What business insurance does a small business need?

Almost every small business needs general liability insurance, because almost any business can hurt a customer or break something that belongs to someone else. Everything after that follows from four plain questions: what do you own, what do clients pay you to do or advise, who works for you, and whose property or data sits in your care? A café usually adds property and workers’ comp, a consultant adds professional liability and cyber, and an auto shop adds garagekeepers for the cars in its bays.

The order matters more than most owners think: start with the ways your business could lose money, match each one to the policy built for it, and only then check what your state, your landlord and your clients require, because a list built from your lease alone will cover the landlord and leave you exposed. You won’t find prices here. A quote gives you the number.

Start with what could go wrong

Set the policy names aside for a minute, because an underwriter doesn’t start with them either, and look at your business the way they would: as a list of ways money could leave it, each of which some policy was written to answer.

Each of those policies is subject to its own terms, limits and exclusionsExclusionAn exclusion is a provision in an insurance policy that removes coverage for specific causes, types of loss, property or activities the policy would otherwise cover.Read the definition, so treat the table as a map. Go down it with a pen, cross out the rows that can’t happen to you, and look at what’s left, because for most owners two or three rows disappear and the rest is the outline of the coverage they need.

One event can land on more than one row. A kitchen fire that closes a café is a property claim for the ruined range and a business income claim for the weeks with no sales, and if the smoke damages the bakery next door, it’s a general liability claim as well. The rows also sort into two piles, harm you do to other people and harm done to you, which is the split between third-partyThird-party coverageThird-party coverage is insurance that protects your business against claims from other people, such as customers or clients, who say you caused them injury, damage or financial loss.Read the definition and first-party coverageFirst-party coverageFirst-party coverage pays for losses your own business suffers, like damage to your property or lost income, rather than claims other people make against you.Read the definition.

Where does one policy stop and the next start?

Most of the eight policies are easy to tell apart. Two boundaries cause nearly all the confusion, and both involve general liability.

The first is the line between general liability and professional liability. General liability typically answers claims that your business injured someone or damaged their property, and it usually pays to defend those claims too, while professional liability answers a different harm, money a client lost because of your mistake, a missed deadline or bad advice. A salon shows why the line matters. A client who trips on a dryer cord is a general liability claim, but a color treatment that damages a client’s hair is often handled under professional liability, depending on how the two policies are written, so a salon that buys only one of them may find the claim it gets is the one it didn’t buy for. General vs. professional liability draws that line trade by trade.

The second is the gap that garagekeepers fills. General liability policies usually exclude property in your care, custody or controlCare, custody or controlCare, custody or control is a common general liability exclusion for damage to other people’s property while it’s in your possession, being stored by you or being worked on.Read the definition, which is where a customer’s car sits while it’s on your lift, so the policy that covers a customer’s broken wrist in your waiting room may not cover the customer’s car in your bay. Garagekeepers can step in for that car, either as legal liability coverageLegal liability coverageLegal liability coverage pays for damage to customers’ property in your care only when your business is legally responsible for it, such as through negligence.Read the definition that pays when you’re at fault or as direct coverageDirect coverageDirect coverage is a garagekeepers option that pays for covered damage to customers’ vehicles in your care whether or not your shop was at fault.Read the definition that pays regardless of fault.

What each type of business usually carries

If customers come to you, buy general liability before anything else. If you hire, workers’ comp moves to the top of the list, since it’s the one policy here that’s usually set by state law instead of by choice, and general liability won’t fill in for it: the NAIC’s small-business guide lists employee claims among the things a general liability policy doesn’t cover, along with vehicle claims and professional errors. And if what you sell is advice or design, professional liability matters more than a slip in the lobby, which is why consultants are the clearest case for it.

That table is a starting point, and your own list depends on what you do, where you do it and what you’ve signed; the business pages for restaurants, contractors, offices, salons, auto shops and retail go further for each one.

The coverage nobody will make you buy

Here’s the part most first-time buyers get backward. They treat the lease as the shopping list, buy what the landlord asked for, to the letter, send the certificate, get a thumbs-up from the property manager and assume that because the paperwork was accepted, the business is covered.

Then something goes wrong that the lease never mentioned. A landlord asks for general liability because the landlord doesn’t want to pay when your customer falls in the hallway, and a general contractor asks for workers’ comp because it doesn’t want your injured crew becoming its problem, and a corporate client asks for professional liability because it wants someone to collect from if your work goes wrong. Every one of those requirements is written to protect the person asking. That’s fair, and you should meet them, but none of them protects your espresso machine, your stock, your tools or the three weeks of rent you still owe while the shop is closed for repairs.

Look at which rows of the first table rarely appear in a contract: commercial property, unless a lender financed the equipment or a lease asks you to insure your improvements, tools and equipment hardly ever, and business income only in some leases. These are first-party policies. They pay you, so few other people have a reason to demand them.

That’s also where small businesses tend to be thinnest. A café that loses its kitchen to a fire can usually survive the repair bill if it has property coverage. The weeks that follow are harder, because with payroll, rent and loan payments still due and no sales coming in, they can drain the account faster than any contractor’s invoice. Business income exists for that stretch. It’s also an easy policy to skip, since no one put it on a form, and our advice is to price it before you decide you don’t need it.

