Evaluating Insurance Needs for Small Businesses: A Comprehensive Guide


Ru Chen

- Updated July 3, 2024

Key Takeaways

  • Small businesses need insurance to protect their assets and mitigate risks
  • The right insurance policy can save a business from financial turmoil
  • Assess coverage needs based on industry, operations, and other key factors
Evaluating Insurance Needs for Small Businesses: A Comprehensive Guide

Insurance is critical in protecting small businesses from unexpected events, like employee injuries, liability claims, and property damage. With the right insurance, a small business can quickly bounce back from a setback. Otherwise, the financial losses could be overwhelming.

Let’s go over what insurance small businesses need based on risk factors, industry, and legal requirements.


Initial Risk Assessment

Business insurance serves to protect a business from unforeseen events, but that doesn’t mean you shouldn’t have a good idea of what these potential risks are. Knowing what incidents could come your way helps your business effectively prepare for them.

Here are some common risks faced by small businesses.

Property damage

If your business owns any physical assets, such as property and inventory, they can be damaged. Transportation issues, customer accidents, fire, theft, and natural disasters can all result in significant property damage and loss.

Liability claims

Many small businesses face liability claims from customers. The most common liability claim against a small business is a slip-and-fall claim, in which a customer gets injured on your business premises.

Liability claims can also arise from professional errors, product defects, and reputation harm. With how a single lawsuit can cause irreparable damage to a small business that lacks the resources for legal fees, business liability insurance becomes crucial.

Business interruption

Business continuity can be hindered by natural disasters, supply chain issues, and a wide range of other disruptions. When your business operations are forced to halt, the bills can quickly accumulate.

Types of Insurance Coverage

General Liability Insurance

General liability insurance is essential for any small business. It provides protection for your business against lawsuits and third-party claims. Examples of covered claims include:

Personal injury: If your small business accidentally causes bodily injuries to others or someone gets injured while on your premises, general liability insurance can cover the legal fees and compensatory costs.

Property damage: General liability insurance also covers expenses if your small business accidentally causes third-party property damage. For example, if your employee who is working at a client’s house breaks a table, general liability can help cover the costs of the property damage lawsuit against you.

Commercial Property Insurance

Businesses that have physical locations and assets should acquire commercial property insurance. This covers physical assets such as buildings, equipment, and inventory from various risks. Covered perils include:

  • Fire
  • Theft
  • Vandalism

Business Interruption Insurance

Business interruption insurance is commonly overlooked by small business owners. It is meant to protect small businesses from costly expenses and lost income during unexpected closures.

Here are expenses that a business interruption insurance policy can cover.

  • Lost income
  • Payroll
  • Rent and lease payments
  • Loan payments
  • Mortgage

There are different types of business interruption insurance that can cover specific needs for small businesses.

Supply chain insurance covers business interruption costs if one of your suppliers can no longer serve you due to covered reasons.

Cargo insurance is useful if your business transports cargo by air, sea, or land. Cargo insurance policies usually cover acts of nature, vandalism, theft, and other perils that lead to cargo loss.

Workers' Compensation Insurance

Workers’ compensation insurance is mandatory in most states. If your business has any employees, you will need to have workers’ comp to cover employee injuries and illnesses on the job. No matter how serious the injury, workers’ comp insurance can offer compensation. Make sure your small business complies with state workers’ compensation regulations and laws.

Workers’ compensation includes coverage for:

  • Medical treatment expenses
  • Salary replacement and lost wages
  • Death benefits to dependents

If employees accept the workers’ compensation benefits, they also waive their right to sue the employer for damage and loss.

Professional Liability Insurance (Errors & Omissions)

Professional liability insurance (also known as E&O insurance) is crucial for any small business that offers professional services or advice to clients or customers. This is particularly important for industries such as:

  • Consulting
  • Healthcare
  • Technology
  • Construction
  • Accountants

Cyber Liability Insurance

In today’s day and age, it is extremely common for small businesses to fall prey to cyberattacks. Protecting sensitive business and customer information is necessary when so much data is stored digitally.

Cyber insurance can cover claims such as:

  • Data breaches
  • Ransomware
  • Notification costs

Commercial Auto Insurance

If your small business uses any vehicles for business purposes, it is essential to carry commercial auto insurance.

Commercial auto insurance policies can protect your business against vehicular accidents and liability claims.


Industry-Specific Considerations

Choosing the right business insurance for your industry is crucial. Different industries face different risks.


The retail industry sees extremely high levels of theft every year. If you run a retailer, it’s crucial to have commercial insurance for theft, product liability, and business interruption. Customer injuries, such as slips and falls, also commonly happen in retail stores.


Construction workers face some of the highest risks of injuries and liability. If you operate in the construction industry, having enough workers’ compensation and commercial liability insurance is critical. Even a single claim filed against you could be financially devastating due to the dangerous nature of construction work.


In the healthcare industry, a small mistake could have rippling and potentially lethal consequences. Medical malpractice insurance is necessary for any medical practice. It covers healthcare professionals against claims of medical negligence and injury.


Accounting mistakes can cost clients a significant amount of money. Because of this risk, it is highly recommended for accounting firms to carry sufficient professional liability insurance. This will cover claims against you in case your accountants make a mistake.

Assessing Coverage Limits and Deductibles

Business insurance coverage limit

The coverage limit refers to how much your business insurance policy will cover before stopping. There is usually a per-occurrence limit as well as an aggregate limit for the entire year.

