Is business insurance required by law?

Some of it is, though less than most owners expect, and the answer depends on your state, but the requirements that come up again and again are workers’ compensation once you have employees, liability insurance on vehicles, and insurance or a bond as a condition of certain licenses. General liability, the policy most small businesses buy first, usually isn’t required by any law at all.

What’s required far more often is insurance written into a contract. A landlord, a general contractor or a corporate client can make coverage a condition of the deal, and once you sign, that requirement is a contract term you can be held to, in the exact wording you agreed to. So the useful answer to “is it required?” comes as two questions: what does your state require, and what have you already agreed to?

What the law can require

Insurance mandates come mostly from states. That’s why the same café can face different rules in two neighboring states, and of the four kinds that show up most often, it helps to know what each one is for before you go looking up your own.

Workers’ compensation

The NAIC says nearly all states require employers to buy workers’ compensation insurance to cover their employees. “Nearly all” is doing real work in that sentence, and so is everything around it: how many employees trigger the requirement, whether part-time and seasonal workers count, which owners can leave themselves off the policy, and what the penalty is for going without all differ from state to state.

New York shows how much the details can matter. Its Workers’ Compensation Board says coverage isn’t required for a sole proprietor who has no employees, but it also counts family members who work for a for-profit business, paid or unpaid, as employees. Say a one-person New York shop starts having a teenage nephew help out on Saturdays. Under that rule, the shop may have crossed the line without noticing.

Because the rules are set state by state, the authority on your situation is your state’s workers’ compensation agency, which you can find on the Department of Labor’s list of state workers’ compensation agencies along with contact details for each one, and if you’re about to hire, hiring your first employee walks through what to check.

Unemployment and, in some states, disability

Employers also take on unemployment insurance, though it works nothing like the policies on this site. The Department of Labor describes it as a federal-state program financed through federal and state employer payroll taxes, so you register with your state and pay the tax instead of buying a policy from anyone.

A few states add a disability requirement on top of that, and New York is the clearest example, where the Workers’ Compensation Board says virtually all employers must provide disability and Paid Family Leave benefits coverage for their employees.

Auto liability for vehicles

The NAIC notes that most states have auto insurance requirements, and that driving without insurance can mean a fine and an impounded vehicle. If your business owns a van, you drive your own truck between job sites, or your auto shop runs a tow truck, ask your auto insurer whether business use is covered at all, because a vehicle used for work may need commercial auto insurance, which is a separate kind of policy that Corgi doesn’t offer. The same goes for employees who run errands in their own cars, a gap that hired and non-owned auto coverage is meant to fill, and Corgi doesn’t sell that either.

Insurance or a bond for a license

Some licenses and registrations require proof of insurance, a surety bond or both, and contractors run into this the most. Washington, for instance, requires construction contractors to register with its Department of Labor and Industries and says state law also requires them to be bonded and insured. Other states, counties and cities set their own rules for contractors and other licensed trades, and some require nothing at all, so your licensing board’s website is the place to check, and it will usually say what proof it wants.

Contracts are where most requirements come from

For most small businesses, the law sets a short list and contracts write the long one. Here’s who usually asks, and for what:

Three things about these requirements catch owners out, and they’re worth more of your attention than the statutes are.

First, they’re specific. A lease rarely says “carry insurance.” It names a limit, a policy, sometimes an endorsement and sometimes a deadline for proof, and close enough doesn’t count, so a $500,000 policy against a $1 million requirement can put you in breach even though you’re insured. Read the clause with the same care you’d give the rent. Then read it again.

Second, the proof usually has to show particular wording. You’ll typically prove you meet a contract 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 for landlords and general contractors that certificate often has to show the landlord as 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 or 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 in favor of the contractor. Both of those are added to the policy itself by endorsement, so typing them onto a certificate does nothing, and a careful landlord or contractor will eventually ask to see the endorsement.

Third, there’s often more than one way to meet a limit. Owners rarely ask. Many contracts let an umbrella or excess policy, sitting on top of your general liability, make up part of a high limit, so a $2 million requirement might be met by a lower primary limit plus an umbrella. Corgi doesn’t sell umbrella or excess policies, but it’s worth reading the clause for that wording before you assume you need the full limit on one policy. And contracts reach one-person businesses too: a general contractor can require workers’ comp from a sole proprietor whom the law doesn’t require to carry it, which business insurance for sole proprietors explains.

None of this is optional once you’ve signed. Let required coverage lapse and you may be in breach of the lease, and turn up at a site without the workers’ comp the contractor asked for and you may not get past the gate. Insurance requirements in a commercial lease and how to read a client contract’s insurance terms go clause by clause.

How to check what applies to you

Work through these in order. It takes about an afternoon if your paperwork is in one place, and you’ll come out with a list you can hand straight to whoever quotes your insurance.

1. Check your state’s workers’ comp rules. Find your state agency on the Department of Labor’s list, and look up when coverage is required, who counts as an employee and whether owners can be excluded.
2. Check your licenses and permits. Look at your state, county and city licensing requirements for your trade. Contractors, in particular, often need to show insurance or a bond.
3. Check your vehicles. List every vehicle used for the business, who owns it and who drives it, and ask your auto insurer whether business use is covered.
4. Read your contracts. Pull the insurance section from your lease, client agreements and any subcontracts, and note the policies, limits and endorsements each one names.
5. Ask what you can’t afford to lose. The law and your contracts set a floor. A salon whose chairs and product would cost months of revenue to replace may want property coverage whether anyone requires it or not.

The SBA’s guidance comes to the same place: laws requiring insurance vary by state, so check your state’s website for the requirements that apply to your business.

So what happens if you go without?

It depends on who required it. Each state sets its own penalties for skipping required workers’ comp, and your state agency publishes them, but the bigger problem is simpler: with no policy, an injured employee’s medical bills and lost wages have no insurer behind them, and they land on the business. Driving without required auto insurance can bring a fine or an impounded vehicle, according to the NAIC, and a missed license requirement can stop you from getting or renewing the license. And a missed contract requirement means a breached lease, a lost job or an invoice that doesn’t get paid.

Then there’s the cost no rule imposes. It’s the big one. A business can meet every legal requirement it has and still be one burst pipe or one bad fall away from paying a loss out of its own account, which is the gap the law was never trying to close.