One of the best reasons to form a limited liability company (LLC) is the personal asset protection this business entity provides.
With an LLC, you as a business owner are shielded from lawsuits, as your creditors can only pursue your business assets, meaning that your house, car, personal bank accounts, and other assets are safe.
However, a common issue we frequently hear about is LLC owners overestimating the power of this limited liability protection. Just because you have personal asset protection doesn’t mean you don’t also need insurance!
In this article, we’ll discuss the various ways insurance can help you safely operate your LLC. Does your LLC need small business insurance?
General Liability Insurance
The first type of small business insurance we’ll discuss is general liability insurance. This form of insurance protects your LLC against third-party claims, such as those from your vendors or customers. A common perspective on this form of insurance is the “slip and fall” scenario.
If a client slips on a wet spot and injures themselves on the floor at your business location, you might find your business facing a lawsuit. In this circumstance, general liability insurance protects your LLC from claims of property damage and personal injury, as well as several forms of reputational damages.
In our opinion, any business that has clients visiting a physical business location needs general liability insurance. Accidents happen, and when they do, they can often be extremely costly. Even a simple slip-and-fall accident can result in months or even years of medical bills, and you certainly don’t want to be left on the hook to take care of these bills on your own.
In addition, general liability insurance protects you from claims of libel or slander. If your business is accused of causing harm due to unfair marketing or advertising practices, general liability insurance has your back. In short, there are quite a few potential harms covered by general liability insurance, and that’s why it’s typically the first type of insurance policy we recommend to our readers.
Commercial Property Insurance
Another common form of insurance for LLCs is commercial property insurance. This type of policy protects your business assets from a variety of harms, like fire, theft, burst pipes, etc.
Commercial property insurance isn’t just for entrepreneurs who own their physical business locations either, as a commercial property policy also covers your physical assets if you rent your business space, or even if you work from home.
In addition, commercial property insurance covers more than just your building and its contents. You will also receive protection for other items on your property, like your fence, parking lot, and any outdoor signage you may have on-site.
Costs for commercial property insurance vary considerably depending on a few different variables. One is the location of your business, and specifically whether your property is in an area that suffers lots of natural disasters. In addition, there are some construction factors that play into this, like whether your office is in a fireproof building, and how recently the electrical wiring, plumbing, and heating/air systems were installed.
In general, commercial property insurance covers the actual structure of your building, as well as everything inside, and also some items on the rest of the property. The only major exceptions are damages caused by earthquakes and floods, which typically require their own separate policies, or for those specific perils to be added to your commercial property policy.
Professional Liability Insurance
Commonly referred to as errors and omissions coverage, this form of insurance protects your business if your professional services or advice cause harm to a client. There are quite a few different business types that should get professional liability insurance to protect their business activities.
For example, law firms, professional consultants, certified public accountants, home inspectors, information technology (IT) professionals, and real estate agents are professions that should typically be protected by errors and omissions insurance.
If your business is sued because you made an error that cost your customer money, or if you were supposed to provide a client with a product or service that you accidentally damaged or ruined, professional liability insurance has your back.
Much like with commercial property insurance, there are many variables that can affect the pricing for this type of policy. These include the industry your business operates in, your location, the size of your business, how long you’ve been operational, and your prior claims history.
Workers’ Compensation Insurance
Obviously, if you don’t have any employees for your LLC, you don’t need workers’ comp insurance. However, whether you have one employee or 1,000 employees, once you hire anyone, workers’ compensation coverage becomes a must.
With workers’ compensation insurance, your business is protected in case an employee becomes injured or ill, or if they die as a result of working for your company. This policy covers things like medical bills, disability benefits, death benefits, and funeral costs.
Even if you think your business operates in an industry with little apparent risk, you should still absolutely protect yourself and your employees with workers’ compensation insurance. You never know when something as innocent as a slip-and-fall accident could burden your business with payments you can’t handle.
Commercial Auto Insurance
One of the biggest misconceptions we encounter with our readers is in regards to commercial auto insurance. There is a surprising amount of entrepreneurs who think commercial auto policies are only necessary if your business owns its own fleet of vehicles, but this simply is not the case.
In reality, any business that requires employees to drive in any capacity should get commercial auto coverage. This is because this policy not only covers vehicles owned or leased by your business, but also covers your employees who drive either their own personal vehicles or vehicles rented or owned by the company.
Business Interruption Insurance
What happens if a catastrophe strikes and your business can’t open as usual? This is a situation where you would be thankful to have business interruption insurance, which protects your company from losses that result from the need to restore property that is too damaged to use.
We’ve gotten lots of questions regarding whether business interruption insurance would have helped entrepreneurs navigate the recent COVID-19 outbreak, and in general the answer is no. Business interruption insurance typically only applies to events like vandalism, damaged or destroyed equipment, wind, fire, and hail.
An example for a situation where business interruption insurance would come in handy is if there’s an extended power outage at your business location due to a natural disaster, like a storm. If you’re unable to operate your business until the damaged power lines are restored, business interruption insurance could keep you afloat until you’re ready to reopen your doors.
Business Owners Policy (BOP)
A business owners policy is essentially the “value meal” of small business insurance, in that it packages together some commonly required policies into one convenient bundle. The typical BOP includes general liability, commercial property, and business income coverage, although you can also add some other kinds of coverage if you’d like to.
The advantages of a BOP are quite simple: bundling these policies together is less of a hassle, as you only have to deal with one policy instead of three separate ones. In addition, your insurance provider will typically give you a small discount for purchasing a BOP instead of separate policies.
Cyber Liability Insurance
In today’s interconnected world, cyber liability insurance is becoming increasingly popular. This form of coverage protects your business from harms like compromised data, commercial identity theft, and cyber attacks.
With a cyber liability policy, your insurance provider would help you restore your data and computer systems, correct your records, provide expense reimbursement, perform legal reviews and forensic IT services, and cover potential legal defense costs.
While some of the policy types discussed in this guide do cover crime to a degree, only with a comprehensive commercial crime insurance policy will you have full protection from employee dishonesty, theft of money or securities, computer fraud, burglary, forgery, and unauthorized alterations.
Commercial Umbrella Insurance
This form of insurance adds an extra layer of protection to your general liability and commercial auto policies. With umbrella insurance, you can increase the liability limits present in those policies.
Additionally, this type of policy expands coverage — for example, if you have a policy that only covers incidents within a certain geographic area, your umbrella insurance could extend the covered area.
Obviously, not all small businesses need all of these forms of insurance. Depending on the nature of your business, as well as the size and scope of your operation, you may need varying combinations of the coverages explained in this article.
For all small businesses, we think that general liability and commercial property insurance are a must. Consider looking into a business owners policy, as this combines the policies we think most small businesses should have. For most businesses with at least one employee, we strongly recommend adding workers’ compensation insurance as well.
We hope this article helped you develop your understanding of the types of small business insurance available to LLCs!