Small Business Insurance: What Every Business Owner Should Know

Insurance can protect your business from unexpected events — and in some cases, it may be legally required. The type of coverage you’ll need depends on your company’s size, what you do and your risk tolerance.

What does small business insurance cover?

Small business insurance is meant to help both your business and personal assets remain protected in the event of unexpected misfortune. This coverage comes in a few different forms, including general liability, property insurance and commercial vehicle insurance, among others. Depending on what type of business you run, you may need more than one type of insurance to be fully covered.

However, it’s also important to note that, in some cases, you may be legally required to hold certain forms of small business insurance. For example, businesses with employees may be state mandated to hold worker’s compensation, unemployment and/or health insurance.

10 common types of small business insurance

When lining up insurance for your small business, consider choosing from the following types of policies.

1. General liability insurance

General liability insurance provides coverage that protects businesses from property damage and bodily injury claims, as well as certain medical expenses. This insurance also covers legal costs from lawsuits involving claims of false advertising, libel and slander. It protects you if there is damage to your rented property as well.

• Is it mandatory? Businesses are not legally required to have general liability insurance, but purchasing a policy could protect your business and personal assets from being seized if a judgment is taken against you.
• Average cost per month: $42

2. Commercial property insurance

If your business owns or leases the building in which you operate, you may want to purchase commercial property insurance. A policy would protect the business property, as well as tools, equipment, inventory and furniture. You can adjust your coverage to reflect your business’s specific property risks.

• Is it mandatory? Commercial property insurance isn’t required by law, but many rental or lease agreements may require you to carry this coverage.
• Average cost per month: $67

3. Business income insurance

Business income insurance, or business interruption insurance, is typically tied to another insurance policy, such as a commercial property insurance policy or business owner’s policy. It protects your assets if business operations are suspended or delayed because of theft, fire damage or other reasons specified in your policy.

Business income insurance would allow you to continue making payroll and paying bills while repairs take place.

• Is it mandatory? Business income insurance isn’t legally required. However, it can be a smart addition to an existing policy if you want coverage in the event your business operations come to a halt.
• Average cost per month: $50 to $150

4. Disability insurance

Group disability insurance protects your employees if they can’t work. Disability benefit plans typically let employees access a certain percentage of their income to cover personal expenses while they’re not working. As the business owner, you can deduct any pre-tax, company-paid premiums.

• Is it mandatory? Disability insurance requirements are currently determined at the state level. Five states currently require businesses to offer a short-term disability plan: California, Hawaii, New Jersey, New York and Rhode Island.
• Average cost: Between 1% and 3% of each employee’s salary

5. Unemployment insurance

Nearly all business owners are required to have unemployment insurance. State and federal taxes fund unemployment insurance programs. Unemployment insurance provides income for eligible workers who are out of work.

Unemployment taxes vary by state, and your rate is dependent on past unemployment claims made against your company — a company that often lays people off, for example, will pay more. For example, the maximum unemployment tax rate in Florida was 5.4% in 2024, compared with 12% in Wisconsin in the same year.

• Is it mandatory? Unemployment tax is mandatory for most business owners, but some owners may be exempt. The IRS only requires you to pay unemployment tax if you paid more than $1,500 in wages during a calendar quarter or if you had one or more employees work at least part-time during 20 or more different weeks throughout the year. Nonprofits with 501(c)(3) tax status are exempt from federal unemployment tax.
• Cost: State rates will vary, but the federal tax rate is 6.0% of the first $7,000 of each employee’s wages.

6. Workers’ compensation insurance

Workers’ compensation insurance gives employees medical and wage benefits if they get hurt or sick on the job.

Workers’ compensation insurance is regulated at the state level. The insurance protects business owners from civil lawsuits that employees could file if they’re injured in the workplace. Your business type, location and history of workplace injuries, among other factors, would determine the cost of a workers’ compensation policy.

• Is it mandatory? You’ll most likely be required to carry worker’s compensation insurance if you have employees. Texas is the only state that doesn’t require employees to carry some level of coverage.
• Average cost per month: $45

7. Employment practices liability insurance

Employment practices liability insurance, or EPLI, protects businesses against claims from employees that their legal rights were violated in the workplace.

These types of lawsuits can affect large and small companies. An EPLI policy would cover the expense of a lawsuit resulting from claims of sexual harassment, discrimination, wrongful termination, breach of employment contract and wrongful discipline, among others.

Though a policy would cover legal costs, punitive damages or civil or criminal fines are often not included. The cost of a policy would be based on your type of business, number of employees and risk factors like past employment lawsuits.

• Is it mandatory? EPLI isn’t legally required, but it may be smart to consider if you have employees.
• Average cost per month: $222

8. Commercial auto insurance

If you have a vehicle that you primarily use for business purposes, you’ll likely need insurance coverage beyond your personal auto policy.

A personal policy could exclude claims occurring during a business activity, such as an accident happening while you’re on the way to a business meeting or making a product delivery. A business auto policy should provide collision and comprehensive coverage for cars, vans, trucks, trailers and other vehicles the business owns.

• Is it mandatory? Every state except New Hampshire requires you to carry some level of commercial auto insurance.
• Average cost per month: $147

9. Employer-sponsored health insurance

Employer-sponsored health plans are a benefit often provided by employers to their employees. This type of insurance assists employees with paying for costs related to their healthcare, such as doctor’s visits or hospital stays.

You can purchase a group health insurance policy from a state-licensed insurer or you can choose to self-fund, which involves paying claims directly from your business’s assets.

• Is it mandatory? The Affordable Care Act (ACA) requires that all businesses with 50 or more full-time employees offer employer-sponsored health insurance.
• Average cost per month: $518

10. Key person insurance

Key person insurance provides financial support if a significant employee dies or becomes disabled.

Although it is a form of life insurance, the business would be the owner of the policy. The business owner would pay the premiums but would have the right to transfer, sell or change the terms of the policy.

The employee must agree to the business’s purchase of the policy and be involved in the process. The policy should cover the key employee’s financial contribution to the company.

• Is it mandatory? Key person insurance is not legally required, but it can be a contracted requirement in certain business transactions, such as mergers and acquisitions.
• Average cost per month: $68

How to choose the right small business insurance

You can break down the process of buying business insurance into a few simple steps:

1. Evaluate your risk: Consider the potential dangers to your business, such as natural disasters or workplace accidents. Your business’s primary risks would inform your policy purchases.
2. Work with a licensed insurance agent: An agent could guide you through the purchasing process to help you buy enough coverage. Agents typically receive commission from insurance companies when they sell policies, so be sure to find an agent who has your best interests.
3. Find the best price: Insurance rates can vary by provider. It’s best to compare prices, terms and benefits included in multiple offers. Shop around before settling on an insurance provider. The SBA provides a guide to help small business owners determine how much they should spend on policies to protect their business.
4. Assess your coverage annually: As you grow your business, your liabilities and risks may evolve. If you make changes like expanding your operation or purchasing new equipment, you may want to consider adjusting your insurance coverage.

A package policy may be an attractive option if you need a number of different policies. Insurers often bundle policies to sell as a single contract, and the cost could be lower than if you made separate purchases. Insurers may package policies for certain types of businesses or industries, like restaurants or hair salons.

A business owners policy (BOP) combines property, liability and business interruption insurance in a single policy. A BOP would protect your building and the contents, and you would be protected from liability if a defective product or a mistake in service causes harm to others.

Small- or medium-sized businesses can be eligible for a BOP, depending on factors like the business location, financial stability and building features. A BOP provides basic coverage and is fitting for many small businesses, but you’ll have to add policies if you need more specific coverage.