Why you need business insurance
Starting a small business is scary. You’re setting sail alone, with no one to fall back on and no way to predict the challenges you’ll face. If anything goes wrong, the onus is on you to make things right. If disaster hits, you’ll be the one standing in the wreckage and taking stock.
That’s why insurance exists. If starting your own business venture is a gamble, insurance is the way in which savvy entrepreneurs hedge their bets and reduce the impact of any potential catastrophes.
We all know how important it is to have health, car and homeowners insurance, but many people don’t realize just how crucial it is for small businesses – including many budding entrepreneurs. If you’re even considering branching out on your own, being appropriately covered should be one of the first things on your mind.
But where can you draw the line between small business and freelance contractor? Do you need insurance no matter what? Is a business owner personally liable for anything involving the business, and if so how can the owner reduce that liability? What general liabilities do small business owners need to be aware of, and which plans cover those risks?
Read ahead for all those answers and more.
When insurance is a good idea
Business insurance isn’t necessary if you’re working from home by yourself, creating goods and services that only really affect other people in the abstract. Your risk of getting sued is minimal if you’re writing self-published romance novels and selling them on Amazon.
But if you’re a true small business owner, then insurance is essential. Insurance can protect you and your spouse from having your assets seized when you’re sued, and can also protect you from going personally bankrupt. Sure, you might never need to use your insurance policy, but it’s good for peace of mind.
For example, if you’re running a home daycare, insurance is a must because you’re responsible for the safety and well-being of other people’s children. Your homeowners or renters insurance won’t cover what happens to a child in your home if they’re a client instead of a friend or loved one.
Remember, if you try to claim an accident on your personal policy that doesn’t follow the guidelines, you’ll be committing insurance fraud.
Types of insurance
The U.S. Small Business Administration recommends the following types of policies for business owners. Not every policy will be relevant to your situation, so be mindful of your own situation before you sign up. If you have questions, talk to an insurance broker or other small business owners you know.
- General liability insurance. This type of insurance protects business owners against a myriad of offenses. For example, if a client visits your office and then slips while walking down the stairs you would be covered. Also, if your business is named in a lawsuit, this policy can pay for attorney expenses.
- Property insurance. Property insurance protects the physical space where you work and the assets that are in it. If you work at home, your homeowners policy might not cover your business assets, but this will. If you rent office space from a third-party, ask them what kind of damage is covered and if your equipment is included under their policy.
- Professional liability insurance. Doctors, tax preparers and financial planners often purchase this type of insurance, which protects against any errors or omissions committed during a line of work. If you’re an accountant who prepares taxes for other small business owners, you should purchase this insurance in case one of your clients is audited after you prepared their taxes incorrectly.
- Product insurance. If you’re selling a physical product, you need to purchase product insurance. This policy will protect you if a product is defective and injures someone when they use it.
- Auto insurance. If you’re driving for work or have employees using a company car, you need to purchase auto insurance that will cover any commercial driving done for your business. Like regular car insurance, this will cover any damage done to your or someone else’s vehicle, related medical bills and property damage. You can’t ask an employee to use their own personal auto insurance to cover any accidents, so you need to purchase this separately.
What else you can do
Change your legal set up
If you’re currently operating as a sole proprietor, forming an LLC or a corporation could protect you from being personally sued for something related to your business. For example, if you own a nail salon and a customer gets an infection after a manicure, they can sue you for damages.
If you’re a sole proprietor, they can go after your personal assets, such as your home and car, to pay for any damages they’re owed. But if your business is structured as an LLC, your personal assets can’t be touched. That doesn’t mean you can completely avoid liability, but it’s much harder to prove that you, and not the business, are personally liable when something goes wrong.
Read contracts carefully
Anytime you’re working with a client, make sure you have a contract that fully outlines what you’re responsible for, including any legal issues. Hire a lawyer to craft a general contract template you can use with all your clients. While an email trail can be used in a court of law, it’s best to have a real contract that’s signed and dated by both parties.
If the client wants you to use their contract, read it carefully before signing. Compare the language to what your contract says. If there’s a section you don’t understand or disagree with, talk to the client and ask them to explain or remove it. There’s also no shame in turning down a client who has a contract you disagree with. While lawsuits might be rare in your line of work, it’s still best to avoid them.
Take customer service seriously
This is good business advice in general, but many people don’t realize that treating your customers right can affect liability as well as profit. It’s pretty simple – the more you take care of your customers, the less likely they’ll be to sue you if something goes wrong.
Obviously this is not an adequate replacement for a good insurance policy, but it can go a long way to reducing your liability. Make sure you and anyone else interacting with customers or clients takes a calm, non-confrontational approach to resolving any issues or discrepancies.
Reduce your personal liability
One situation that many unprepared small business owners find themselves in is facing personal consequences for actions taken on behalf of the business. You may be operating in the capacity of a business owner, but that doesn’t make you bulletproof to legal consequences. Typically these consequences come as a result of defaulting on a loan, breaching a contract, committing a crime during the course of business or letting the business fall out of compliance.
With a business loan, you’re only liable if you guarantee the loan personally or co-sign for it. A contract leaves you vulnerable if you sign the paperwork, so try to sign under the business name as often as possible. Falling out of compliance with your LLC or corporation leaves your personal assets open to seizure, so make sure to pay any relevant fees and file all necessary paperwork. If you commit a crime while operating in the name of your business, the issue is simple – all federal and state laws are still applicable and your business structure cannot protect you from prosecution.
Have an emergency fund
This is less of a way to reduce liability and more of a strategy to reduce harm. Stashing away money for several months of expenses to an emergency fund will ensure that if everything goes south, you and your employees will have the wherewithal to pick up the pieces.
Obviously saving this much cash isn’t realistic for every business in every situation, but it’s a goal to strive for. You could also consider taking on a partner to share the risk and contribute capital, further reducing your personal liability if disaster strikes.
The bottom line
If you’re wondering whether your small business needs insurance, the answer is probably yes. Unless you’re working entirely in a non-liable freelance capacity, there’s probably some form of coverage you need to stay out of trouble.
In general, there are two types of insurance: the kind you need, and the kind you’ll wish you had if something goes wrong. Figure out what insurance plans you absolutely need to have, and then decide how much risk you’re willing to take on by foregoing other types. Much of this is up to personal preference, but it’s almost always better to err on the side of caution when it comes to a business.
On top of being properly insured, there are plenty of things you can do to reduce the liability of your business – and your personal liability as the owner. You can never predict a disaster, but being properly prepared will go a long way to making sure your business gets through the other end in one piece.