How Business Insurance Works


Andy Chang

- Updated February 21, 2024

How Business Insurance Works

As a business owner, you want to protect your investment and assets from potential risks that can occur during normal operations. This is where business insurance comes in. Business insurance refers to various coverage options that can help protect your company from potential financial losses resulting from unexpected events, such as property damage, liability claims, or lawsuits. From small businesses to large corporations, business insurance is essential to running a successful business. In this increasingly complex world, having the right insurance coverage can provide peace of mind and help safeguard your business's financial stability.

Types of Business Insurance

Let's explore some of the most popular types of liability insurance available to business owners:

General Liability Insurance

First on the list is general liability insurance, also known as business or commercial liability insurance. It covers various claims, including bodily injury, property damage, personal or advertising injury, medical payments, products-completed operations, and damages to rented premises. It's a must-have for almost every small business owner or contractor. It's essential to note that when shopping for general liability insurance, your rates depend on your business's specific features.

Business Owners Policy (BOP)

If you need general liability insurance and property coverage, you can bundle them together in a business owner's policy (BOP). This policy provides liability coverage for customer injury, property damage, product-related claims, and commercial building and movable property coverage. Additionally, many BOPs offer business interruption coverage, which reimburses you for lost revenues if you close for a covered claim. It's ideal for small and midsize business owners, such as restaurants, retail stores, and wholesalers. However, BOP insurance does not cover your employees.

Employment Practices Liability Insurance (EPLI)

Small businesses with employees can benefit from employment practices liability insurance (EPLI). This type of insurance protects you if an employee files a claim against you for wrongful discipline or termination, sexual harassment, discrimination, negligent evaluation, breach of employment contract, mismanagement of employee benefits, or wrongful infliction of emotional distress. Some insurers offer EPLI as stand-alone coverage, while others provide it as an endorsement to their BOP. Your business type, number of employees, and various risk factors influence the cost of EPLI.

Professional Liability Insurance

Finally, there's professional liability insurance, also known as errors and omissions (E&O) insurance. It offers coverage to businesses that provide professional services, and B2C businesses frequently use it to safeguard against claims stating their services caused clients financial distress or bodily injury.


How Premiums Are Determined

Premiums for business insurance are typically determined by several factors, including the type of coverage you need, the size and nature of your business, and the risk associated with your industry and operations.

To determine your premium, insurance companies typically look at various factors, such as your past claims history, the type of work you do, the number of employees you have, and the location of your business. They may also consider other factors like your revenue, your industry's risk profile, and the level of coverage you need.

For example, if you operate a business in an industry considered high-risk, such as construction or healthcare, expect to pay higher premiums than a business in a lower-risk sector. Similarly, if you have a history of making claims or have a higher likelihood of making claims due to the nature of your work, your premiums will likely be higher.

Insurance companies also use actuarial tables and statistical models to help determine premiums. These tools allow them to assess the likelihood of claims based on historical data, and adjust premiums accordingly.

The level of coverage you need can also affect your premium. If you want higher coverage limits or additional types of coverage, such as business interruption coverage or cyber liability insurance, you can expect to pay more for your policy.

The Role of Deductibles

A deductible is the amount of money you agree to pay out of pocket before your insurance kicks in and starts covering costs.

Generally, the higher your deductible, the lower your premium will be. This is because you're taking on more risk by agreeing to pay a more significant portion of the claim yourself.

For example, let's say you have a $1,000 deductible on your general liability insurance policy. If a customer makes a claim against you for $5,000 in damages, you'll be responsible for paying the first $1,000 out of pocket, and your insurance company will cover the remaining $4,000. If you had a $2,500 deductible instead, you would be responsible for paying the first $2,500 out of pocket, and your insurance company would cover the remaining $2,500.

Choosing the right deductible for your business insurance policy can be a balancing act between your budget and your level of comfort with risk. If you have the financial resources to cover a higher deductible in the event of a claim, you may be able to save money on your premium. On the other hand, if you're concerned about the financial impact of a large deductible, you may opt for a lower deductible and pay a higher premium.

It's important to note that different types of insurance policies may have other deductible options. For example, a property insurance policy may have a separate deductible for damage to your building or business equipment. Make sure you understand the deductible options for each type of coverage you need and choose the one that makes the most sense for your business.

Coverage limits are the maximum amounts an insurance company will pay out for a specific type of loss. Picture them as the safety net that catches your business when things go downhill.

These limits can be set per occurrence (meaning for each incident) or aggregate (the total payout for all incidents during a policy period).

Why Do Coverage Limits Matter?

Your business will be responsible for the difference if a claim exceeds your coverage limit. This could mean shelling out a pretty penny, which isn't great for your bottom line.

So, knowing your coverage limits helps you make informed decisions, ensuring your business stays protected without breaking the bank.

Types of Coverage Limits

Per Occurrence Limit

This is the maximum amount your insurance will pay for a single incident. For example, if you have a $1 million per occurrence limit and face a $1.5 million lawsuit, you're on the hook for $500,000.

Aggregate Limit

This is the total amount your insurance will pay out during your policy period, usually a year. If your aggregate limit is $2 million, and you've already had $1.5 million in claims, you've got only $500,000 left for future incidents. Keep track of your claim history to avoid any unpleasant surprises.


