Property and Casualty Insurance
Protection against loss is critical for everything you do, including running your own business or earning money from a side hustle. The primary tool for mitigating business risks is property-casualty insurance. There are many insurance policies within the realm of property-casualty insurance, each with its own vocabulary. Understanding the different types of property-casualty insurance can help you limit the amount of many catastrophic financial losses. In particular, you will want to know which ones apply to your business or side hustle.
In this post, I’ll talk about the most important types of property-casualty insurance for small businesses and side hustles. These coverages include businessowners (with key components – auto, liability, and property), professional liability, workers’ compensation, and fidelity and surety bonds. I’ll highlight the coverage provided by each type of business insurance. In addition, I’ll touch on some factors to consider as you decide whether to buy them.
Some small businesses buy a package policy, called a businessowners policy (BOP), to cover their vehicle, liability, and property exposures. It is similar to the combination of personal auto and homeowners insurance policies. Businesses that don’t need all three types of insurance coverage can buy insurance policies separately. The separate policies are commercial auto (covers all types of vehicles), general liability, and property. The package policy is usually less expensive than the three separate policies, as long as you need all three coverages.
The limit of liability determines the maximum amount the insurer will pay for a covered liability claim. Also, one or more deductibles determine the amount the insured pays before the insurer starts paying for physical damage claims. Separate deductibles can apply to each of the comprehensive and collision portions of vehicle coverage and to physical damage claims related to any buildings and/or contents covered by the policy.
The vehicle coverage is the same whether bought using a BOP or a separate commercial auto policy. It protects against anything for which the business owner becomes legally liable related to the operation of vehicles covered on the policy. That is, if an insured driver is in an accident, liability insurance will usually cover the costs to third parties. These costs can include injuries or damage to their property. The insured has the option to also purchase physical damage coverage. This insurance can cover damage to the insured’s vehicles either from an accident (collision coverage) or other perils, such as theft and fire (comprehensive coverage). The vehicle coverages for commercial vehicles are very similar to those in a personal auto policy which I cover in detail here.
If you use your personal vehicle for your side hustle or business, it is critical that you buy commercial auto coverage. Personal auto policies generally exclude coverage for:
- Employees during the course of employment.
- Ownership or operation of a vehicle while it is being used as a public or livery conveyance, such as Uber or Lyft.
- The insured when employed or otherwise engaged in any business.
Almost all claims made against your personal auto insurance will be denied if your vehicle was being used for a side hustle or business.
Premiums for auto insurance vary based on the number and types of vehicles insured; the coverages, limits, and deductibles purchased; characteristics of the drivers; where the vehicle is driven; and the distances driven, among other factors.
Businesses usually face one or more of four types of liability – vehicle (discussed above), premises and operations, products, and professional. Premises and operations and products liability are parts of both general liability policies and BOPs. Professional liability is a separate policy, so I’ve covered it below.
Premises and Operations
Premises and operations coverage (which I’ll call Prem/Ops) provides insurance for things related to your business location or operations. It covers injuries to third parties (not employees) or damage to their property.
Slips and falls by customers at business locations are the most common types of Prem/Ops claims. For example, if someone is injured at your business location, in your parking lot or as the result of your operations, your business may be liable for their medical expenses and/or lost wages.
If your customers come to your place of business, you’ll want to consider Prems/Ops coverage. Most homeowners policies exclude coverage for claims related to a business. As such, it is important to check your homeowners policy if you do business out of your home to avoid gaps in coverage.
The premium for Prem/Ops coverage depends on the nature of your business, the number of types of locations, and the limit of liability you purchase, among other factors.
Products liability coverage provides insurance for damages related to your products. These damages include third parties (not employees) who are injured or their property when it is damaged. For example, the products liability insurance of a medical device manufacturer protects the company against claims that its products are defective and cause injury or illness to patients. On a much smaller scale, burns from McDonald’s coffee that was allegedly too hot are also insured under products liability coverage. If you make a product that could injure someone or damage their property, you’ll want to consider products liability coverage.
Premiums for products liability coverage depend on the type of products sold, the amount of sales, and the limit of liability you purchase, among other factors.
Property insurance protects your property, including buildings and their contents. You can also purchase insurance for just the contents if you don’t own the building. Property coverage protects against a long list of perils, generally including fire, hurricane, tornado, vandalism, and theft. In many places, you must purchase earthquake or flood coverage separately. Any intentional damage or damage from acts of war, arson, and sometimes riot is usually not covered. Read your policy to make sure you understand what is covered and what isn’t.
When you buy property coverage, you estimate the values of your buildings and contents. Insurers can often reduce the amount of any claim recovery, even for partial damage, if you underestimate the value of your property. As such, it is important to determine the value of your buildings and contents fairly.
Property insurance for businesses always includes business interruption coverage. Under this coverage, the insurer pays for lost profits and some overhead expenses when your property has been damaged by a covered peril. The insurer also covers expenses related to a temporary location at which you operate your business while your building is being replaced or repaired. Business interruption insurance applies only when your business is interrupted due to a peril covered under the buildings and contents coverage. For example, pandemic is almost never a covered peril for buildings and contents because it doesn’t damage either one. In that case, there is no insurance coverage if your business is shut down due to a pandemic.
