will cover specifically.
- Medical payments: If a third party such as a client, vendor, visitor, etc. gets hurt at your business (employees are not included in this due to being covered under workers comp) this coverage can kick in and pay for their medical costs. This coverage is limited to policy limit which is typically $10,000. The insurance carrier’s structure this as a small bucket of money to cover any medical expenses quickly to avoid the accident from turning into a lawsuit which is expensive to litigate.
- Advertising errors: Claims against your business for copyright infringement in your advertisements or false advertising. (If your business runs any Facebook, Instagram or other digital/non-digital paid advertisements it is important to have this coverage.)
- Damage to rented property: If your business is renting office space (full office, or co-working space) this coverage protects against any damage caused by fire, lightning or explosion.
Commercial Property: A commercial property policy protects any physical property owned by your business such as real estate, laptops, cameras, equipment, office desk/chairs, office furniture, inventory, etc. Any physical property your business owns can be listed on the policy. The property coverage is tied to a physical location. If you are a digital nomad and your laptop and/or equipment travels with you, make sure you have those items listed as “property off premises” or on a “property floater”. That means the property coverage will travel with the items when they are away from your office. When listing the value of items make sure to list replacement cost. The insurance carrier will only pay the cost to replace the items to the original condition they were in from the time of loss versus providing the brand new value. Commercial property coverage is the most strict type of coverage when it comes to paying claims. It will only pay out to the exact locations listed on the policy. Pro tip: It is important to make sure you have the correct physical address (including correct suite number if applicable) listed on the policy free of typos!
Commercial Package: A commercial package is a policy that bundles general liability and commercial property together into one policy. You will typically see a small discount for the bundling of these two policies. A common way premium is calculated for this type of policy is based on your estimated annual sales and the overall risk factor of your business. If your business is brand new and you have very low sales, square footage of your office can also be used to as factor calculate the premium instead of gross sales. The higher the estimated annual gross sales or square footage, the higher the “exposure” thus the higher the premium. Pro tip: As your business grows, make sure you are updating your Commercial Package policy to include updates estimated annual sales figures, office location details and if you have pivoted to any new areas of business since launching. You want to make sure your policy is covering your current business operations. This tends to get overlooked when growing a company and cannot be fixed after a claim occurs.
Business Owners Policy: A business owners policy is commonly referred to as a “BOP”. This type of policy was designed for small business owners by insurance carriers. Similar to the Commercial Package, the Business Owners Policy bundles the following 3 main coverages together: general liability, commercial property, and business income. A “BOP” policy also can include several add-on coverages to tailorize coverage for your specific business needs. For example, if you or any interns/employees use their personal car to run errands for the company you can add “hired and non-owned auto” coverage to protect your business from liability resulting from a car accident up to $1,000,000. Without this coverage, you can have a gap in coverage. Depending on the type of business you have you can also bundle “professional liability” also known as “errors & omissions” coverage from a sub-limit of $250,000 up to $1,000,000 in limit. If you need higher limits for contractual reasons, you can pay additional premium for higher limits. Most insurance carriers can go up to $5,000,000 limit without much trouble or additional information needed. Some insurance carriers may also provide the option to add on “data breach” or “cyber” coverage up to a certain limit. The benefits of a business owners policy are you’re able to bundle several important coverages into one policy at the most competitive pricing available. You will also only have to contact one insurance company to report a claim and make a payment. This is a policy most startups and small businesses carry.
Business Income: If your business is unable to operate due to a property loss that is covered by your policy, business income can help save the day by helping to replace income that is lost during this time. Typically covered types of property loss resulting from fire, theft or wind. To be exactly sure what is covered for your business please check your policy.
Business income coverage helps cover the cost of payroll (to help you can retain your employees), cover monthly bills (help you stay in business) and even cover marketing expenses to let your customers know when you will be reopening. It is important to check if your current policy has this coverage. Business income is especially important for businesses that generate their primary income from their physical location, equipment or other business property.
How is business income defined? It is typically defined as the net income (net profit or loss) plus the normal operating expenses. If you add “extra expense” to the coverage it is generally defined as expenses that are “reasonable and necessary” to avoid or minimize the amount of time the business is unable to operate. By adding business income with extra expense you are broadening the coverage which is always a good thing.
There is a “waiting period” that is listed most policies. Typically it can be anywhere from 24 hours- 72 hours. It depends what is listed on your policy. Pro tip: you can ask for a shorter waiting period of 24 hours to be quoted when your shopping for coverage. This waiting period works similar to a deductible. Meaning the waiting period has to pass before coverage kicks in. As a business owner, you want the coverage to kick in asap.
