Assessing Your Business Insurance Needs


Bryan Huynh

- Updated February 23, 2024

Assessing Your Business Insurance Needs

If you own your business, then you should always be prepared for the unexpected. Your company could be booming one day and facing financial ruin the next. Someone could rob your office or physical store. A data breach could expose your customers to identity theft. One of your employees could get injured in a car crash while driving a company vehicle – or they could injure someone else. If you do not have the appropriate insurance plans in place, then you might have to pay out of pocket.

Can your company withstand such a severe setback?

Assessing your business insurance needs is essential before seeking and purchasing a policy. While this process may take some time, it can ultimately pay off if your company faces a costly claim. Determining what type of coverage you need involves identifying:

  • the risks and liabilities in your business.
  • the value of your business assets.
  • the potential financial impact of business interruptions.
  • your company’s legal requirements.
  • the gaps in your current insurance coverage.
  • the potential cost of insurance premiums.
  • the level of risk tolerance for your business.
  • the risks associated with your industry or location.
  • the different types of business insurance available.
  • the potential impact of natural disasters or other catastrophic events.

Follow these useful tips to make assessing your business insurance needs easier.


Identifying Potential Risks and Liabilities in Your Business

Factors such as industry, location, and technology usage determine the specific risks that your company may face. Examples of these risks include property damage, bodily injuries, and data breaches that can result in financial loss, reputation harm, and legal liabilities.

Listing the potential risks and liabilities your company could face can help you understand the specific types of coverage you may need in your business insurance policy. You can acquire coverage that addresses the major risks and avoid coverage that will not help your company at all.

For example, if your company operates a retail store, then property damage is a risk you should list. You might seek commercial property insurance to cover this risk. If your company does not work from a physical location, then you might not need commercial property insurance. Paying for coverage you do not need can cost you in the long run.

Evaluating the Value of Your Business Assets

Knowing the value of your company’s assets can aid in selecting the right type of insurance coverage to mitigate risks associated with potential losses. Business assets include items like equipment, inventory, and property.

Inaccurate or nonexistent asset valuation can result in financial losses for your business. If you are over-insured, you may be paying higher premiums than required, which can affect your bottom line. Being under-insured can lead to financial losses if an unexpected incident like a robbery or natural disaster happens.

For instance, imagine you own a restaurant and have not assessed the value of your inventory correctly. In the event of a kitchen fire, you may not have adequate coverage to replace your equipment. You can either pay to replace damaged equipment or close your restaurant. If you accurately appraised your assets, then your insurance coverage should cover replacement costs and keep your restaurant running.

To evaluate your company's assets, simply add up the value of all equipment and inventory owned by the business. Then subtract any debts or liabilities. You could also seek the advice of a professional business broker or accountant who specializes in valuation instead of attempting it on your own.

Assessing the Potential Financial Impact of Business Interruptions

Business interruption insurance is designed to protect businesses from financial losses resulting from a disruption in their operations. This type of coverage generally includes lost revenue, fixed costs like rent and utility bills, and expenses incurred from operating from a temporary location. Measuring the potential financial impact of business interruptions can help you find out the amount of business interruption coverage that your business requires.

For example, suppose a company operates a physical retail store. A hurricane sweeps over the area, damaging the store so much that no one can safely enter it. Business interruption insurance will likely be triggered to cover the lost revenue, fixed costs, and expenses for a temporary location until the store reopens.

On the other hand, a software development company might not have a physical location that is susceptible to hurricanes. This company might need a customized policy that accounts for other types of interruptions like cyberattacks.


Understanding Legal Requirements for Business Insurance

One obvious way to figure out what type of business insurance your company needs is to look to laws and regulations. State laws can mandate certain types of business insurance coverage depending on the state where your business operates. Some types of commercial insurance types are not legally required. Understanding which policies are mandatory for your business helps you comply with state laws and save money on irrelevant coverage.

For example, if your company has employees, then workers’ compensation insurance is often required to provide medical and wage benefits to employees who become injured or ill while performing work-related duties. If you are a self-employed individual and depending on where you work, then you might be able to skip this insurance.

Another example involves liquor liability insurance. This coverage protects the business against liability that may arise from selling or serving alcoholic beverages to intoxicated customers who could potentially cause injury or damage to others. If your state does not require this type of insurance, then you can choose not to purchase it even if having it can protect you from liability.

You might need to carry a specific level of coverage as required by client contracts. If the requirements outlined in a client contract are not met, it could result in breach of contract. This could possibly lead to legal action by the client, which could result in financial damages or other consequences for your business.

Identifying Potential Gaps in Your Current Insurance Coverage

Although most business insurance policies cover essential risks, there may be gaps in the coverage that could leave a business exposed to threats and financial loss. Changes in business conditions, like hiring employees or adding new products or services, can create gaps in coverage needs. For example, if a business started offering delivery services, they might need to add commercial auto insurance to their policy to protect against accidents while driving for business purposes.