So run the test the other way. For each thing you own and each month of income, ask whether you could pay to replace it out of savings next week, and if the answer is no, it belongs on your list, whatever your lease says.

Is any of this required by law?

Some of it, but less than people expect, and almost all of it comes from state law instead of federal law, which is why a café can face different rules on either side of a state line. Three requirements come up most:

• Workers’ compensation. The NAIC says nearly all states require employers to carry it, and the thresholds, exemptions and penalties differ from state to state. The Department of Labor keeps a list of state workers’ compensation agencies, which is where your state publishes its rules.
• Auto liability. The NAIC notes that most states have auto insurance requirements and that driving without insurance can bring a fine or an impounded vehicle. A vehicle your business owns or uses for work may need commercial auto insurance, which is separate from the policies in this guide.
• Licenses and registrations. Some trades must show insurance or a bond to get or keep a license. Washington, for instance, requires construction contractors to register with its Department of Labor and Industries and says state law requires them to be bonded and insured.

General liability isn’t on that list, and in most places no law requires it, though contracts often do. A landlord may require it at set limits and ask to be named an additional insuredAdditional insuredAn additional insured is a person or company, such as a landlord or client, added to your liability policy so it can protect them from claims tied to your work.Read the definition, a general contractor may want it plus workers’ comp and a waiver of subrogationWaiver of subrogationA waiver of subrogation is an agreement, usually added to your policy by endorsement, that stops your insurer from recovering claim payments from a specific client, landlord or contractor.Read the definition before your first day on site, and once you sign, those terms bind you. You’ll usually prove you meet them with a certificate of insuranceCertificate of insuranceA certificate of insurance (COI) is a one-page summary that proves your business has insurance, listing your policies, limits, insurers and policy dates.Read the definition, and the article on whether business insurance is required by law separates the two kinds of requirement.

What these eight policies won’t touch

Say your delivery van rear-ends someone on the way to a catering job. None of the policies above is built for that, because vehicles you drive for the business typically need commercial auto insurance, and general liability usually excludes auto accidents, so a contractor with a truck or a bakery with a van needs to sort this out separately.

Floods are the other big one. Property policies usually exclude flood damage, and FEMA’s flood insurance program warns that many business owners assume their commercial policy covers flooding when it often doesn’t, which is a bad thing to learn while the water is still in the stockroom; business flood coverage is available through the National Flood Insurance Program.

A few more exist that you should know about, even though Corgi doesn’t sell them. A restaurant or bar that serves alcohol may need liquor liability, theft by your own employee usually falls to crime coverage, and claims like wrongful termination go to employment practices liability. An umbrella or excess policy can add liability limits above your other policies, and a surety bond, which some licenses and contracts require, guarantees your obligations to the other party more than it protects you. The common exclusions in each policy are worth a look too.

Limits, deductibles and when to buy

Once you know which policies you need, two numbers shape each one, and the first is the limit. Liability policies usually carry a per-occurrence limitPer-occurrence limitA per-occurrence limit is the most a liability policy will pay for all claims arising from a single incident, however many people are hurt or claims are filed.Read the definition and an aggregate limitAggregate limitAn aggregate limit is the most a policy will pay for all covered claims combined during one policy period, no matter how many claims you have.Read the definition for the year, and your lease or contract usually sets the floor. This site shows general liability at an illustrative $1 million per occurrence and $2 million aggregate, but judge any limit against what you could be sued for, using our guide to choosing liability limits. Property limits should reflect what it would cost to replace what you own today, at today’s prices, and the reason is more than the obvious one: many property policies carry a coinsuranceCoinsuranceCoinsurance is a property policy condition that reduces your claim payment if you insure your property for less than a set percentage of its value, such as 80%.Read the definition clause that can reduce a claim payment if you insured for less than a set share of the property’s value, so an undervalued limit can short you twice. The deductible is the second number, and what business insurance costs depends on both.

Then the timing. Buy before anyone asks for proof, because that request usually arrives with a deadline attached, and the order for most businesses looks like this:

1. Before you sign a lease. Landlords often want proof of general liability before they hand over the keys.
2. Before your first job or client contract. General contractors and corporate clients typically want a certificate on file before work starts.
3. Before your first hire starts. Check your state’s workers’ comp rules first, and see hiring your first employee.
4. Before you open the doors. Property, business income and liability should all be in place on opening day.
5. At every renewal, and whenever something big changes. A new location, a large contract, new equipment or a jump in revenue or payroll can each change what you need.

Coverage doesn’t reach backward. A policy generally covers events during its policy periodPolicy periodThe policy period is the span of time between a policy’s start and end dates, usually 12 months, during which its coverage is in force.Read the definition, so a fall the week before your policy starts isn’t covered by it, while claims-made policies, a common form for professional liability, add their own timing rules. The buying itself is a short process, laid out in how to get business insurance.

With Corgi, you can get a quote online in about five minutes, underwriters, not a broker, answer your questions, and your certificate is available the day you buy, to download or send to a landlord or client from your account. If you hire later, workers’ comp can be added to your existing policy without a new application, and if a new contract asks for higher limits, they can be raised the same day.

The businesses that end up underinsured are rarely the ones that bought nothing. More often they bought what someone else asked for, years ago, and never looked again while the stock doubled, the payroll grew, the second location opened and the van got added to the fleet, so the policy describes a business that no longer exists. Renewal is the one day a year someone will remind you to check.