We’ve all had that moment of approaching the car rental desk, getting offered thirteen different types of insurance, and having no idea which one is right, or if none of them are. When it comes to selecting the appropriate small business insurance policies, the process can feel very similar.
Sure you have car insurance for your company vehicle, but do you have insurance for employees who are using their private vehicles for company use? You have insurance on your building and inventory, but have you insured the specific assets you used as collateral to secure your business loan?
It can be very difficult to know when to draw the line.
Risky Business: The Importance of Insurance
Chances are if you’re starting a new small business, you’re not afraid of a little risk. However, it’s also highly likely that you have invested a large amount of money in this new endeavor. It is only prudent to take sensible steps to minimize the impact of unexpected events such as a lawsuit from a customer or employee, a freak natural disaster, or god forbid, the untimely death of a business partner.
Unlike the vast majority of the permits and licenses discussed in the previous section, there is no legal requirement to take out most forms of insurance. That being said, stories of small businesses completely wiped out after Hurricanes Katrina and Sandy should provide a serious lesson about the need to insure your core assets.
At a Glance:
- You wouldn’t be an entrepreneur if you were too afraid of a little risk, but a failure to secure adequate insurance can leave your business (and potentially your personal) assets at risk.
- Choosing the right amount of insurance for your small business is never an easy decision. A good rule of thumb is to always buy insurance if you couldn’t absorb the loss of a particular asset without dramatic effect.
- Small business owners who have employees are legally obliged to pay workers’ compensation insurance and unemployment insurance. Other obligations vary from state to state.
Evaluating Your Risk
Many small businesses in New York and New Jersey were forced to close following Hurricane Sandy because they lacked the insurance that would have gotten them back on their feet. That fact is well-known. What’s less well-known is that this lack of proper insurance coupled with a lack of proper legal incorporation has also resulted in many entrepreneurs seeing their personal assets come under threat.
In order to avoid the same fate, you’ll want to consider your potential insurance needs both in terms of the potential frequency of claims against you and the size of the potential liability. That means you’ll need to think carefully about your assets and what you can and cannot afford to lose. A good rule of thumb is to always buy insurance if you couldn’t absorb the loss of a particular asset without dramatic effect.
Once you’ve chosen your insurance coverage, you’ll want to re-evaluate it at least once a year. As your business grows in terms of revenue, space, and number of employees, your insurance needs will evolve too.
Insurance for Businesses with Employees
We’ve been talking a lot about insurance choices, but one time where you are legally required to purchase insurance is when you start to take on employees. At that point, you will need to purchase the following: workers’ compensation insurance, unemployment insurance, and, depending on your business location, disability insurance. Current states where disability insurance is a legal requirement include: California, Hawaii, New Jersey, New York, and Rhode Island.
Workers’ compensation insurance is designed to provide wage replacement, medical, and death benefits to employees who are injured on the job. In exchange for these benefits, the employee gives up his or her rights to sue for liability leading to the accident. Your premium will be reflective of the type of business you operate, the average salary of your employees, and your individual experience.
As the name implies, unemployment insurance provides benefits for unemployed workers, helping them stay afloat between jobs. One more insurance that you’ll want look into for your employees is health insurance, following the introduction of the Affordable Care Act. Find out your business obligations here.
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