Small business insurance: 12 types + how to choose

Running a small business is no small feat. Everyone knows it takes passion, dedication, and a lot of planning, but few think about how much effort goes into guarding against unforeseen risks. With 80% of business owners aiming to grow, understanding how small business insurance protects against growth-stifling catastrophes is crucial.

The right insurance policies can make all the difference when things go wrong. And while it might seem like an added expense, having the proper coverage can save you in the long run. 

To help you get started, we’ll walk through 12 types of small business insurance and how to choose what’s best for your unique needs.  

The role of small business insurance

Essential business insurance types

Specialized coverage for specific business types

Protecting your workforce

Niche protections for small businesses

How to choose small business insurance

Tips for reducing insurance premiums

How to handle small business insurance claims

Run your business with confidence

The role of small business insurance

If you’re wondering how much small business insurance is, remember that it’s more than just another line item on your budget; it’s an essential safeguard against unforeseen risks and financial losses. Think of it as a safety net that helps protect your business from a litany of perils, such as lawsuits, property damage, theft, and even natural disasters.

Without insurance, even a minor incident, like a customer slipping and falling in your shop, can lead to catastrophic (and sudden) out-of-pocket expenses. For this reason, you shouldn’t think of insurance as just another cost; it’s an investment in business continuity. It allows you to focus on growing your business instead of worrying about “what if” scenarios.

Let’s face it—no one plans for accidents or disasters. But when they happen, having the right small business insurance can mean the difference between bouncing back quickly or facing potential ruin.

Essential business insurance types

When it comes to protecting your business, not all insurance policies are created equal. Some are essential for almost every small business, even ones involving only one self-employed individual, while others depend on specific small business insurance needs. Below, we’ll break down the must-have coverages that form the backbone of a solid small business insurance strategy.

1. General liability insurance

Let’s start with the foundation: general liability insurance. This broad coverage protects your business from third-party claims like bodily injury, property damage, or personal/advertising injury—think defamation, copyright infringement, or false advertising.

Imagine this: A customer slips and falls in your store, damaging their phone in the process. Or worse, someone accuses your business of using their logo without permission. General liability insurance helps cover legal fees in these scenarios. It’s not just a policy—it’s a lifeline for handling unexpected claims that could otherwise drain your resources.

The bottom line? General liability insurance is a foundational policy for almost all businesses. Whether you’re a freelancer, retailer, or contractor, it’s one of the first coverages you should consider.

2. Commercial property insurance

Next up is commercial property insurance, which protects your business’s buildings, equipment, inventory, machinery, and other physical assets. If disaster strikes, this policy helps cover the costs of repairing or replacing any lost items.

A standard policy covers theft, vandalism, fire, and certain natural disasters like windstorms or hail. It doesn’t matter if you own your space, rent it, or even work from home; if your business relies on physical assets to operate, you should have this coverage.

Without commercial property insurance, a fire or break-in could leave you scrambling to replace expensive equipment or inventory. Protecting these assets could, ultimately, be what keeps your business running smoothly.

3. Business owner’s policy (BOP)

If you want to reduce your small business insurance cost, an effective way to do that is to bundle coverage (and thereby save on overhead, headaches, and extra paperwork) through a business owner’s policy. A BOP combines general liability and commercial property insurance into one convenient package, often at a lower cost than buying the policies separately.

This simplifies your insurance management by consolidating two critical coverages into one policy. Plus, the potential savings can free up resources to invest back into your business.

Who benefits most from a BOP? Businesses with a physical location, equipment, or inventory—like retail shops, restaurants, or small manufacturing operations—are ideal candidates. If this sounds like you, a BOP could be the perfect way to streamline your small business insurance needs.

Specialized coverage for specific business types

Not every business faces the same risks, which is why specialized insurance exists. These policies are designed to address unique challenges specific industries or business models face. Whether you’re a consultant, an e-commerce store, or a tech startup, there’s coverage tailored to your needs.

4. Professional liability insurance

If your business provides advice, services, or expertise, professional liability insurance (also known as errors and omissions (E&O) insurance) is essential. This policy protects against claims of negligence, mistakes, or failures to act in your professional capacity.

For example: Imagine a client accuses you of giving incorrect advice that led to financial losses. Or perhaps they claim you missed a critical deadline, costing them a significant opportunity. Professional liability insurance covers defense costs, settlements, or judgments that arise from these types of allegations.

This type of coverage is essential for service-based businesses like consultants, accountants, designers, and healthcare providers. If your work directly impacts clients’ outcomes, this policy helps shield you from potentially devastating claims.

5. Product liability insurance

If your business manufactures, distributes, or sells products, you’ll need specialized product liability insurance. This policy covers risks associated with the goods you bring to market, protecting you from claims related to design flaws, manufacturing defects, or inadequate warnings and instructions.