Sometimes, insurers set lower limits for specific situations or types of claims. For example, you might have a $1 million per occurrence limit but a $100,000 sub-limit for fire damage. If a fire causes $200,000 in damages, you're on the line for the remaining $100,000.

How to Choose the Right Coverage Limits

Now that you've got the basics down, let's talk about finding the sweet spot for your business. Here are some tips for choosing coverage limits that have your back without leaving you broke:

  1. Assess your risks: Consider the specific risks your business faces. Do you work with hazardous materials? Are you in a flood-prone area? Being honest about your vulnerabilities helps you choose the correct coverage.
  2. Look at industry standards: Check out what other businesses in your industry typically have for coverage limits. This can give you a ballpark figure to start with.
  3. Consider your assets: Insure your business for its total value, including property, inventory, and equipment. Underinsuring can be a costly mistake if disaster strikes.
  4. Reevaluate regularly: As your business grows and evolves, so do your insurance needs. Make it a habit to review your coverage limits annually or when significant changes occur.

Claims Process

When you file a claim for your business insurance, you'll need to provide some information to your insurance company. This usually includes things like the date and time of the incident, a description of what happened, and any relevant photos or documentation.

Once your insurance company has all the necessary information, they'll assign an adjuster to your case. The adjuster's job is to investigate the claim and determine how much the insurance company should pay out.

During the investigation, the adjuster may need to speak with you and any other parties involved. They'll also review any police reports or medical records relevant to the case.

Once the investigation is complete, the adjuster will recommend to the insurance company how much they should pay out. You'll receive a check for the settlement amount if you agree with their recommendation.

If you disagree with the adjuster's recommendation, you can appeal the decision and ask for a second opinion. This is usually done through a process called arbitration.

Factors That Impact the Cost of Business Insurance

The cost of business insurance can vary depending on several factors. For example, your business type can affect how much you'll pay for insurance. A construction company, for instance, might have to pay more for insurance than a consulting firm because of the nature of the work involved.

  • Size: Another factor that can affect insurance costs is the size of your business. Generally, the larger your business (including the number of employees), the more you can expect to pay for insurance.
  • Location: Where your business is located can also impact your insurance premiums. If your business is located in an area with higher crime rates or is prone to natural disasters, you might have to pay more for insurance.
  • Industry: Certain industries are considered at higher risk than others, which can also affect insurance costs. For example, a business that deals with hazardous materials might have to pay more for insurance than a retail store.
  • Claim History: Your business's claims history is another important factor impacting insurance costs. If you've had multiple claims in the past, your insurer might consider you a higher risk and charge you higher premiums.
  • Coverage Limits: The coverage limits you choose can also affect your insurance costs. The more coverage you want, the more you can expect to pay in premiums.
  • Deductible: Choosing a higher deductible can lower your premiums, but it also means you'll have to pay more out of pocket if you ever need to make a claim.
  • Credit Score: some insurance providers might consider your business's credit history and employee safety measures when determining your insurance costs. You might have to pay more for insurance if you have a poor credit score or a weak safety program.

The Importance of Risk Management

Effective risk management helps businesses identify and mitigate potential risks, which can help reduce the likelihood of a claim and lower insurance costs.

By implementing a solid risk management program, businesses can identify potential hazards and take steps to prevent accidents and injuries. This can include implementing safety protocols, providing employee training, and conducting regular safety inspections.

In addition to reducing the likelihood of a claim, effective risk management can also help businesses mitigate the impact of a claim if one does occur.

By focusing on risk management, businesses can also demonstrate to insurers that they are committed to minimizing risk, which can help them secure more favorable insurance rates. Insurers are more likely to offer lower premiums to businesses that take proactive steps to manage their risks and reduce the likelihood of a claim.

How Business Insurance Protects Against Liability

Business insurance is a crucial aspect of running any company, big or small. It helps to mitigate financial risks and protect your business against unexpected events. One of the most important ways business insurance can protect your company is by providing liability coverage.

Liability insurance protects your business from legal claims made by third parties, such as customers, employees, or vendors, who have suffered damages or losses due to business activities. This type of insurance can cover various claims, including bodily injury, property damage, and personal injury. Without liability insurance, your business could be liable for damages or legal fees, quickly draining your financial resources.

It's important to note that property and liability insurance are not the same. While property insurance protects your business assets, liability insurance protects your business against legal claims made by third parties.

A comprehensive business insurance policy should include both types of coverage and other types of coverage that may be relevant to your business, such as workers' compensation insurance or cyber liability insurance.

Having a comprehensive business insurance policy can provide many benefits to your business. Knowing that you are protected against unexpected events and liabilities can give you peace of mind. It can also protect your business reputation, as customers, employees, and partners may view a well-insured company as more reliable and trustworthy.

Protect Your Business

Business insurance is an essential investment for any business owner. It protects your business against liabilities, unexpected events, and financial loss. Having a comprehensive business insurance policy that includes property and liability coverage ensures that your business is well-protected and positioned for long-term success.

Trying to find the right business insurance? Our top recommendations include reputable companies such as NEXT Insurance, The Hartford, Thimble, and more.

About The Author

Andy Chang

Andy Chang

Founder of InsuranceRanked

Andy Chang is the founder of InsuranceRanked, a review site dedicated to helping consumers find the best companies in financial services. Andy is passionate about financial education and wellness, and helping others reach financial freedom. He consistently writes about topics ranging from credit to banking and lending.

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