This year I’m finally going to start my dream business. I'm excited! What insurance do I need to get started?

The most important kind of insurance for new businesses is liability insurance. It covers legal costs, including the cost of hiring a lawyer, if your business is sued.

Legal costs can be extremely expensive, hundreds of thousands or even millions of dollars. This is even more true for businesses like childcare, cosmetics and food service, because there’s the potential to really harm your customers.

You might need other types of insurance depending on your business’s niche. Commercial property insurance and commercial auto insurance are common needs for new businesses, in addition to liability insurance.

What Does Business Insurance Cover?

I’m not sure why I need business insurance, especially because my business is small and new. Can you explain what business insurance covers?

Business insurance isn’t just one kind of coverage. It’s a blend of multiple types of coverage. So there isn’t one set of things that business insurance covers—you can mix and match based on your business’s size and niche.

These are four common parts of small business insurance:

Liability insurance: Covers legal expenses, including the cost of legal representation and any damages you might owe.
Commercial property: Covers buildings, equipment, inventory and even your customer’s stuff if you’re storing it (like in a hotel or repair business).
Commercial auto: Covers vehicles that are used for your business. You may need a commercial auto policy in addition to your regular car insurance if you plan on driving your personal car for business.
Professional liability insurance: Provides extra legal protection if you’re sued for providing bad guidance to your customers, like in a consulting business.

Even within those categories, there’s lots of variety in what’s covered. Your insurance needs may also change dramatically over time. That’s why it’s good to work with an independent insurance agent. They can help you pick out the coverage you need at the right price point for your business.

How Much Does Business Insurance Cost for a New Business?

I’m in the middle of putting together a business plan and I’m stumped about what to budget for insurance. How much should I be planning for?

This is a more complicated question than it seems. In short, it’s all down to your business’s size and niche. Take a second to think about worst-case scenarios for your business:

Could expensive property or equipment get damaged?
Are you working with flammable materials that are prone to fire?
Are you driving vehicles for business that could get wrecked?
Is there a risk of physically harming a customer, including food poisoning?
Is there a risk of seriously humiliating a customer or causing them measurable financial harm?

The worse your worst-case scenarios could be, the more expensive your business insurance could be.

For now, expect to spend a few hundred dollars per year on insurance if your business is small. That should cover liability insurance and maybe even some property insurance. For a larger business, like a restaurant, the cost is likely to be in the thousands of dollars per year.

What Happens if I Don't Have Business Insurance?

I started a small photography business last year, mostly for family and friends. I don’t have business insurance yet and I’m not sure I need it. Do I need to worry?

Photography is a good example of a field where insurance needs vary widely. A few important factors come into play. Let’s look at a few examples that also apply to many other small businesses:

Are you shooting high-stakes events like weddings?
Is your photography making up a large portion of your income?
How expensive is your camera?

Let’s expand all those scenarios:

If you’re shooting events where customers are likely to sue you (or at least be highly upset) if you screw up, then liability insurance and professional liability insurance are worth buying. Otherwise you could be on the hook for lots of money.
If you’re using your photography to pay your bills, then liability and commercial property insurance (insuring crucial equipment like lighting or backdrops) can keep your business afloat if something bad happens. That way you don’t have an interruption of income.
If you would struggle to find the money to replace your camera if it was stolen or damaged, then a special kind of property insurance called inland marine can help. Inland marine insurance covers expensive, portable equipment like cameras.

Whether you should worry depends on what your situation is relative to the questions and scenarios above. If it’s more of a hobby, you might be fine staying uninsured. But once it gets serious, it’s time to look into getting covered.

These principles apply to all sorts of other small businesses. There are lots of risks to not having business insurance. It’s important to know those risks and know your niche.

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