For example: Imagine a customer claims your product caused harm because it was poorly designed or lacked proper safety instructions, or perhaps a batch of defective goods led to recalls or lawsuits. In these and similar cases, product liability insurance steps in to cover the requisite legal fees, settlements, or judgments.

This coverage is particularly relevant for manufacturers, distributors, and retailers. If your business involves physical products, having this policy ensures you’re prepared for the unique risks that come with bringing goods to market.

6. Cyber liability insurance

Cyber liability insurance is incredibly important in today’s digital world. A policy focused on cyber liability protects your business against costs related to data breaches, ransomware attacks, and other computer- and information-related incidents.

These policies cover expenses like lost income due to system downtime, repair costs for compromised systems, legal fees, notification costs for affected customers, and even public relations efforts to rebuild trust. Cyberattacks can happen to anyone, whether you’re processing online payments, storing customer data, or simply using cloud-based tools.

For businesses handling sensitive information, maintaining a strong web presence, or relying on technology to operate, cyber liability insurance isn’t optional. A single breach could cost thousands (or even millions), so having this coverage is a surefire way to protect your future success.

Protecting your workforce

Your employees are among your enterprise’s most valuable assets, and protecting them from work-related risks is essential. Whether it’s ensuring they’re covered in case of injury or safeguarding your operations when disruptions occur, these policies help create a safer, more resilient workplace.

7. Workers' compensation insurance

If your business has employees, workers' compensation insurance is almost certainly a legal requirement—and for good reason. This policy covers medical costs and lost wages for employees who are injured or become ill due to work-related incidents.

Here’s how it works: If an employee slips and falls at your job site or develops carpal tunnel syndrome from repetitive tasks, workers' compensation covers their medical bills and a portion of their lost income if their condition forces them to miss work. Beyond protecting your employees, this coverage also shields your business from potential lawsuits related to workplace injuries.

Nearly all states require businesses with employees to carry workers' compensation insurance, so it’s something you’ll need to plan for.

8. Commercial auto insurance

If your business uses vehicles—for deliveries, transporting goods, or traveling to client sites—you need commercial auto insurance. This policy covers accidents involving company-owned cars or vehicles used for business purposes, offering protection beyond personal auto insurance.

It covers things like physical damage to the vehicle, liability for injuries or property damage caused to others, and even medical payments for drivers and passengers. For example, if an employee gets into an accident while making deliveries, commercial auto insurance helps cover repair costs, legal fees, and medical expenses.

This coverage is essential for any business that relies on vehicles to operate. Without it, you could be personally liable for damages or injuries resulting from an accident involving a company vehicle.

9. Business interruption insurance

Unexpected disruptions can bring your business to a standstill, and business interruption insurance is designed to help you recover. This policy replaces lost income and covers ongoing expenses when your business is forced to close temporarily due to a covered peril, like a fire, natural disaster, or other catastrophic event.

These policies cover rent or mortgage payments, payroll, associated taxes, and even temporary relocation expenses while you get back on your feet. For example, if a flood damages your storefront and forces you to shut down for repairs, business interruption insurance ensures you can keep paying your bills and avoid financial strain.

This coverage is vital for maintaining stability during tough times. Without it, even a short-term closure could lead to missed paychecks, late rent payments, or worse—putting your entire business at risk.

Niche protections for small businesses

While essential and specialized coverages address many risks, some businesses have unique needs that require tailored solutions. These niche protections are designed to fill gaps in coverage for specific scenarios or industries. If your business falls into one of these categories, don’t overlook these policies.

10. Home-based business insurance

If you run your business from home, your standard homeowners insurance policy might not be enough. Home-based business insurance extends your existing coverage to include business-specific risks, ensuring your operations are protected.

This policy addresses things like general liability—say, if a client visits your home office and gets injured—and professional liability if you make a mistake while working on a project. It can also help replace lost income if your home office is damaged and you’re unable to work temporarily.

Many homeowners policies exclude business-related claims, so it’s worth checking if you can add an endorsement to your existing coverage. If you’re running a business from home, this type of insurance ensures you’re not exposing yourself to unnecessary risks.

11. Commercial umbrella insurance

For businesses with higher-liability risks, commercial umbrella insurance provides an extra layer of protection. This policy kicks in when the limits of your primary liability policies—like general liability or commercial auto insurance—are exhausted.

Here’s how it works: Imagine your business is sued for damages that exceed the coverage limits of your existing policies. Without umbrella insurance, you’d be responsible for paying the difference out of pocket. With this policy, however, you gain additional coverage to handle those costs, protecting both your business and personal assets.

This type of insurance is especially valuable for businesses facing higher exposure, such as construction companies, manufacturers, or any operation where accidents or lawsuits could result in significant financial losses. Adding a commercial umbrella policy is an affordable way to ensure you’re fully protected.

12. Commercial flood insurance

If your business is located in a flood-prone area or near waterways, commercial flood insurance is a must. This policy protects against damage caused explicitly by floods and flash floods, which are typically excluded from standard property insurance.

