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  • 19 August 2014
  • Eric Michaels

Why you need business insurance: five risks that small businesses face

Most entrepreneurs recognize the logistical challenges that come with starting a successful business. Between studying the market, crafting a sound business plan, and figuring out the local tax code, you will end up spending a lot of time and money getting it straightened out. Make sure to protect that investment by insuring your young business against problems that may arise in the course of operations.

Even if you have no employees and work out of your home, insurance may save your company from a crushing blow. Here are some examples of risks that owners face:

Once you have your operation up and running, any lack of preparation could come back to haunt you and your partners.

Business insurance for property
According to the U.S. Small Business Administration (SBA), the definition of company property is broad. Commercial business locations obviously qualify as property, but so do company products, investments, legal papers, and equipment, in most cases. Since you must observe a budget while launching any business, decide on your essential needs when shopping for insurance policies. Fires and natural disasters can quickly ruin years of saving and planning, while the loss of business relationships may hurt even more.

Insuring against mistakes

Human error is guaranteed to affect your business at some point. Honest mistakes by you or an employee may range from harmless negligence to serious malpractice in product development or content listings. Since business owners must delegate work to employees when expanding a company's reach, it is wise to insure yourself against any operational errors. Lawsuits arising from business mistakes can be devastating without the proper insurance.

Liability for products and operations

If you have developed a product for the general public, it is impossible to foresee every potential defect or problem. Product liability insurance safeguards against any lawsuit that heads your way as a result of consumer use. The SBA website notes that selling clothing or other less-dangerous materials does not require as much coverage as, for instance, an appliance running on electricity.

Determining the correct level of insurance for your business strikes many entrepreneurs as the most complicated part of the process. Fortunately, insurance companies provide risk-assessment services to prepare you for any possible problems. When you receive policy quotes, keep in mind that insurance companies make more when they sell more coverage, so not every plan will be essential to your needs. You should prioritize for your specific case.

Home-business insurance needs

While running a business from a home office or garage may seem like a safe harbor from liabilities, you still face risks. Slip-and-fall accidents during deliveries could make you liable for personal injury to a postal worker or other delivery worker. Property fires are another risk; even if homeowners insurance covers the loss of property, it usually does not cover the loss of business. You may be hit hard with costs for unfilled orders, breaches of contract with partners, and other business-related liabilities.

Employee insurance

No matter how small your business is at launch time, you will likely hire employees at some point in the life of a successful company. Insurance is mandatory for business owners with employees. Accidents on the job (workers' compensation), issues arising from job loss (unemployment insurance), and disability risks all need separate insurance policies. In states such as New York and California, special insurance requirements exist for every employer.

Research your state's requirements during the planning stages — not when your business is already launched — to get the full picture of startup costs for your venture. Once you have your operation up and running, any lack of preparation could come back to haunt you and your partners.

Understanding business insurance is a crucial part of starting a company. Use the many resources available from insurance experts to cover the risks you could face along the way.

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