The recommended coverage limit will depend on factors such as your business’ risks, risk tolerance, asset valuation, size, and the insurance policy type.

In general, businesses need business liability insurance coverage of at least $1 million. Not only does this protect a small business from expensive liability claims in case of professional errors and damages, but many client contracts require you to carry adequate insurance.

Business insurance deductibles

The business insurance deductible is the monetary amount your business needs to pay out-of-pocket before insurance kicks in. A higher deductible usually means a lower business insurance premium, which can help you save money each month. However, it also means that if you need to file a claim, failing to reach the deductible would mean a lack of insurance coverage.

Risk Management Strategies

An essential component of any small business is to develop risk management strategies.

Implementing preventive measures can help your company avoid disasters and mitigate risks. Conveniently, it can also help you reduce the premium of insurance policies. By lowering your frequency of insurance claims and staying up to date with your risk mitigation measures, you can negotiate better terms.

Here are examples of risk management options for small businesses.

Insurance coverage

Getting the right business insurance is a great way for small businesses to protect themselves from unpredictable expenses. Insurance can cover a significant portion of financial burdens like liability claims, broken equipment, and commercial auto accidents.

Cyber awareness training

Employees should know about basic cyber security measures and common scams. This means providing training regarding:

  • Suspicious links and malware
  • Keeping software up to date
  • Not accessing sensitive info on non-company devices
  • How to respond in case data is leaked

Install security measures

Office security systems, such as fire alarms and sprinklers, can reduce the risks faced by your company. It can also reduce some of your insurance premiums. For example, commercial property insurance premiums may be reduced if you prove that your small business uses up-to-date security systems.

Budgeting for Insurance Costs

Small businesses should budget with their insurance coverage needs in mind. Here are some useful points about insurance budgeting to keep in mind.

Your risk factors

Companies with significant property can benefit from more comprehensive commercial property insurance. On the other hand, small businesses that sell digital services or non-physical products might not need commercial property insurance. Instead, they might need to procure better cyber liability insurance.

By evaluating what risks your company is exposed to, you can better determine how much insurance it needs.

Estimate costs

Even for small businesses, insurance can cost thousands of dollars every year. This takes into account general liability insurance, professional liability insurance, cyber insurance, workers’ compensation, and business property insurance.

Small businesses should take the time to compare competitive insurance quotes between different providers. This helps newer businesses understand the cost range for each type of insurance coverage, which can vary depending on many factors.

Online tools and insurance brokers can help you quickly gain insight into insurance premiums. Use a calculator to determine how much your business would need to pay for active insurance coverage every month, quarter, and year.

Choose suitable deductibles and coverage limits

A higher deductible means your business would need to pay more out-of-pocket in case of a covered peril or loss. However, this can help keep your overall insurance costs down by lowering your premiums.

A lower coverage limit can make your insurance policy more affordable. However, this means that you might not have enough coverage in case of an incident. Assess your risk tolerance and business values to see what insurance coverage limits suit your business.

Reviewing and Updating Insurance Policies

Small businesses need to regularly update business insurance coverage over the years. Insurance coverage limits and types should reflect changes in your company’s business operations or growth. Failing to update coverage can result in compliance issues, gaps in coverage, and greater risks.

If your small business undergoes any big changes, it’s a good time to review your insurance coverage and make updates as needed. Here are examples of when you might want to update your insurance policy.

  • New employees
  • New location
  • Expansion into a new field
  • Significant revenue growth
  • Significant financial losses or setbacks
  • New products or services

Choosing the Right Insurance Provider

When choosing a small business insurance company, it’s important to carefully compare and evaluate. Factors to consider include:

Claims handling: Each insurer has its own way of handling claims. This can determine how quickly and smoothly you can obtain insurance payouts.

Customer service: Highly rated, friendly customer service can make filing insurance claims less stressful.

Reputation: Your ideal business insurance company should have a good reputation. This suggests that they treat customers well and have solid financial stability.

Here are some of the best business insurance providers for small businesses.

Case Studies and Examples

Case Study 1: Fire in a Restaurant

A small, family-owned restaurant started selling delicious snacks in New York. However, a kitchen fire resulted in a forced shutdown until they repaired the place the meet safety standards.

Not realizing that they needed commercial property insurance, the owner was unable to pay for payroll and other operating expenses. The restaurant’s reopening was greatly delayed, and many regulars did not return afterward. The business was ultimately forced to close and declare bankruptcy. The owner’s personal assets were at risk as well due to the business closure.

Case Study 2: Accounting Firm Makes a Mistake

An accountant from a small accounting firm mistakenly provided the wrong tax advice to a client. This resulted in serious financial penalties and tax complications for the client.

Fortunately, the accounting firm carried enough professional liability insurance. It covered around $20,000 in legal defense and settlement fees, helping the small accounting firm recover and continue on with its practice.


To evaluate insurance needs, small businesses should:

    1. Identify risks based on industry, operations, and location
    1. Determine appropriate types of business insurance
    1. Estimate costs and budget for insurance
    1. Implement cost-saving and risk-mitigating measures
    1. Regularly review coverage and update as needed

By being proactive with business insurance, you can better protect your small business’ products, services, and stability. Make sure to keep up-to-date with changes in industry regulations and insurance products.

About The Author

Ru Chen

Ru Chen

Content Writer

Ru Chen is a content writer with several years of experience in creating engaging and well-researched articles. She mostly writes about insurance, business, digital marketing, and law. In her free time, she can be found watching horror movies and playing board games with her partner in Brooklyn.

The Latest Articles

Read Articles