What Type of Business Insurance Will I Need?
When you run your own business, you’re responsible for mishaps like property damage, business interruptions, cyber attacks, and legal cases. Without business insurance, these events can change the trajectory of your company.
In this article, we will explore the importance of business insurance, outline common types of business insurance, and provide tips on how to select the right coverage for your business.
Do you need business insurance?
A common misconception is that there is little benefit to business insurance unless you actually have a loss, accident, or claim. However, the truth is that all businesses face risks. The potential financial implications of not having insurance far outweigh the costs of paying for insurance.
Business insurance can cover costly damage and liability claims which you might otherwise have to pay out-of-pocket. Business insurance can also protect property, mitigate litigation risks, and help your business stay afloat if major vendors back out without warning. Without business insurance, unexpected events and claims could impact your finance for years to come and change the trajectory of your ecommerce business.
Is business insurance required by law?
There are several types of business insurance available for ecommerce businesses. Insurance requirements vary by state.
For example, almost every state in the U.S. requires that businesses hold a certain amount of insurance for employees, including workers' compensation and unemployment insurance. Five states—California, Hawaii, New Jersey, New York, Rhode Island—and Puerto Rico require that employees receive short-term disability coverage.
Tips for choosing business insurance coverage
Your business faces unique risks and your insurance coverage should be tailored to address these risks. When choosing insurance, consider the aspects of your operations that need protection. Remember that your coverage needs may change as your business grows.
Some considerations when choosing insurance for an ecommerce company include:
- The type of work you do
- Your physical location(s)
- Property and equipment
- Intellectual property
- Employee rights
- Customer protections
Choose insurance that fits your industry and your specific needs. For example, an ecommerce business with a physical storefront might need insurance that can cover lost business in the event of a fire. Or the ecommerce business might need insurance coverage that can make up for lost business if a manufacturer supplies faulty products.
Standard business insurance policies often cover your operations across the country. When purchasing insurance, it’s important to establish the locations where your business will operate. Insurance companies often charge different rates and premiums depending on your business’ location. Some may only offer coverage in certain states.
Types of business insurance
Many business insurance types overlap in their coverage, and it’s important to choose policies that are cost-effective, flexible, and cover your business operations adequately. Below, we outline the most common types of insurance used by ecommerce businesses.
- Business Owner’s Policy (BOP): If your business employs fewer than 100 people, operates out of a small workspace, and makes less than $1 million in annual revenue, you might be eligible for a business owners policy, or BOP. A BOP combines many different insurance coverages into a single policy, making it a flexible and affordable way to protect your business.
For example, if a flood damages your office, your BOP insurance might cover office repairs and pay employees’ wages while business is interrupted.
- General liability insurance: For businesses that are too large to be eligible for a BOP, general liability insurance can cover liabilities, including claims of bodily injury or property damage.
For example, if an employee slips and falls in your warehouse, general liability insurance can help pay for their hospital and treatment bills. If your coverage includes product liability insurance, your coverage can also cover any bodily injuries that your products may cause.
- Business income coverage (also known as business interruption insurance): If your business closes because of a covered incident, business income coverage helps cover your payroll.
For example, if a fire damages your warehouse and you need to temporarily stop operations, business income coverage can protect against certain financial losses that are sustained while the business is unable to operate (referred to as a period or restoration).
Insurance Services Office worksheets from insurance companies can help create an accurate estimate for your business income coverage. Estimates are for worst case scenarios. There are several worksheets available for free online.
- Commercial property insurance: Commercial property insurance covers damage to your commercial business property, including your office furniture, tools, and equipment.
For example, if a tornado cracks your office windows, commercial property insurance can help pay for the repairs.
- Commercial auto insurance: If your employees are driving for work, commercial auto insurance can cover the cost of car accidents.
For example, if your employee rear ends another vehicle during a delivery, commercial auto insurance can help pay for any damages.
- Workers’ compensation insurance: Workers’ compensation insurance provides your employees with benefits if they’re injured or fall sick while working. In the U.S., it's a legal requirement for all businesses to have workers’ compensation insurance. However, costs and rules on the types of employees that need coverage vary by stage.
For example, if an employee develops back problems from years of sitting for their office job, this coverage can help pay their medical bills.
- Data breach insurance (also known as cyber liability insurance): If your business faces computer-related attacks, such as malware, phishing, and ransomware, or if a laptop with confidential information is stolen, data breach insurance will cover the costs.
Ensure that you have signed up for all legally-required insurance coverage before you start running your business. Then, give yourself a budget for insurance that includes the price of insurance coverage you deem necessary along with the amount of risk you’re willing to take on independently. Keep in mind that this budget may change. It can be difficult to estimate how much your insurance will cost before chatting with an agent because rates vary depending on factors like your business' value and its operational risks.
How to get business insurance
Although there are many types of business insurance to choose from, it can be difficult to decide which type is right for your company. You should research your options, compare quotes, and talk with reputable agents with high ratings before settling on a business insurance policy. Finding an agent also requires research. Keep in mind that independent agents often source better deals because they’re selling products from a range of insurance companies. Look online and chat with other ecommerce business owners to find an agent who can understand your needs.
To get business insurance quotes, you’ll need to give your insurance agent the following information:
- Business name: Include your legal business name and a doing business as (also known as a DBA or a trade name), if you have one
- Address: Include the physical location(s) of your business and its mailing address
- Entity: Include your business entity type, such as a sole proprietorship or LLC
- Property: Include unique features of your property, how much coverage you’ll want on the building and the items you own, and any property information that can’t be found online
- Prior insurance: Include the name and relevant coverage information of any prior insurance companies you may have used, as well as related work experience you might have in the industry
- Loss runs: Your current insurance company can give you a loss run, which helps a new insurance company choose what rates you’ll have. The lower your losses, the better your rates
- Payroll numbers: Payroll numbers include prior losses, the industry your business is in, the number of people you employ, and the size of your payroll. These numbers can determine workers' compensation policies
- Sales numbers: Sales figures can help determine your general liability rates
If you’re having a hard time knowing where to start, take a look at the 50 largest business insurance companies.
Calculating business income for insurance purposes
Many insurance policies are tied to your business income, which you can find by calculating your gross receipts or sales. Your business income includes all items and services you sell at your business. Follow these steps:
- Calculate your total revenue
- Subtract your business’ expenses and operating costs from your total revenue. This will lead to your business’ earnings before tax
- Deduct taxes from your business earning to find your business’ net income. Your net income will be your business income
For some insurance plans, you will receive an audit at the end of each policy year before renewal, where you’ll owe or receive the difference between the amount you originally paid and the actual amount you owe. The actual amount is calculated based on your sales numbers, income, and losses.
Insurance coverage can make or break your ecommerce business and should be one of your first items of business.