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Small Business Insurance: Requirements and Recommendations

Small business insurance policies generally fall into four basic categories and cover most risks faced by small business owner-operators. The main types of small business insurance include professional liability, product liability, general liability, and commercial property insurance policies. Depending on the products and services provided by the company and the state in which the company is located, some types of insurance may be legally required in order to conduct business. Additionally, employers are required by law to maintain adequate workers compensation coverage on their employees and, depending on state-specific laws, may be required to offer unemployment coverage for employees as well.

Professional liability insurance
Also known as malpractice insurance, professional liability insurance protects small businesses against financial losses due to errors or negligence on the part of the company or its employees. Professional liability insurance is required for certain professions; for example, doctors, dentists, and osteopaths are legally obligated to maintain a certain level of professional liability insurance in order to practice medicine in most states. While not all small businesses are legally required to carry professional liability coverage, it is recommended for any company that routinely provides personal services to the general public; these include hair salons, massage therapy centers, and gyms with personal training services.

Product liability insurance
For businesses in the manufacturing, distribution or retail fields, product liability can represent a major risk factor; as a result, product liability insurance is a necessity in order to protect the assets of the small business. Product liability insurance protects the company against claims for defective or malfunctioning products and is required by law for some types of products. Generally, the amount of product liability insurance required is commensurate with the level of risk involved in the particular product; health care products and cosmetics, for example, typically entail a higher level of risk than combs, brushes and hair barrettes.

General liability insurance

While professional and product insurance policies cover specific risks of the particular business, general liability insurance covers the small business against legal claims for injuries, accidents, and libel or slander during the normal course of operations. General liability insurance, as its name suggests, offers general protection against most types of legal action relating to the company’s activities.

Commercial property insurance
Like traditional homeowner’s insurance, commercial property insurance covers both the buildings and structures and the contents of the insured property. Commercial property insurance is available in two basic types:

• Peril-specific insurance covers the buildings, equipment, and contents against specific types of losses including fires, floods, or vandalism, but its coverage is restricted to the specific losses enumerated on the policy
• All-risk policies cover buildings, equipment, and contents against damages caused by a wide range of events, but may incorporate exclusions for acts of war, floods, earthquakes, or other specific types of risk factors

Commercial property insurance is usually required and always recommended in order to protect the small business against catastrophic financial loss in the event of a major fire, flood, or other covered incident.

Other coverage
Workers compensation insurance is legally required in most states for small businesses that employ one or more persons other than the owner. In some cases, unemployment insurance is required by state law as well. If the small business elects to offer health care coverage to its employees, it is bound by anti-discrimination laws to offer that coverage equally to all eligible employees regardless of their race, gender, or physical disability.