In this guide
Most small businesses build their insurance from a handful of core policies: general liability, commercial property (often bundled together in a business owner's policy), professional liability, workers' compensation, and commercial auto. Cyber and umbrella coverage fill gaps those policies leave. Which ones you need depends on what you do, whether you have employees, what you own, and the laws in your state.
Key takeaways
- General liability covers injuries and property damage you cause to other people, but not your own employees, your own property, or professional mistakes.
- A business owner's policy (BOP) bundles liability, property, and business income coverage, and is often a starting point for small businesses that qualify.
- Workers' compensation is governed by state law. Most states require it for most employers, while Texas generally lets private employers choose.
- Service businesses that give advice or expertise often need professional liability (errors and omissions) on top of general liability.
- Personal auto, homeowners, and personal umbrella policies usually leave big gaps for business activity.
Why small businesses need insurance
A single lawsuit, fire, or injured worker can cost more than a small business earns in a year. Insurance moves part of that risk to an insurer in exchange for a premium. It can also pay for a lawyer to defend you, even when a claim against you turns out to be groundless.
Some coverage is not optional. The U.S. Small Business Administration (SBA) notes that businesses with employees must carry certain types of insurance and that required coverage varies by state. Landlords, lenders, and clients may also require you to carry specific policies before they will sign a lease, loan, or contract.
General liability insurance
Commercial general liability (CGL) is the foundation for most businesses. According to the Insurance Information Institute (Triple-I), it typically covers:
- Bodily injury and property damage to other people caused by your premises or business operations, such as a customer slipping in your shop.
- Personal and advertising injury, such as libel, slander, or copyright infringement in your advertising.
- Medical payments for non-employees hurt on your premises, usually on a no-fault basis.
- Legal defense costs and damages you are found liable for, up to your policy limits.
General liability has important exclusions. It does not cover injuries to your own employees (that is workers' compensation), professional errors, or your own property. Standard policies also generally exclude pollution and liquor liability, which may require separate coverage.
Business owner's policy (BOP)
A business owner's policy packages several coverages that small businesses commonly need. Triple-I describes a BOP as combining three parts:
- Property coverage for your building or office space and the business property inside it.
- Liability coverage similar to general liability.
- Business interruption (business income) coverage, which can replace lost income if a covered event, like a fire, forces you to shut down for a while.
Buying a bundle can be simpler and may cost less than buying each piece separately. Not every business qualifies, though. Triple-I says companies with about 100 employees or fewer and revenue up to about $5 million are normally candidates, and that some higher-risk businesses, such as restaurants, may be ineligible. Rules differ by insurer.
Watch out: A BOP does not include professional liability, workers' compensation, or commercial auto coverage. Coverage limits are also usually lower than with larger commercial policies, so check whether they fit your risks.
Commercial property insurance
Commercial property insurance pays to repair or replace business property damaged by covered events such as fire, storms, theft, or vandalism. That can include your building (if you own it), equipment, furniture, computers, and inventory. Even if you rent, you may own thousands of dollars of equipment and stock that your landlord's policy will not cover.
Many small businesses get property coverage through a BOP. Businesses with significant or specialized property may buy a standalone policy instead. Like homeowners insurance, commercial property policies have exclusions, and damage from floods and earthquakes typically requires separate coverage.
Good to know: If you run a business from home, your homeowners or renters policy may offer little or no coverage for business equipment or business liability. The SBA notes that a home-based business rider can add limited coverage. A BOP or separate policy may be needed for more. See our guide to what homeowners insurance covers.
Professional liability (E&O) insurance
Professional liability insurance, also called errors and omissions (E&O), protects businesses that provide services or advice. It covers claims that your work caused a client financial harm through negligence, mistakes, misrepresentation, or inaccurate advice. It typically pays legal defense costs and judgments up to the policy limit.
Triple-I lists professions that should consider it, including accountants, architects, engineers, graphic designers, IT consultants, management consultants, real estate agents, and software developers. Some states require it for certain professions. Clients may also require it in their contracts.
Most professional liability policies are written on a "claims-made" basis. That generally means the policy must be in force both when the work was done and when the claim is filed. For a side-by-side comparison, read general liability vs. professional liability.
Workers' compensation insurance
Workers' compensation pays for medical care and a portion of lost wages when an employee is hurt or becomes ill because of their job, generally regardless of who was at fault. In exchange, employees usually give up the right to sue their employer over the injury.
For private employers, workers' comp is controlled by state law, and each state sets its own rules. In most states, most employers with employees must carry it. The details vary a lot, including:
- How many employees trigger the requirement (some states exempt very small employers).
- Whether business owners, partners, or certain types of workers are covered or exempt.
- Whether you can buy from private insurers, a state fund, or both, or self-insure.
Texas is the notable exception. The Texas Department of Insurance (TDI) says private employers in Texas can generally choose whether to provide workers' compensation coverage. Employers that opt out are called "non-subscribers." They still have duties, such as posting a notice of no coverage at work, notifying new hires in writing, and filing an annual notice with TDI's Division of Workers' Compensation. Opting out can also leave an employer more exposed to employee injury lawsuits.
