Insurance – What It Is and Why You Need It

Insurance is a financial contract (policy) between an individual or business and an insurance company. It helps protect against specific, unexpected financial loss and can be a powerful resource for small business owners.  

Do I need insurance?  

When a business is starting up, every penny counts. It may look like a good idea to skip insurance, especially when a business has not broken even or turned a profit yet, but this is not a good idea. In fact, if you have not made a profit yet, it may be all the more reason to purchase the right coverage for your business. 

Insurance can help protect your business from third-party lawsuits (those coming from people outside of your company), it can protect your employees, it can protect your personal assets, and in some cases, it may be required by law in your state.  

But there is such a thing as being overinsured or not having the right type of insurance. Insurance policies need to be tailored to your business needs and potential liabilities. Reading policies carefully, understanding what insurance will cover, and how claims can be paid are all critically important when choosing the right insurance for your small business.  

What type of insurance do I need?  

There are many different types of insurance, and many policies can differ from provider to provider and state to state. Below are some of the most common types of insurance educational founders seek:  

• General liability insurance - General liability insurance is a very common policy that small business owners buy. It covers third-party lawsuits (those coming from people outside of your company), including slip-and-fall accidents, property damage to third parties, and reputational damage.
• Professional liability insurance - Professional liability insurance (also known as errors and omissions insurance) covers lawsuits over professional mistakes, giving bad or incorrect instructions, or problems with the quality of your work that cause a financial loss. Professional liability insurance is different from professional liability or errors and omissions waivers you might use as part of your business. Professional liability insurance often covers the cost to defend you against the claim whereas waivers shift liability away from the business but don’t provide funds to defend against a claim. Learn more about waivers here.
• Workers' compensation insurance - Workers’ compensation insurance covers medical bills and partial salaries of employees injured at work. This insurance is required in most states for businesses with employees. Remember, health insurance does not cover work-related accidents. Workers’ compensation insurance covers your business and your employee’s medical expenses from a work-related accident. Learn more about worker’s compensation insurance here.
• Commercial automobile insurance - Commercial automobile insurance covers your business-owned vehicles. 

• Commercial umbrella insurance - Commercial umbrella insurance can provide additional coverage for liability claims made on general liability, employer’s liability, or a commercial auto insurance policy once policy limits have been reached. This may be something to consider if you need additional insurance coverage or if some aspect of your business does not lend itself to traditional insurance policies. Learn more about special circumstances insurance in this FAQ. 

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