Most types of small business insurances are optional, but your state’s laws can require specific types of coverage in some situations. However, even when it’s not mandatory, you should consider getting it anyway.

Here’s what you need to know to figure out whether you need small business insurance, including the most popular types of policies, when they’re legally necessary, and what can happen if you don’t have them.

Is It Mandatory to Have Business Insurance?

Business insurance isn’t always mandatory, but there are situations where you’ll have to get certain forms of coverage. Your state is most likely to require the following types of insurance for a small business owner:

Workers’ Compensation Insurance 

If you have employees, every state except Texas requires that you get a workers’ comp policy. 

It covers your employee’s costs for bodily injury or illness due to their job, including their medical bills and lost wages. Don’t confuse it with health insurance, though.

Professional Liability Insurance

For businesses that provide certain services, states may require professional liability coverage, also known as errors and omissions insurance. 

It also protects you against lawsuits for mistakes you make on the job. For example, doctors and lawyers may need coverage to protect them against malpractice lawsuits.

Commercial Auto Insurance

These policies can cover the costs of car accidents for you and your employees. You may need it if your business owns or leases vehicles or if your employees have to use them as part of operations, regardless of who owns them.

If your business happens to make, sell, or distribute alcohol, you may also need liquor liability insurance, though that’s a more niche occurrence. It covers the medical and legal costs of alcohol-induced accidents, which general liability insurance excludes.

If any of the situations above apply to you, check your state laws to confirm whether or not you need to get coverage.

What Happens if I Don’t Have Business Insurance?

If you don’t have business insurance that your state requires, you’ll receive fines and penalties at a minimum. If you willfully choose not to buy legally mandated insurance like workers’ compensation, you may also face prosecution and jail time.

The legal requirements and the penalties for breaking them vary significantly between states, so confirm the rules that apply to your area.

Otherwise, no one’s going to come after you for not having business insurance, but you’ll be vulnerable to the risks those policies are designed to mitigate.

For example, say you don’t have general liability insurance, and a customer injures themself while on your business’s property. If they decide to sue you, you’d have to cover the legal costs and any subsequent court-ordered damages out of pocket.

Paying for legal proceedings, medical bills, or property damages without assistance from an insurance provider can easily crush your small business. So it’s often worth paying for coverage, even if only for the peace of mind it brings.

What Types of Business Insurance Should I Consider?

If your state requires that your business have insurance, make sure you buy whatever commercial insurance coverage you need to stay in compliance.

Once you have those policies in place, other types of business insurance may also be worth purchasing. Here are some of the ones you should consider if you can afford the business insurance cost.

General Liability Insurance

General liability insurance, or business liability insurance, protects your business against the potential lawsuits that you can find yourself on the receiving end of as part of regular operations.

Broadly, it covers the costs of a claim against you for bodily injury or property damage. That includes expenses like the following:

• Lawyer fees for defending your business against a lawsuit.
  
• Medical bills for someone injured on your business’s property.
  
• Costs to repair or replace a client’s personal property that you or an employee damaged.

General liability coverage is a good investment for many businesses. If there’s even the possibility that your business might be vulnerable to a lawsuit, it’s often worth paying for liability coverage.

If your business sells a product, make sure you get a policy that includes product liability insurance coverage. It’ll protect you from damages caused by the things you sell to customers.

Commercial Property Insurance

Commercial property insurance is another form of coverage that businesses frequently find beneficial. While liability insurance protects you against lawsuits for damages you cause to other people’s property, these policies cover what belongs to you.

You can get coverage for your business’s building, furniture, tools, equipment, and more. Your insurer should reimburse you for damages caused by hazards like the following:

• Fire and smoke
  
• Storms, blizzards, or hurricanes
  
• Theft and vandalism

Note that this insurance product won’t necessarily cover damages from everything. For example, floods and earthquakes frequently require separate policies.

Business Income Insurance

Business income insurance, also known as business interruption insurance, can help you stay afloat if your business has to stop operations due to a covered hazard. It can also help if something prevents your business from operating at peak capacity.

For example, if you have to shut down your restaurant or only offer to-go services because a storm damaged your seating area, business income insurance could help.

Your policy can reimburse you for costs like mortgage and rent payments, payroll, and lost income while you repair the damages.

Business Owners Policy

A business owner’s policy, or BOP policy, is one of the best types of business insurance. It bundles general liability, commercial property, and business income insurance into one convenient policy for less than you’d pay to get them individually.

If you’re interested in getting one or two of the coverages listed above, make sure you shop around for a BOP policy as well. You might be able to get the third form of coverage for roughly the same price as buying two of the others separately.

What Types of Small Businesses Need Business Insurance?

If your business has employees, offers professional services, involves the use of a commercial vehicle, or sells alcohol, your state may legally require that you get some form of business insurance coverage.

However, even outside these situations, insurance can benefit many types of small businesses. For example:

• General liability insurance is a good idea for any business that might be vulnerable to a lawsuit.
  
• Business income insurance becomes increasingly necessary the more you rely on your business for financial support.
  
• Commercial property insurance is a good idea for any business with valuable equipment that it needs to function.

To help you determine whether your business needs coverage, look at the standards for companies of your size in your industry. You can always talk to an insurance agent to get personalized advice. Of course, ultimately, your business is unique.

For example, if you’re a sole proprietor with no employees or expensive business property, you don’t need workers’ comp or commercial property insurance.

However, you might need cyber liability insurance if you deal in sensitive information, which can cover the costs of a data breach.

What to Look for in a Small Business Insurance Policy

When you’re considering a small business insurance policy, there are two primary characteristics to focus on: the total insurance cost and coverage limits.

Ideally, you’ll want to minimize the former while maximizing the latter. At the very least, though, get the amount of coverage you need at a price you can afford.

Small business insurance costs usually manifest in two ways:

• Premiums: These are the monthly or annual payments you make to keep your insurance. If you’re delinquent on payments, your coverage will lapse, and your insurance company will eventually cancel the policy.
• Deductible: Most types of business insurance policies require you to pay some amount of expenses before assisting you with the rest of your costs. That amount is your deductible.

As for your coverage, just confirm that the limit on the policy meets your needs. For example, if you’re buying liability insurance, you can check the typical costs of a lawsuit for businesses like yours and make sure you get a policy that exceeds that.

Don’t Wait to Get Started

In the early days of your business, you need to take care of some things as soon as possible. Buying insurance to stay in compliance with state regulations and to protect yourself against potential risks is one of them.

If you ever plan to get financing for your company, establishing your business credit is another. One of the best ways to start is with CreditStrong’s business credit builder account.

We put your loan proceeds into a savings account to secure the loan so you can qualify even if your business has only been open for a short while. As you pay off the balance, we’ll report your activity to the commercial credit bureaus, thus building your credit.

Don’t wait to get started. Take action for your business today!

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