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Practical Business Skills

Insurance

Business insurance can offer you protection and help keep your business and personal finances secure. As a business owner, it’s your responsibility to secure the necessary business insurance to protect your assets, property and employees. If you’re not protected with the right insurance, an accident, natural disaster or lawsuit could result in expenses that you can’t afford and force you to close your business.

Insurance required by law

There are a few types of business insurance that are required by law to help protect your company and employees from the financial burden of unexpected events. The requirements differ from state to state, so visit your state commissioner’s website to find out the coverage required in your area. Also, be sure to thoroughly research all types of insurance associated with your industry to stay compliant, using resources like the Insurance Information Institute.

Here are a few types of insurance required in many states:

Workers’ compensation insurance
Workers’ compensation is required by law and provides coverage for medical expenses, lost wages and rehabilitation costs to employees who are injured or become ill at work. Each state has a different workers’ compensation system and requirements, so be sure to visit your state’s worker's compensation department website.

Unemployment insurance
Unemployment insurance provides temporary financial assistance to workers who have lost employment through no fault of their own, such as being laid off or quitting due to unsafe working conditions. State and federal governments generally require employers to pay unemployment insurance for each employee. The amount you’ll pay can depend on how many employees you have, how much you pay them and whether previous employees have claimed unemployment benefits.

Disability insurance
Disability insurance covers part of an employee’s income in the event they are unable to work after a non-work-related injury or illness. Disability insurance is required for employers in some states, so make sure to research the requirements where you run your business.

Other common types of business insurance

Once you have secured coverage required by law, you can look into additional insurance to help protect your business against other risks.

When considering which types of insurance make the most sense for your business, think about potential events and pitfalls you wouldn’t be able to afford without help. These are the types of coverage you should prioritize.

If there’s a trade or professional association for your business, it may be able to give you some guidance. You could also ask other small business owners who run similar types of businesses for advice.

Review the chart below to help understand what protections are generally associated with each insurance type.

Insurance type
Natural disasters
Liability claims
Property protections
General liability insurance x
Product liability insurance x
Professional liability insurance x
Commercial property insurance x x
Home-based business insurance x x x
Business owner’s policy x x x

Not every type of insurance is right for every business. While you might not need all types of insurance, a few common types include:

General liability (GL) insurance
This coverage is useful for many businesses. It is designed to help protect your company if someone else, or someone else’s property, is damaged by your business or on your business property. For example, if one of your customers falls in your store, GL insurance can help cover the cost of the person’s medical expenses. The policy may also help pay for legal fees if your business is sued because of something that happened at your store or office.

Product liability (PL) insurance
Intended for businesses that manufacture, distribute and sell products, PL coverage protects businesses from losses if a product hurts someone else or damages someone’s property. For example, if you produce and distribute electronic devices with faulty parts that injure a customer, PL insurance can help cover the cost of care, the person’s lost wages and your business’s legal fees.

Professional liability insurance
Errors and Omissions Insurance is also known as Professional liability Insurance. It’s intended for businesses that provide services to customers and can help cover the cost of a claim that your business made a mistake or failed to do something. For example, if you own a cleaning company and accidentally damage a client’s house, professional liability insurance will help cover the costs and fees associated with the incident.

Commercial property insurance
Commercial property insurance intended for businesses with a significant amount of property and physical assets (office equipment, inventory, company documents). This coverage can help pay for repairs, replacement and lost income if your business’s property is damaged by a covered incident, such as a careless employee, fire, explosion, burst pipes, storm, theft or vandalism.

Home-based business insurance
For businesses that are run out of the owner’s home, this coverage protects your business-related files, equipment and operations. Homeowners and renters insurance policies generally won’t cover your business, which is why home-based business insurance can be important.

Business owner’s policy (BOP)
A business owner’s policy combines several of the typical small- and medium-sized business insurance options into one policy. This helps simplify the insurance-buying process and can save you money. BOP may include property insurance, liability protection and business interruption insurance. The latter can cover your lost income if your business has to close or be rebuilt because of a natural disaster.

Long-term disability insurance
Long-term disability insurance protects employees from loss of income in the event they are unable to work for an extended period of time due to illness, injury or accident. Benefits can last two, five or 10 years, or until retirement.

Life insurance
For many small business owners, life insurance can help your family, partners or employees in the event of your death. This coverage can help pay for funeral costs, ongoing living expenses, outstanding debt, continuing a family business, financing your children’s education and protecting a spouse’s retirement plans.

Business insurance expenses and fees

There are many factors that affect the price of insurance for small businesses, including the type of policy, coverage limit and deductible, as well as the industry, location, revenue, number of employees and physical size of a business.

When purchasing business insurance, your business (the policyholder) will sign a contract with an insurance company. Your company will pay the insurer a premium. In return for the premium, the insurance company will help pay for financial losses from certain disasters or incidents depending on the type of insurance you buy.

Most insurance policies have deductibles, or what you pay out of pocket before your insurance company begins covering costs. For example, if you have a deductible of $500 and your company experiences a loss of $800, you will be responsible for paying $500 and your insurance company will pay the remaining $300.

How to buy business insurance
To help you navigate the process of buying business insurance, consider these simple steps.

  1. Identify risks. Evaluate what types of accidents, natural disasters or lawsuits may affect your business to determine what insurance you’ll need.
  2. Find a licensed agent or broker. If you don’t know a lot about insurance and could use the help of a professional, consider finding a licensed insurance agent or broker. They can help you find policies that best match your business needs. Agents generally represent a single company, while brokers may be able to help you compare policies from different insurance companies.
  3. Weigh your options and costs. Insurance policies can offer different types or amounts of coverage, and can have very different premium rates. It’s wise to compare the rates, terms and benefits from each policy to make sure you’re getting the best deal and coverage. Generally, higher deductibles and lower coverage limits lead to lower premiums; however, this can cost you more in the case of significant loss or damage.
  4. Review often. Your insurance needs can grow as your business does. That’s why it’s important to reassess your potential liabilities at least every year.

Learn more about buying insurance.

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