The “period of restoration” is the time period the business income coverage applies. The period of restoration begins when the covered damage forces your business to stop operating. It comes to an end when the damage covered by your policy is repaired or reasonably repaired.
The standard period of restoration can be listed as 12 months. Pro-tip: Select at least 18 months or greater for the period of restoration. The reason being construction takes longer than expected also if you have to rebuild a structure it will be subject to current building codes and permits which take longer than expected to clear. It always a good idea to give yourself more time.
You can add “Extended Business Income” coverage to your policy to broaden coverage. Some businesses still struggle to get their sales back up to the place they were before the property loss occurred. Business Income coverage stops once your business is back to an operating state. By adding extended business income the coverage can help replace the lost income while you are rebuilding your business. For example, if you have a dry cleaning business and you have to close down for a few months due to a fire. By the time you reopen, several of your customers may have found a new dry cleaner which results in business income loss even after re-opening.
Hired & Non-Owned Auto Coverage: As mentioned above, Hired & Non-Owned Auto Coverage is an add-on coverage you can include in a Business Owners Policy, Commercial Package or on a Commercial Auto Policy. This is a key coverage for small businesses and startups since most small companies may not have a car designated for business use only or be owned in the business’s name. In this case, if you or your interns/employees are using their personal vehicle for business errands and you or they get into a car accident, the business is not protected from liability. This is usually a gap in coverage. By adding this coverage to you can protect your business from liability up to $1,000,000. Required minimum personal auto limits are very low compared to business auto limits. (In CA the minimum personal auto limits are $15,000 for injury or death of 1 person per accident/ $30,000 for injury or death of 2 or more persons per accident/$5,000 for any property damage per accident.)
In the case, you (the business owner) or your employee are driving a personal vehicle for a business errand and are involved in a car accident the personal auto policy will protect the driver and owner of the car up to their personal auto policy limits. However, if your business is named in the lawsuit there is no coverage from liability unless you have hired & non-owned auto coverage. This is a commonly overlooked exposure. Pro-tip: Hired & Non-owned and a must have coverage for all businesses regardless of size. It is typically inexpensive to add to a General Liability or Business Owners Policy. The pricing can range on average from $125 to $165 premium for the year. Which breaks out to about $10.42 to $ 13.75 per month. Not bad for $1M in liability coverage!
Commercial Auto: If your business owns any vehicles you would protect them under a commercial auto policy. The coverage is similar to personal auto insurance. The major difference is the limit of liability. Typically for business $1,000,000 is the standard limit of liability for this policy. Personal auto insurance limit of liability is grossly lower than this limit. Typically most contracts will require your business to carry the $1,000,000 limit of liability for this policy. Some contracts may also require you to carry a higher limit which can be done so via an umbrella policy. Hired & Non-Owned Auto coverage can be added to this policy. Hired & Non-owned auto coverage is typically inexpensive to add and is a must have coverage for businesses in CA.
Umbrella: An umbrella policy provides an additional layer of liability protection on top of existing insurance policies. Before the umbrella policy limit of liability can kick in towards a claim, the underlying insurance policy limits have to be maxed out.
For example, if you have a General Liability Policy with $4M Aggregate/ $2M Occurrence limits and a $1M Umbrella Policy. If you have a covered liability claim for $3M, your General Liability Policy will respond first up to the policy limits of $2M of the claim since that is your maximum per occurrence” limit. (“Occurrence” is insurance-speak for per claim.) The Umbrella Policy will kick in the next $1M limit of liability towards the claim. The Aggregate limit is for the entire policy period subject to the occurrence limit. This means the policy has limits to cover 2x $2M claims in one policy period of 12 months if you have $4M Aggregate/$2M Occurrence.
An Umbrella Policy can be purchased for several limits of liability. Your business can purchase a $1M umbrella policy, $2M umbrella policy, $3M umbrella policy, $4M umbrella policy, etc. When purchasing the umbrella policy you will have to select which existing insurance policies your business has that you want the umbrella policy to “go over”.
For example if you have a contract that is requiring you to carry a $3M limit of liability for general liability and $2M limit of liability for commercial auto but your current policy only has a $2M Aggregate limit of liability for General Liability and $1M limit of liability for commercial auto, you can purchase a $1M umbrella policy that goes over your general liability & commercial auto policy to satisfy this contractual requirement.