Watch out: Penalties for not carrying required workers' comp can be serious and vary by state. Check your state's workers' compensation agency or department of insurance for the rules that apply to your business.
Commercial auto insurance
If your business owns vehicles, or you or your employees drive for work, you may need commercial auto insurance. Triple-I explains that a personal auto policy may cover some business use, but if a vehicle is used primarily for business, there is likely no coverage under a personal policy. A personal policy also would not defend your company if it were sued.
Businesses whose employees drive their own cars for errands, or that rent vehicles, can look at hired and non-owned auto coverage. It protects the business when someone drives a vehicle the business doesn't own. Learn more in our guide to when your business needs commercial auto insurance.
Cyber insurance
Almost every business now stores some customer data, takes payments online, or relies on computer systems. Cyber insurance can help cover the costs of a data breach or cyberattack. Depending on the policy, that may include:
- Breach response costs, such as notifying affected customers and hiring forensic experts.
- Restoring lost or damaged data and systems.
- Lost income while your systems are down.
- Liability if customers or others sue over exposed data.
Standard general liability and property policies may offer little or no cyber protection. Cyber coverage is sold as a standalone policy or as an add-on, and what is included differs widely between insurers. Read the definitions and exclusions closely.
Commercial umbrella insurance
A commercial umbrella policy adds extra liability protection on top of your other liability policies, such as general liability and commercial auto. If a large claim uses up the limit on an underlying policy, the umbrella can pay above it, up to its own limit. It is meant for unusually large losses, like a serious accident involving a company vehicle.
A personal umbrella policy usually excludes business-related claims, so business owners generally need a commercial version for business risks.
Who typically needs what
The right mix depends on your business. The table below shows common patterns, not rules. Your own needs may differ.
| Type of business | Coverage often considered |
|---|---|
| Solo consultant or freelancer working from home | Professional liability, general liability, home-based business coverage or a BOP, cyber |
| Retail shop or office with customers visiting | BOP (liability, property, business income), workers' comp if you have employees, cyber |
| Contractor or trade business | General liability, commercial auto, workers' comp, tools and equipment coverage, umbrella |
| Professional firm (accounting, design, IT) | Professional liability, BOP or general liability, workers' comp, cyber |
| Business that makes or sells products | General liability with products coverage, property, business income, workers' comp |
| Delivery or service business with vehicles | Commercial auto, general liability, workers' comp, umbrella |
Tip: Make a list of what could realistically go wrong in your business: a customer injury, a client claiming your work cost them money, a fire, a stolen laptop full of customer data, an employee hurt on the job. Then match each risk to a policy. Gaps become easier to spot.
How to shop for small business insurance
- Check your legal requirements. Start with your state's workers' compensation and insurance department websites, plus any licensing rules for your profession.
- Review your contracts. Leases, loans, and client agreements often name the coverage types and limits you must carry.
- Gather your details. Insurers usually ask about your revenue, payroll, number of employees, location, property values, and claims history.
- Compare quotes from several insurers. Prices, limits, exclusions, and deductibles can vary noticeably, so compare coverage line by line, not just the premium.
- Get expert help when needed. A licensed agent or broker who works with businesses like yours can explain options. Your state insurance department can answer questions about rules and licensing.
Review your coverage at least once a year and whenever your business changes, such as hiring your first employee, buying a vehicle, or signing a big new contract.
Frequently asked questions
Is business insurance required by law?
Some types can be. Workers' compensation is required for most employers in most states, and businesses that own vehicles must meet state auto insurance requirements. Other coverage, like general liability, is usually not required by law but is often required by landlords, lenders, or clients. Rules vary by state and profession.
Does a sole proprietor with no employees need workers' comp?
Often not, since workers' comp is mainly for employees, but rules vary by state and some industries have special requirements. Some owners choose to cover themselves. Check with your state's workers' compensation agency.
Is a BOP the same as general liability insurance?
No. A BOP usually includes general liability, but it also bundles commercial property and business income coverage. It does not include professional liability, workers' comp, or commercial auto.
Can I opt out of workers' comp in Texas?
According to the Texas Department of Insurance, private employers in Texas can generally choose whether to carry workers' compensation. Non-subscribers must still meet notice and reporting requirements. TDI also notes that private employers who contract with government entities must provide coverage for the employees working on those projects. Check TDI's current rules.
How much does small business insurance cost?
It varies widely based on your industry, location, revenue, payroll, number of employees, claims history, and the limits you choose. The most reliable way to find out is to request quotes from several insurers for the same coverage.
Sources
- U.S. Small Business Administration – Get business insurance
- Insurance Information Institute – Small Business Insurance Basics
- Insurance Information Institute – Understanding business owners policies (BOPs)
- Insurance Information Institute – Commercial general liability insurance
- Insurance Information Institute – Professional liability insurance
- Insurance Information Institute – Business Vehicle Insurance
- Texas Department of Insurance – Non-subscriber information
- Texas Department of Insurance – Workers' compensation insurance guide
General information only. This guide explains general concepts and is not insurance, legal or financial advice. Rules and prices vary by state and insurer. Check your policy documents and speak to a licensed insurance professional or your state insurance department about your situation.