Almost all business owners invest in commercial insurance to ensure that they’re prepared for unforeseen incidents — accidents, fire, legal battle, or even theft.
But, what is commercial insurance? And how do you know if you need it?
Keep reading to find out how commercial insurance works and discover the different types.
What Is Commercial Insurance?
Commercial insurance, also known as business insurance, protects both businesses and their owners and employees. There are several types of business insurance, with each one designed to meet a particular need.
Basic business insurance coverage includes property, liability, and crime. In addition to basic insurance, you can customize your business protection by purchasing additional policies relevant to your business needs.
For example, liquor liability insurance makes sense for bar and restaurant owners but not for contractors and construction companies.
How Commercial Insurance Works
Commercial insurance policies work just like personal insurance policies.
In exchange for paying the monthly insurance premium, the insurance company agrees to provide financial coverage for the losses covered in your policy.
If your storefront gets burned down — and your insurance covers fire — you can file a claim with your provider to reimburse the losses.
Your insurance company will process your claim and send an adjuster to calculate the damage. After determining the costs, the insurance company will compensate you for the loss (minus your deductible).
Here are the key policy terms you should know when shopping for commercial insurance:
- Premium – The recurring amount of money you pay for your insurance policy. Commercial premiums can be paid monthly, quarterly, or annually.
- Deductible – The amount you need to pay towards a claim before your insurer reimburses you. For example, if you make a claim for $65,000 and have a $15,000 deductible, your insurer will pay you $50,000.
- Occurrence limit – Maximum amount of money your insurer will pay out per claim.
- Policy limit – Maximum total amount of money your insurer will pay out over the policy’s lifetime.
Common Types of Commercial Insurance
Commercial insurance needs vary depending on the type of business. Still, most businesses purchase the following four commercial insurance types:
General Liability
General liability insurance, also known as business liability insurance, protects your business from a financial loss if your business operations cause bodily injury or property damage.
A single lawsuit can put a small-scale operation or contractor out of business. A general liability insurance policy protects you from losing your livelihood in case of an accident and legal action.
Many insurance providers combine general liability and commercial property coverage (described below) into a single policy known as a Business Owner’s Policy (BOP).
Is it required?
General liability insurance is not legally required, but it is highly recommended for every business.
Commercial Property
Commercial property insurance, also known as commercial building insurance or hazard insurance, protects your business property, including your building, equipment, furniture, and inventory. With it, you receive coverage for property damage, vandalism, and theft.
You can also customize your policy to include coverage for essential documents and storage costs incurred during repair periods.
Even if you run your business out of your home, you should purchase commercial property insurance as a typical homeowner’s policy excludes coverage for equipment used for business purposes.
Is it required?
Commercial property insurance is not legally required.
Commercial Auto
Commercial auto insurance covers any vehicles used for your business, such as cars, trucks, and vans. It includes coverage for physical damage (for both vehicle and persons involved), liability, and other costs associated with a vehicle accident, such as towing and rental cars.
Wondering where to draw the line for used for business?
If you only use your vehicle to commute to work, your car insurance will cover the damages to your car. A commercial auto insurance kicks in if you use your vehicle to transport goods, complete a service, or tow equipment.
Is it required?
Yes. Every vehicle owned by a business needs commercial auto insurance. Review your state’s laws for more information on minimum coverage levels for passenger and property carriers.
Workers’ Compensation
Most personal health insurance policies exclude medical expenses associated with a work-related injury. So, the responsibility falls upon the employers to cover those expenses, which they do through workers’ compensation insurance.
A workers’ compensation insurance policy covers medical payments and missed wages whenever there is an injury on the job.
Is it required?
Almost all states require workers' compensation for businesses with employees, but some have exceptions. You can check out your state’s workers’ comp requirements on the National Federation of Independent Business’s website.
Want to make workers’ comp even easier? Hourly offers streamlined workers' comp insurance and payroll services for small businesses with hourly workers.
Powered by real-time data, Hourly’s platform simplifies the highly complex workers’ comp process. It syncs your payroll data directly to your workers’ comp policy so you only pay exactly what you owe on your premiums, not an estimate.
Hourly's goal is lower audit risk, faster payroll runs, and better claims and safety services for small businesses everywhere. Hourly is a licensed insurance agent with products underwritten by various insurance companies.
Other Types of Commercial Insurance
Besides the four basic types of business insurance, there are other insurance products you can consider.
Cyber Liability
Cyber liability insurance covers you if you suffer a financial loss as a result of a data breach. Cyber liability coverage can be first-party and third-party.
A first-party coverage kicks in if your business experiences a direct financial loss by a data breach. In contrast, third-party coverage covers you if someone sues you due to the information stolen due to a data breach in your company.
For example, if a hacker gets into your financial data and steals your clients’ credit card information, that would require third-party coverage.
Cyber liability coverage may reimburse you for costs associated with recovering data, cyber extortion, and crisis management.
Professional Liability
Professional liability insurance, also known as errors and omissions insurance (E&O), protects you and your business from financial loss that results from mistakes made in your professional services.
In particular, professional liability policies cover loss from lawsuits resulting from missed deadlines, undelivered services, breach of contract, oversights, and negligence.
Medical malpractice is an example of professional liability insurance. Some states have compulsory professional liability insurance for legal and medical professionals.
Employee Benefits Liability
If you’re a small business owner providing benefits to employees, you may want to consider employee benefits liability insurance. This coverage protects you if you make a mistake or error in the administration of your benefit plan.
Cost of Commercial Insurance
Commercial insurance costs can be challenging to predict with the varying coverage needs of different businesses.
For independent contractors and small businesses, you can expect to spend between $1,500 and $10,000 annually on commercial insurance coverage.
Factors affecting your insurance rates include:
- Industry
- Business size
- Number of employees
- Total revenue
- Business age
- Total payroll amount
Here are some basic formulas you can use to understand how insurance companies calculate your risk level and premiums.
Understanding Ratings for Liability Coverage
To calculate your loss rate, insurance companies use data from a large pool of similar companies.
Liability Premium = Revenue x Loss Rate
Insurance companies use revenue to estimate risk for companies where liability is associated primarily with customers, such as retail. But, the liability for some industries, such as construction, lies more with employees. In that case, your insurance provider may use payroll instead of revenue to calculate your premium.
Understanding Ratings for Property Coverage
Insurance companies use several factors to calculate your property exposure rating. First, they consider the industry your business is in, which tells them how you will use the building. Then, they look at the building’s construction style, materials, and location.
Combined, all of these factors help your insurance company determine your commercial property’s risk level.
Property Premium = Total Insured Value x Property Exposure Rate
In general, the more risk your business incurs, the more you’ll spend on insurance. If you own a construction business, you can expect higher insurance premiums than a marketing firm.
Protect Your Business with Commerical Insurance
No matter what type of business you own, you want to keep your company and employees protected. There are many different types of commercial insurance to choose from, including general liability, commercial property insurance and workers' comp. Talk to your insurance agent about getting the right insurance for your business, like an affordable workers’ comp insurance plan from Hourly. Hourly offers great rates for businesses with hourly workers.
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