Professional Liability/ Errors & Omissions/ Tech Errors & Omissions: Professional Liability, Errors & Omissions (commonly abbreviated to E&O) both refer to the same type of coverage. The first two names can be used interchangeably. Why? Because insurance likes to be over complicated. This coverage covers your company against any claims that you were negligent in the work/services you provided. How could professional liability coverage be triggered? If your client sues your company for a negligent error made in the professional services provided to them. For example, if you make a typo or clerical error in your work that causes the client thousands of dollars in damages. Professionals across various industries need to carry professional liability such as real estate agents, consultants, hairdressers, photographers, lawyers, tax preparers, accountants, lawyers, insurance agents, home inspectors, technology companies etc. In most of these professions, it is contractually required. It can also be a requirement of their professional license.
For the technology industry, professional liability is referred to as Tech E&O (stands for Technology Errors & Omissions). The use case for Tech E&O is very clear for B2B tech companies. Tech E&O is a common contractual requirement. Why is this coverage so commonly required for Tech companies? Think of the case when your technology fails what would be the repercussions? What would be the potential damages to your clients? When technology fails it could result in a financial impact to the company using the tech especially if the tech is helping provide a core function of their business. It is very common for companies to sue their technology product providers for errors caused by the technology. The general liability policy would not provide coverage for technology companies if their product fails or causes errors. It is very common for technology companies in the following segments to purchase this coverage: software, information technology, hardware & electronics manufacturing companies. For B2C tech products, the greater number of users you have the more your exposure of liability grows. It is important to carry Tech E&O for B2C companies as well.
Product Liability: If your business sells a physical product before you start selling it you will need to purchase product liability. Product Liability coverage protects your business against claims of personal injury or property damage that are caused by the product(s) sold or supplied through your company. This is a common contractual requirement before you can start selling your product in-store or online. The degree of difficulty of getting quotes for this coverage will depend on what the product is, target age it is intended for, where it is manufactured, what materials it is made of, and the overall risk factor. If you are a startup, insurance companies will want to know if you have domain experience in the space or any previous history working in the industry or one that is similar. Pro tip: If you have neither, you can build trust by demonstrating your research in building a safe product. This can be illustrated by 3rd party safety testings, user testings, customer feedback, detailed research on product strengths, etc.
Cyber Liability & Data Breach: Both Cyber Liability & Data Breach coverage can help cover the costs that result from a data breach for notification to impacted individuals, employees even government agencies, identity protection, credit monitoring, legal fees, PR costs post-breach, legal fees, liability and more depending on what coverage you purchase. A major benefit to this type of insurance policy is most top insurance carriers will provide you, the business owner, with access to professional assistance to help provide information on your state specific laws/regulations and how best to comply with them quickly. By taking quick action to comply with the state laws it can help your business considerably with potential fines.
The term “cyber insurance” tends to be an umbrella term used with protecting data. Whether that is your company’s private data, your employees, and/or your clients/users. Each insurance carrier will have its own coverage definition, different retention limits (aka deductibles), and value-add services. Pro-tip: When shopping for this coverage it is really important to understand what is being covered and what is being excluded. Different quotes from insurance companies for this coverage will not be apples to apples. Pro tip: It is important you are very clear about what risk you’re trying to protect this business from and make sure you are purchasing the appropriate policy to do so.
Directors & Officers: Directors & Officers coverage is commonly referred to as “D&O”. This coverage helps cover the defense costs from lawsuits brought against the board of directors and/or the officers of the company for wrongful act allegations. The directors & officers of a company have a personal exposure when serving and their personal assets can be at risk during the management of the company. This is why most board members you are courting to join your company’s Board of Directors will require your company to have a D&O policy in place before joining your board for their personal protection. The cost of the policy will depend on the risk of the business and personal assets of your board members. If you are recruiting and attracting high net worth individuals or high profile individuals there is a greater risk for a lawsuit to be brought against the company and the board of directors. Pro-tip: Have a D&O policy in place before courting sought after board members. It will let send a positive signal that you are a savvy business owner. For startups, many VC’s will require the startup to purchase a D&O policy before closing a larger fundraising round.
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Important Disclaimer: This is general information for educational purposes only. Each insurance carrier has their own specific policy language which dictates what their specific policy will cover. It is important to read your policy and ask questions on any language you are not clear about.
If there is a type of policy you would like to learn more about but do not see it above, please email hello@beemabroker.com and we will add it with a full description! Thank you! :)
