Guest Post by Kevin Kerridge, Hiscox Small Business Insurance

As the number of small businesses in America increases, small businesses themselves are getting smaller. Over the past several years, there’s been a 25 percent increase in home-based employment, according to Interbrand research. Small doesn’t mean risk-free, however. Though many small business owners don’t realize it, small businesses face many of the same risks as larger enterprises, and failing to plan for an adverse event can have serious financial consequences.

Virtually every small business should have insurance. Defending against claims is time-consuming and expensive and most business owners don’t have the time, resources or expertise to do it on their own. In 2011, small businesses are projected to incur $152 billion in tort liability costs, according to the U.S. Chamber Institute for Legal Reform. Still, most small businesses are unprepared. Many home-based businesses do not carry business insurance, even though the costs for small business insurance liability coverage can be less than $25 a month.

Business Insurance from Day One

Bruce Katz, who runs a law and accounting office in Westport, Conn., has a small office with no employees but hundreds of clients.  He knew he needed business owner’s insurance as soon as he had assets to protect. For Bruce, who is cautious, that was day one.  “Many owners don’t have the accounting, financial and legal background I do so they might not understand business risk to the extent that I do,” he said. “I am lucky in that regard.”

One common misconception by smaller or home-based business owners is that a homeowner’s policy will cover business-related losses. That’s often not the case, and in fact, running a business from one’s home could even create unanticipated coverage issues under that policy.

To truly protect themselves and the businesses they’ve worked so hard to establish and nurture, small business owners should be aware of the risks they face and how they can protect themselves with the right liability insurance.

Essential Insurance Coverage for Small Businesses

While policies need to be tailored for individual businesses, there are two types of essential coverage for solo shops – professional liability and general liability. Owners with one or more employees should also consider adding workers’ compensation coverage.

If business owners are ever faced with a claim, the insurer will provide a legal defense and pay any damages up to the policy’s limits, for covered claims. A thorough risk assessment and the descriptions below can help business owners determine what type and level of coverage they need.

Professional Liability Insurance(E&O)

Professional liability insurance, which is also referred to as errors and omissions insurance, protects against claims that the business was negligent in its performance of services or failed to provide services. For example, a business may develop a new inventory or invoicing system for a client that then claims the finished product doesn’t have the functionality it expected.

Professional liability insurance coverage is particularly important for businesses that provide a professional service and regularly counsel and advise clients. Some carriers will also customize coverage depending on your specific business. For example, technology businesses can request that software copyright infringement coverage is included as part of their professional liability policies.

Some professional liability policies will even provide ‘retroactive’ coverage. This means you are protected for unknown claims made during your policy period from work completed in the past back to an agreed date (usually the date your business started).

Finally, any business with one or more employees must carry workers’ compensation insurance. That’s the law in every state except Texas. Although Texas doesn’t require the insurance, businesses are still liable for any job-related illness or injury, and many employers do cover their employees.

General Liability Insurance

General liability insurance, also called commercial general liability, is one of the most common types of small business insurance, covering physical damage to equipment or property of others or injuries to people, as well as protection against libel and slander claims. In many cases, landlords will require this coverage of their tenants that rent office space, and clients will also require their vendors to carry this coverage before they will do business with them.

Small businesses should consider this coverage, especially if they or their employees visit clients or their clients visit them.

General liability coverage is also recommended for people who have access to a client’s equipment, such as IT systems or technology, since they may be liable for any physical damage they cause.

Any small business that is involved with writing or speaking about another business also needs general liability coverage to protect them in case they are ever accused of libel or slander.

Insurance Offers Certainty, Peace of Mind

When shopping for insurance, it’s important to take into account the financial health of the insurer as well as its particular strengths. While many aspects of starting and growing a small business are uncertain, protecting the business and its owner’s personal and professional assets for covered claims should be a sure thing. With the right insurance coverage, small business owners can gain peace of mind and focus their attention on what they do best – running a successful and sustainable business.

About the Author
Kevin Kerridge is the Director for Hiscox Small Business Insurance. Mr. Kerridge previously led Hiscox’s small business insurance coverage in the UK, which covered 38,000 small businesses in 2010.  Learn more about insurance for small professional services businesses online at hiscoxusa.com or over the phone at 888-202-3007.

Note: This article does not offer legal, tax, or insurance advice related to the needs of any specific, individual business.  Please consult your professional advisor.