Companies that frequently review their operations for gaps can compare insurance coverage and rates from different providers to find the best fit for their needs and budget. Being under-insured could hurt a company’s fortunes. However, having coverage that fills a gap that is no longer relevant can waste money. Referring to the previously-mentioned example, imagine a company begins to deliver services and realizes they need to fill their commercial auto insurance gap. They do. Later, the company discontinues deliveries. After assessing former gaps and risks, the company can remove commercial auto coverage from its policy.

Evaluating the Potential Cost of Insurance Premiums

Factor in the cost of insurance premiums when assessing your business insurance needs. This information can help you decide whether the expense is feasible and make informed decisions about risk management. Identifying potential risks is critical for businesses to plan and take action to prevent or minimize negative impacts. Awareness of these risks can help businesses avoid unexpected expenses and maintain their financial health.

Companies can reduce insurance premiums by adopting risk mitigation strategies or modifying their business practices to lower the likelihood of specific risks. Taking a proactive approach can prevent losses that could otherwise disrupt operations and require costly insurance coverage.

For instance, a restaurant can train its staff to serve alcohol responsibly to reduce the risk of liquor liability claims, such as injuries caused by intoxicated customers. This strategy can also improve the restaurant's reputation and customer satisfaction.

Assessing the Level of Risk Tolerance for Your Business

Risk tolerance is the amount of loss that a company is willing and able to manage. Companies with a higher risk tolerance may be comfortable with lower levels of coverage. Those with a lower risk tolerance may require higher levels of coverage to minimize their exposure to financial risk.

For example, a small consulting firm with only a few employees and minimal assets may have a higher risk tolerance and be comfortable with lower levels of coverage for general liability or property damage. A manufacturing company with a large workforce, significant assets, and potentially hazardous operations may have a lower risk tolerance and require higher levels of coverage for liability and property damage.

Identifying Potential Risks Associated with Your Industry or Location

Your company’s risks help dictate what type of insurance it needs. Industry and location play huge roles in defining these risks.

For instance, if a business operates in a highly litigious industry such as healthcare, it may face a greater risk of lawsuits and may need to purchase professional liability insurance to protect against potential legal costs.

Regarding location, a business located in a flood-prone area may need to purchase flood insurance to protect against potential property damage and loss. Another business in a high-crime area may need to consider purchasing crime insurance to protect against theft or vandalism.

In all of these instances, insurance premiums might be higher.

Understanding the Different Types Of Business Insurance Available

You need to learn about all of the various types of business insurance you can use to protect your company. Each type of insurance is designed to provide coverage for different types of risks, allowing you to customize your insurance plan to your specific business needs.

For example, if your business has employees, you will require workers' compensation insurance to cover any injuries sustained while on the job. If your business uses vehicles for company operations, you will need commercial auto insurance to cover accidents or damages caused by these vehicles. If you manufacture products, then you should obtain product liability insurance.

Understanding the types of business insurance can also help you identify and fill any gaps in your coverage. You can determine if there are any additional types of insurance you may need to protect your business.

Common types of business insurance include:

  • General liability insurance: Protects against financial loss from bodily injury, property damage, medical expenses, libel, slander, lawsuits, and settlement bonds or judgments.
  • Product liability insurance: Protects businesses that manufacture, wholesale, distribute, and retail a product against financial loss from defective products causing injury or bodily harm.
  • Professional liability insurance: Covers businesses that provide services to customers against financial loss from malpractice, errors, and negligence.
  • Commercial property insurance: Covers property and physical assets against loss and damage caused by events like fire, smoke, storms, civil disobedience, and vandalism.
  • Home-based business insurance: Offers coverage for small amounts of business equipment and liability coverage for third-party injuries.
  • Business owner’s policy (BOP): Combines typical coverage options into one bundle, simplifying the buying process and saving money.

Assessing the Potential Impact of Natural Disasters or Other Catastrophic Events on Your Business

If your company is located in an area prone to earthquakes, hurricanes, or floods, you may need additional coverage to protect your assets from potential damage. Since these events can result in business interruption, then that type of insurance might come in handy.

Knowing what natural disasters and similar events could adversely affect your company can help you plan better for them. Protecting your assets from these events and devising emergency response plans can mitigate damages and interruption.

Determine What You Need

If you find buying business insurance confusing, don't worry. You're not alone. Reach out to an insurance agent or broker for guidance on the best insurance products for your business or a better understanding of insurance terms and coverage. The sooner you assess your business insurance needs, the sooner you can get the protection your business deserves.

Looking for the right business insurance? Here are our top picks from reputable companies, such as NEXT Insurance, The Hartford, Thimble, and more.

About The Author

Bryan Huynh

Bryan Huynh

Product Tester & Writer

Bryan Huynh is a dedicated Product Tester & Writer. Just as insurance has your back, Bryan works to review and inform you about the wide range of insurance products available, ranging from business, auto, health, home, pet, to life insurance.

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