Small Business Insurance Basics

Regardless of the size of your business, you will need some level of insurance to protect you and your business.

Group of young business people 

Types of Business Coverage:

Business Overhead Expense Insurance
Business Overhead Expense Insurance is designed to provide funds to cover overhead expenses during a business owner’s absence because of disability. It is intended to help maintain the business; it is not meant to replace disability income insurance or disability buy-out insurance. Eligible businesses include regular C Corporations, S Corporations, Limited Liability Companies, Partnerships, and Sole Proprietorships. Premiums are deductible as a business expense. Although the proceeds are taxable, they are used for tax-deductible business expenses.

Buy-Sell Insurance
There are essentially three risks facing a closely held business owner: death, disability and retirement. Upon the business owner’s death, disability or retirement, only one of three things is going to happen to their business: it will be continued, sold, or liquidated. The planning process should reveal the answers to each of these possibilities.

Key Employee Insurance
When certain key employees die or become disabled, insurance can compensate the business. This coverage cushions some of the adverse financial consequences that results from losing a key employee.

Disability Income Protection
No plan can be considered complete unless there is an evaluation of protecting one’s income. The expenses of a disability caused by a sickness or injury can quickly exhaust savings and create substantial debt. Disability protection can be completed individually or through a business owned group plan.

Other Essential Coverage:

Most small businesses need to purchase at least the following four types of insurance.

Property Insurance
Property insurance compensates a business if the property used in the business is lost or damaged due to such things as fire or theft. In addition to the building or structure, property insurance covers personal property such as office furnishings, inventory, raw materials, machinery, computers and other items necessary to a business’s operations. Depending on the policy, property insurance may include coverage for equipment breakdown, removal of debris after a fire or other destructive event, some types of water damage and other losses. It may also provide operating funds when the business is trying to get back on track after a catastrophic loss.

Liability Insurance
Any business can be sued. Customers may claim the business caused them harm due to a defective part, an error in a service or disregard for another person’s property. If the business is found liable, liability insurance pays damages, up to the policy limits, as well as attorneys’ fees and other legal defense expenses. It also pays the medical bills of anyone injured by or on the premises of the business.

Business Auto Insurance
A business auto policy covers cars owned by a business. The insurance pays any costs to third parties for bodily injury or property damage for which the business is legally liable, up to the policy limits.

Workers Compensation Insurance
In most states an employer must have Workers Compensation Insurance when there are more than a certain number of employees. The minimum number varies from three to five, depending on the state. Workers Comp Insurance, as this coverage is usually called, pays for medical care and replaces a portion of lost wages if an employee is injured in the course of employment, regardless of who was at fault for the injury.

If a worker dies due to injuries sustained while working, the insurance provides compensation to the employee’s family. An extremely small business, with one or two people working out of a home, may not need workers compensation insurance. But, it may need more property and liability insurance than what is offered by a typical homeowners policy.

Other Types of Coverage:

Employee Benefits
Employers who hope to retain solid, hard-working employees should be prepared to offer basic employee benefits. In addition to salary, good benefits provide important resources that not only help build a positive working relationship between employer and employee but also promote good work habits and financial practices.

Employee benefits will vary depending on the employer, and it is important for business owners to carefully consider their options.

Errors and Omissions Insurance/Professional Liability
Some businesses involve services such as consulting, design functions or representing the needs of others, which can lead to being sued by customers or clients, claiming that the business’s failure to perform a job properly has injured them or caused some sort of harm. Errors and omissions or professional liability insurance covers these situations. The policy pays the judgment for which the insured is legally liable, up to the policy limit. It also provides legal defense costs, even when there has been no wrongdoing.

Employment Practices Liability Insurance
Employment practices liability insurance covers (up to the policy limits) damages for which an employer is legally liable such as violating an employee’s civil or other legal rights. In addition to paying a judgment for which the insured is liable, it also provides legal defense costs, which can be substantial even when there has been no wrongdoing.

Umbrella Policies
As the name implies, an umbrella liability policy provides coverage beyond the business’s other liability insurance policies. It is designed to protect against unusually high losses and provides protection when the policy limits of one of the underlying policies have been used to the limit. For a typical business, the umbrella policy protects beyond the general liability and auto liability policies. Additionally, if a company has employment practices liability insurance or other types of liability insurance, the umbrella could provide protection beyond the limits of these policies.


Donna Quintana, RHU
Employee Benefits and Health Insurance Specialist

Shane Quintana, LUTCF
Business and Estate Planning Specialist


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