What Is Business Insurance?

Definitions & Examples of Business Insurance

Insurance adjuster inspecting crack in brick wall
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Business insurance is coverage for financial losses your business suffers when property damages or injuries occur. Financial losses may be incurred by accidents, negligence, intentional actions by people, or by weather, and naturally occurring events.

As a precautionary measure against loss, most small businesses purchase insurance to ensure that they are protected from damages. There are several different types of insurance you can purchase for your small business; it is important to understand what types of property are covered under each type of policy so that you can decide which is best for your business.

What Is Business Insurance?

Business insurance is protection from financial losses that may occur during the operations of the business. Companies use a variety of vehicles and equipment to accomplish their daily tasks and are held responsible for ensuring the services and products they provide are safe and reliable.

Sometimes, accidents happen or equipment fails. Employees or patrons can be injured, and malfunctioning machinery might need to be repaired or replaced. Without insurance to cover the costs of replacement, medical payments, lawsuits, or employee injuries, businesses would very quickly experience significant financial losses.

How Does Business Insurance Work?

Insurance for business works similar to insurance for personal purposes. The owner purchases coverage plans, pays premiums at set intervals, and receives enough financial support to provide for expenses from any circumstances that would cause a loss.

Claims are submitted to the insurance provider, and if the instance is covered, the insurance company sends money to the business. If there are any deductibles, they must be paid, and the claimant can only receive the limit of the policy.

Business insurance is also a tax-deductible expense.

For example, assume a small business owner runs a breakfast diner and serves lots of coffee in the morning. They have purchased a general liability insurance package, and believe they are covered for most circumstances. One morning, a cashier spills hot coffee on a patron, and he receives burns that required hospitalization.

The owner would submit a claim to the insurance company—if the situation was covered by the policy, the owner would meet any deductible required and the insurance provider would cover any medical expenses for the patron and legal expenses that arose.

What Does Business Insurance Cover?

The Small Business Administration (SBA) lists six different types of insurance a business owner can consider. The type of insurance required by businesses in each state will be different, so check with your state's insurance regulatory agency to make sure you are covered.

Most states, at a minimum, require worker's compensation insurance, unemployment insurance, and disability insurance in addition to other insurance types specific for the business. 

Businesses are not limited to only one type of insurance policy, so if an owner determines more than the minimum is necessary, they can purchase additional coverage as necessary or negotiate with a provider to receive the coverages they need.

A business' industry and how it interacts with the public will dictate the kinds of coverage that is needed. To figure out what your business needs, you should know what each type of insurance covers and who it is for. Insurance for business is designed to cover just about any type of loss imaginable—if the right policies are chosen.

Business Insurance Types and Coverage
Type Who Is Covered What Is Covered
General Liability Insurance All businesses Financial losses from injuries, property damages, lawsuits, medical, libel and slander
Product Liability Insurance Manufacturers, wholesalers, retailers, and distributors Loss that results from defective products which cause bodily injury
Professional Liability Insurance Service-based businesses Negligence and malpractice
Commercial Property Insurance Business that have considerable assets and properties Covers losses from disasters that are natural or man-made, such as wind damage or vandalism
Home-Based Business Insurance Home-based businesses Covers a small amount of equipment and bodily injury; it's added to a homeowner's policy
Business Owner's Policy Home-based businesses and small business owners Merges typical coverage into one package
Categories per the SBA

Do I Need Business Insurance?

To determine whether you need business insurance or not, the SBA outlines four steps.

  1. First, assess the risks your business has. If there is a chance of injuries, accidents, or any other type of loss, make sure that you have purchased insurance to cover them. While there are insurance packages available that cover known circumstances, consider talking to other business owners in similar industries to see what they have—if you are just starting out, they may have experienced something you should consider insurance for.
  2. Choose your insurance agent from well-known, established agencies that have the means to provide the benefits promised.
  3. Compare coverage and offerings from multiple providers to make sure you are getting the most bang for your buck.
  4. Take a look at your insurance needs at least once a year, before your policy expires to give you time to reassess whether it still is meeting your business needs or not.

Key Takeaways

  • Business insurance is coverage for your business' property, assets, and finances.
  • There are six types of business insurance, each designed for different businesses and industries.
  • Each state has different minimum coverage requirements, but generally, most businesses have to provide worker's compensation, unemployment, and disability insurance.
  • You can supplement your business insurance with any of the types you might need, or negotiate a bundle that will cover all your needs.

Article Sources

  1. Internal Revenue Service. "Deducting Business Expenses." Accessed July 7, 2020.

  2. National Federation of Independent Businesses. "Small Business Insurance Dos and Don’ts." Accessed July 7, 2020.

  3. Small Business Administration. "Get Business Insurance." Accessed July 7, 2020.