Although having a limited liability entity such as a corporation or LLC will help to protect your personal assets in the event of significant liabilities to your business, you also don’t want the business you may have spend significant amounts of money and time building to be wiped out by those liabilities as well. This is where business insurance comes in. What you may not realize is that there are many types of business insurance that cover different liabilities:
– Workers’ compensation: You may be familiar with workers’ compensation, which covers medical/rehab costs and lost wages for employees injured on the job. If you have employees, you are required by state law to carry workers’ compensation insurance. Workers’ compensation insurance can cover different forms of liability: first, it obviously covers medical bills and lost wages for employees who suffer injuries on the job; second, it can cover liability to an employee’s family in the event of an employee’s permanent total disability or death due to workplace injuries; third, workers’ compensation can optionally cover liability due to employment practices, such as harassment or discrimination.
– General liability: As the name suggests, general liability insurance covers the general liabilities that covers the basic liabilities that businesses can incur, such as if customer slips in the bathroom of your restaurant, or some of the widgets you manufacture turn out to be defective. However, general liability insurance policies also have lots of exclusions, so you will want to read any policy carefully to ensure that a potential liability that may be more likely for your business is not excluded.
– Auto and property: If your business owns vehicles, or owns or leases property, you may want to obtain auto or property insurance. With respect to auto insurance, your state may have laws setting the minimum policy limits you may have; if you don’t have enough coverage, you may be subject to penalties or attachment of corporate income. Also pay attention to the specific perils that are covered in property insurance — if the location of your property is subject to an increased risk of certain kinds of perils (floods, for example) you will want to make sure that your property insurance policy covers it or you have additional insurance to cover it. You will also want to ensure that the value of the policy can cover replacement of your property in the event it is destroyed — if you only have a $1 million policy but it will take $2 million to replace your property, you have an issue.
– Umbrella: There is also a type of insurance policy that acts as an additional fall-back layer of protection, known as an umbrella policy. Umbrella policies typically pay out in the event that your liabilities exceed your existing policies.
– Business Interruption: This insurance helps to cover overhead and expenses during times when your business is out of commission (such as after a natural disaster).
– “Key Person”: Insurance that pays out upon the death, disability, or retirement of a founder or executive, which permits the company to buy back the founder’s or executive’s shares; this is particularly useful for smaller companies, so that the company doesn’t have “dead equity” or founders don’t have to be partners with the co-founder’s or executive’s family.
– Disability: Particularly useful for sole proprietors, pays a percentage of average earned income in the event of disability that prevents working on the business.
– Life insurance: If a small company (usually sole proprietor) takes out a business loan, the bank may require the company or proprietor to take out life insurance to cover the loan, with the bank named as beneficiary. Or entrepreneurs can take out life insurance for the normal reasons of providing their family with some income, so as to prevent creditors from taking the business.