As a small-business owner, you rely on your business for a dependable stream of income. Because your business is such a big part of your financial plan, protecting it from various types of risks can be extremely valuable, and managing those risks is an essential part of your business planning. The types of business insurance that previous parts of this article have discussed can help give you the protection you need and are readily available from many major insurance companies, such as AIG, CNA Financial, and St. Paul Travelers.
On the other hand, buying insurance policies to manage your business risk has a cost. Depending on how much insurance your business needs, premiums can be extremely high, and even relatively small premiums on different insurance lines can add up quickly. The hard reality for many small businesses is that their owners probably can't afford to buy the entire suite of available policies. Most will have to prioritize their coverage needs.
What you must have
You will be required to obtain certain types of business insurance. Workers' compensation insurance is the best example. Nearly every state in the country requires any business with employees to buy a policy or to participate in a workers' compensation insurance pool that works much like a private policy. Business owners in certain professions may also have a professional requirement to purchase some forms of insurance. For instance, in many states, attorneys and other legal professionals are required to carry professional liability insurance with fairly high policy limits, to ensure that their clients will be able to recover substantial damages if an attorney commits malpractice.
In other cases, while there may be no legal or regulatory requirement for you to have insurance coverage, you may have to get insurance just to do business with certain clients or to make business arrangements with suppliers and other third parties. For instance, if your business leases office space from a building owner, your lease may require you to have general liability insurance that names both your business and the landlord as insured parties under your policy. Similarly, if you're bidding on a work project, your prospective client may require you to have professional liability insurance, so that even if you go bankrupt or out of business, there will still be money to help cover costs.
What you probably should have
Beyond the insurance that your business has to buy, deciding what additional coverage to carry requires an in-depth look at the nature of your business and the particular risks that it faces. In general, liability and property insurance can be extremely valuable for businesses of all sizes. If, for instance, you frequently have customers come onto your business premises, then general liability insurance is much more important than if you typically visit customers where they live or work. If you have a lot of business equipment and other property, then property insurance makes more sense for you than if you only have a computer and some basic office machines. And if you're in a high-risk profession such as medicine or law, then professional liability insurance is a must, despite its high costs.
Even if you don't think you need a particular type of insurance, at least get a quote to see how much coverage would cost. Sometimes it will cost a lot, but depending on the size of your business and your occupation, some forms of insurance can cost relatively little. In some cases, you may find more cost-effective ways of reducing or eliminating the risk of some losses. For example, instead of purchasing a product liability policy, you may discover that it's cheaper to implement stricter quality control guidelines that aim to eliminate defective products at the source. While taking alternative measures may not totally eliminate your risk, they may reduce it to levels that you're willing to accept.
One particular warning applies to liability insurance. Many business owners set up their businesses as corporations, with the expectation that the corporate entity will protect their personal assets from the liabilities of the business. Although incorporating your business may provide some protection, it won't prevent someone from trying to hold you personally liable for damages. Don't assume that incorporating means you won't have to spend money on business insurance.
With all of the things business owners have to consider, putting insurance coverage on the back burner can be tempting. Yet without the right insurance coverage, you may be putting the source of your current and future income at risk. It makes sense to do an insurance review to make sure that the risks your business faces won't prove to be its downfall.
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Fool contributor Dan Caplinger has been paging through dozens of pages of insurance documents for a favorite charity. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy doesn't need risk management.