It covers things like structural damage, electrical systems, plumbing, and even inventory or equipment damaged by rising waters. For example, if a hurricane causes flooding that ruins your storefront or warehouse, commercial flood insurance helps cover repair and replacement costs.

Even if you’re not in a high-risk area, floods can happen unexpectedly due to heavy rains, snowmelt, or sewer backups. Without this coverage, you could face overwhelming repair bills or even lose your business entirely. Peace of mind is worth investing in, and flood insurance is an often-overlooked way of doing that.

How to choose small business insurance: 6 steps

The right small business insurance policy can help you keep your company running smoothly. Your coverage can reduce the risk of high out-of-pocket costs if you’re liable for damages or injuries or your business suffers damage from a qualifying event. 

But finding the right policy can be tricky if you’re not sure where to start. Here’s how to find coverage that works for your business and protects you from risks you may face:

1. Assess your business risks: Every business has unique risk factors it needs to protect against. Think about the types of lawsuits and accidents your business could experience during a typical year. Also, consider the types of natural disasters common to your area.
2. Pinpoint essential coverage: Once you understand the risks that could threaten your business, think about the types of coverage you need to protect against the most severe. For most businesses, this will involve property insurance, business liability coverage, business interruption insurance, and other similar policies.
3. Consider additional coverages: After identifying your essential coverage needs, think about the types of additional coverage you may want to invest in. This could involve buying an umbrella policy, investing in cyber liability protection, or purchasing professional liability insurance.
4. Review policy details: Before you agree to pay for coverage, take the time to review the policy details for each type of insurance you’re considering. Read the terms, the qualifying events each policy recognizes, and the coverage limits each policy has. You may need to make changes based on your business’s unique needs.
5. Work with an insurance broker: While you can purchase insurance on your own, it’s a good idea to work with an insurance broker. They can help you narrow down a list of the best small business insurance companies for you, helping find coverage that meets your needs and potentially recommending additional coverage based on your business’s unique risk factors.
6. Consult other small businesses: You can also speak with other small business owners to see what types of small business insurance they’ve purchased and which providers they work with. 

These steps can act as a small business insurance guide to help you find the right coverage for your company. As always, it’s a good idea to speak with an insurance broker to ensure that you get the coverage you truly need and coverage limits that will protect your bottom line and reduce your small business insurance cost.

Tips for reducing insurance premiums

Quality insurance for small businesses can be expensive. But there are things you can do to reduce the cost of your insurance premiums without compromising on the types of coverage you purchase. 

Here are a few tips to keep in mind:

• Compare quotes from multiple providers: Shop around and get quotes for insurance for small businesses from several insurance companies before you choose a policy. Compare the coverage types, limits, and details with each provider and choose the policy that meets the insurance needs for small businesses like yours at a price you can afford.
• Ask about bundling policies: You may be able to reduce your premium costs by purchasing multiple policies from the same insurance provider. Ask your insurance broker about any discounts they may offer for bundling policies. 
• Review coverage regularly: You may end up buying more insurance than you really need. Review your coverage at least once a year and consider decreasing your coverage limits if you feel that your policies could be more balanced. Reducing your coverage limits may save you money on monthly premium rates.
• Consider payment options: Insurance providers may offer discounts for paying for coverage upfront rather than in monthly installments. Ask your broker if your provider offers lower premium rates if you make payments upfront.

When you determine what insurance is needed for a small business like yours, know that you will have to pay for coverage. But these tips should help you lower your business insurance costs and help you save on premiums throughout the year.

How to handle small business insurance claims

The claims process will be different depending on the insurance provider you’re working with. But there are some steps you’ll want to follow to file your claim regardless of who you’re working with:

• Report the claim: Notify your insurance agent or contact your insurance provider’s claims division to report the damage and initiate the process.
• Document everything: Take pictures of the damage and write down as much information as you can about the incident.
• Review your policy details: Review your policy and coverage limits to make sure the claim is valid. Don’t be afraid to appeal the decision if your insurance provider denies your claim.
• Communicate with the insurance adjuster: Stay in contact with the insurance adjuster and point out any damage they don’t readily notice during the walkthrough.
• Accept or appeal the settlement: If the insurance settlement is fair and meets your needs, you can accept it and get paid quickly. If it’s too low, you may be able to appeal the decision.

These are just the most common steps you’ll want to take. Ask your insurance agent for advice as soon as you file a claim, and let them guide you through the process.

Run your business with confidence

Choosing the right small business insurance might seem overwhelming, but it’s one of the most important decisions you’ll make as a business owner. From foundational policies like general liability and workers' compensation to specialized coverages like cyber liability and commercial flood insurance, each policy plays a key role in protecting your business.

If you’re ready to take the next step, consider using accounting software to manage your business finances and ensure you’re prepared for insurance premiums and other expenses.