As an entrepreneur and small business owner, protecting your hard-earned investment is likely a top priority. One key way to mitigate risks is through business insurance.
While certain types of business insurance are legally mandated, having adequate coverage can safeguard your assets and provide invaluable peace of mind.
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Is Business Insurance Required By Law for Small Businesses?
The short answer is: it depends.
Business insurance requirements vary based on several factors, including your business type, number of employees, operating locations, and the regulations of your state and local jurisdictions.
Worker’s Compensation Insurance
If you have employees working for your business, you will likely be required to carry worker’s compensation insurance. This type of policy covers medical expenses and a portion of lost wages for employees who are injured or become ill due to a workplace incident.
Almost every state requires companies with employees to have some level of worker’s comp coverage, with few exceptions.
According to a recent study by the Employer’s Resource Council, over 20% of small businesses were out of compliance with worker’s comp laws due to lack of awareness or oversight. Failing to carry mandatory coverage can result in costly fines and legal penalties.
Need Workers Comp?
Starting as low as $800/year.
Commercial Auto Insurance
If your business uses vehicles for operations, commercial auto insurance will almost certainly be a legal requirement. Personal auto insurance policies typically exclude coverage for vehicle use related to business purposes. Most states require a commercial auto policy for any vehicle owned by a business.
General Liability Insurance
While general liability insurance is not legally mandated in most states for small businesses, it’s considered essential coverage that is often required by landlords for leased spaces or by clients before signing contracts. General liability protects against third-party bodily injury, property damage, advertising injury and more through policy add-ons.
According to a 2020 study by the Insurance Information Institute, 42% of small business claims were related to general liability, highlighting its importance.
Other Common Business Insurance Options Depending on your industry, location and operations, you may be legally required or should strongly consider other types of coverage as well:
- Professional Liability Insurance (Errors & Omissions)
- Cyber Liability Insurance
- Commercial Property Insurance
- Business Interruption Insurance
- Employment Practices Liability Insurance (EPLI)
Need General Liability?
Starting as low as $450/year.
The average small business carries six different insurance policies based on 2021 market surveys. Bundling coverages can often provide bundled discounts.
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Running a Business Without Insurance is Risky
While not having required insurance can lead to fines and penalties, operating without any coverage at all is extremely unwise from a liability standpoint. Without insurance, your business assets and personal finances could be at risk if you face a lawsuit or catastrophic event.
According to legal data analysis, 43% of businesses face lawsuits or temporary business disruptions every year. And the average out-of-court settlement was $45,000 as of 2022. Having ample commercial liability, property and business interruption coverage could be vital to withstanding these financial hits.
Looking to the Future with Business Insurance
Beyond just meeting minimum legal requirements, taking a proactive approach to business insurance planning is smart for long-term growth and success. As your operations evolve and expand, nimble insurance solutions can provide flexibility.
For example, on-demand “pay-as-you-go” business insurance platforms are increasing in popularity for easily adjusting coverages as needs change. According to TechCrunch, funding for digitally-enabled business insurance startups grew 7x in 2022.
When developing your business plan, be sure to work with an experienced commercial insurance broker to build a robust risk management strategy. The right broker will provide expertise on current regulations, customize an ideal coverage portfolio, and make forward-looking recommendations to protect your dreams as an entrepreneur.
With some due diligence and guidance, you can check the “business insurance” compliance box while also safeguarding your company’s future. An ounce of prevention through tailored insurance truly is worth a pound of cure.
