In 1992, 79-year-old Stella Liebeck bought a cup of coffee from her local McDonald’s drive-thru in Albuquerque. As she tried to remove the lid to add cream and sugar, the cup tipped over and poured scalding hot coffee onto her lap, leading to severe third-degree burns. Liebeck later took McDonald’s to court, where the judge ruled in Liebeck’s favor, determining that McDonald’s was irresponsibly overheating its coffee, and awarded Liebeck millions of dollars in punitive damages.
This famous case is also a great illustration of why companies need business insurance. While McDonald’s was able to absorb the cost of the settlement, any business of any size can take a hard hit if faced with a lawsuit. And companies can be held liable for all kinds of incidents, including property damage, car accidents, or an injured employee. These things happen—and business insurance can help protect your company.
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What is business insurance?
Business insurance protects businesses from the financial losses associated with unexpected events, including property damage, lawsuits, loss of income, theft, employee injuries and illnesses, and workers’ compensation. Put simply, in cases of injury or damage, your business insurance reimburses your company, either fully or partially, for the costs. Think of business insurance as a layer of protection.
What does business insurance cover?
“Business insurance”—sometimes called commercial insurance—is an umbrella term, not the name of a business insurance policy you can buy. In fact, when you start researching business insurance, you might notice there are nearly as many types of policies as there are businesses. Depending on the type of insurance you need and the policies you choose, business insurance can cover:
- Property damage
- Liability protection
- Vehicle insurance
- Loss of income
- Employee injuries/illnesses
- Workers’ comp
- Customer injury
You can also get a business owner’s policy (BOP), which is an insurance package that combines general liability insurance, commercial property insurance, and business income insurance into a single policy.
3 types of business insurance
1. Commercial property insurance
2. Liability coverage
3. Employee insurance
Here are three common types of business insurance and what they cover:
1. Commercial property insurance
Commercial property insurance covers damage to your business property by way of fire, storms, theft, and other property-related events, depending on the policy. These policies usually don’t protect against flooding, however, which often requires additional coverage.
Common types of commercial property insurance policies include business personal property, business income, commercial auto, commercial flood, and home-based business insurance.
Situations that might require commercial property insurance include:
- Your retail store is broken into and robbed. Commercial property insurance can help cover costs of repairs and replace stolen inventory.
- A wildfire destroys your property. Property insurance can help cover loss of income and potentially help buy new real estate.
2. Liability coverage
Liability protection policies provide legal liability coverage for all the ways your company could be sued. This includes bodily injury, property damage caused by your company (as opposed to damage to your company’s property), advertising injury, employment practices, and errors or omissions. Common types of liability policies include general, commercial umbrella, directors and officers, and professional liability insurance.
Situations that might require liability insurance include:
- A customer is injured in a fall on your property. Sometimes called a “slip and fall,” this situation can potentially lead to medical expenses and lawsuits.
- Your accounting business makes a mistake. The result is your client has to pay hundreds of thousands of dollars in back taxes. Professional liability insurance—also called errors and omissions—could help cover these costs.
- An employee falls for a phishing email. The perpetrator manages to steal sensitive client data. Cyber liability insurance helps you compensate victims, cover legal costs, pay for public relations to repair damage to your reputation, and cover the cost of credit monitoring for affected customers.
3. Employee insurance
Even small business owners need business insurance policies: If your US-based business has three or more employees, you’re required by federal law to have workers’ comp and disability insurance. Workers’ comp covers your employees’ lost wages if they’re injured on the job and unable to work, and is generally used in place of litigation. Employer’s liability insurance covers additional costs if an employee’s bills aren’t covered by those two.
Disability insurance is either short term or long term. Long-term disability insurance is usually reserved for wealthy individuals or provided by the state, while short-term disability insurance is provided by the company. It’s used for injuries that lead to more time off of work than those covered by workers’ comp but usually lasts less than a year. It also can cover illnesses or injuries that happen outside of work.
Situations that might require employee insurance include:
- An employee crashes a forklift. They didn’t know it had a flat tire. This type of workplace accident may be covered by workers’ comp.
- Your delivery driver gets into a car accident. Their leg breaks during the accident and they choose to sue you for more compensation. While your vehicle insurance covers the car and workers’ comp covers the initial costs, the employer’s liability insurance could help cover the extra cost you’re being sued for.
- Your receptionist gets cancer. Short-term disability insurance may cover 80% of their wages for three to six months.
When do businesses need insurance?
It’s a very good idea to have business insurance, no matter what your company does or how big it is. Every company—from a small sole proprietorship to a massive corporation is potentially at risk of accidents, natural disasters, and being sued. It’s the reality of doing business.
Here are a few specific situations for which you want to make sure you’re covered:
- You have employees. Employees are helpful, but they create a whole area of potential liability. Make sure you’re covered with workers’ comp, disability, and employer practices liability insurances.
- Your business has grown. As your small business grows, so too do your business insurance policy needs. Maybe you have a new property, more employees, or more profit. Update your insurance policies to keep up with changes to your company.
- You acquired a business vehicle. Got a new work car, van, or truck? You’re going to want to get vehicle insurance for the same reasons you insure your personal vehicle.
- You need industry-specific insurance. Some industries have specific insurance policies to cover incidents more likely to occur in their line of work. A photographer, for example, likely has very different needs than a retail store or car mechanic.
- You recently signed a lease. It’s important to get general liability insurance any time your company signs a lease. In fact, many landlords require it.
- It’s required by law in your jurisdiction. Most US states require some sort of business insurance, whether it’s commercial auto insurance or workers’ compensation insurance. The federal government also has additional requirements, including workers’ comp, unemployment, and disability insurance.