Premiums for property coverage depend on the values, types and ages of insured buildings, the value and types of insured contents, where the property is located, and the deductible you have selected, among other factors.
An umbrella policy allows you to increase the limit of liability on all your liability policies at once. That is, an umbrella policy can provide coverage for vehicle, Prem/Ops, and products liability. The limits on the underlying policies must meet certain minimum requirements. An umbrella policy usually also protects you against some liability claims not covered by the underlying policies, such as libel and slander. The concepts underlying umbrella policies that protect businesses are similar to the concepts that underlie personal umbrella policies.
Umbrella premiums depend on all the characteristics of the underlying policies, along with the limit and deductible on the umbrella policy.
Professional liability insurance protects you against claims that you have caused someone an economic loss by making a mistake when providing professional services. For example, if you are providing bookkeeping services, a client might sue you if you prepared tax returns incorrectly that led to a financial loss by the client. Or, if you are providing legal services, errors could include everything from missing a court deadline to providing incorrect advice. A professional liability policy usually covers these errors, unless intentionally made.
If your business provides advice or professional services to clients, you will usually want to purchase a professional liability policy. Professional liability covers services just as products liability insurance covers things your business manufactures.
Professional liability premiums depend on the type of services provided, annual revenue, and the limit of liability selected.
Workers’ compensation insurance (often called workers comp) protects you against the cost of injuries and illnesses to employees that occur during the course of their employment. Almost every US state requires you to provide workers comp for employees, as long as you have at least the minimum number of employees. That minimum number of employees is usually around four. Some states, such as California and Colorado, require you to provide coverage even if you have only one employee.
Workers comp reimburses employees for a state-mandated portion of lost wages and for medical costs. Employees covered by workers’ comp cannot sue for covered injuries and illnesses except in very limited situations.
Premiums for workers comp depend on the number of employees and their wages, the state in which they work, and the type of work performed by each employee.
Surety & Fidelity Bonds
Some businesses need to buy surety or fidelity bonds as part of their operations. Most surety bonds provide guarantees to third parties (the obligees) that you (the principal) will perform certain actions. By comparison, fidelity bonds protect an employer against the fraudulent or dishonest actions of its employees.
One of the most common surety bonds is a construction bond. If your business is a construction company, it might promise to build a structure for a buyer. The buyer will likely pay your business for some of its services in advance. In that case, the buyer wants a guarantee that you will complete the structure. You can buy a construction bond from an insurer for the benefit of the buyer (the obligee). If you fail to complete the structure, the insurer will either pay the obligee the cost of completing the structure or hire a contractor directly to complete it.
Other types of commercial surety bonds cover signature guarantees for notaries and remediation costs for mining or drilling operations. Surety bond requirements vary widely by state. I found the “What Bond Do I Need?” section of this website quite interesting.
Most fidelity bonds insure property, money, or securities owned by customers to which employees have access. For example, a fidelity bond usually covers the embezzlement of deposits by an employee for services or products not yet provided. Similarly, a fidelity bond can insure against misappropriation of pension assets or real estate escrow funds. Also, a fidelity bond can provide protection if an employee takes something while at a client’s business or home.
Most side hustles and very small businesses don’t require fidelity or surety bonds. Nonetheless, they are very important components of a company’s risk management plan if it has any of these types of exposures. The face amount of the bond, the type of coverage provided, and the history and financial condition of the insured determine the cost of surety and fidelity bonds.
Other Types of Property-Casualty Insurance
There are several other types of property-casualty insurance that a small business might need.
- Crime Insurance – Property insurance and fidelity bonds don’t cover all theft losses. If you sell a product, you might need to look into purchasing crime insurance.
- Cyber Insurance – Cyber insurance can cover your operations if they are disrupted by a cyber-attack. It also can protect you if your confidential business and/or your customers’ or employees’ personal information is stolen electronically. If your business has any of these exposures, you will want to investigate the various types of cyber coverage.
- Directors’ and Officers’ Liability (D&O) Insurance – D&O insurance covers economic losses incurred by third parties that result from significant decisions made by directors or officers. Publicly-traded companies or companies with more than one owner often buy D&O insurance. If you are not the sole owner of your business, you might want to evaluate the need for D&O insurance.
Where to Buy Property-Casualty Insurance
Buying property-casualty insurance for a business is similar to buying it for your personal exposures.
- Some insurers, such as Progressive (just an example – in no way do I intend to endorse Progressive as I know nothing about its premium, coverage, or service), allow you to purchase insurance for your business online.
- Other insurers, such as Liberty Mutual (again, just an example), are direct writers. You talk directly to an employee of a direct writer when buying insurance.
- Insurance brokers and agents provide access to all other insurers. They usually have access to a wide range of insurers. Small businesses, especially those without unique exposures, can work with an agent to acquire insurance. You may need to work with a broker if you have a large business or need unique expertise.
If you are new to buying insurance for your business or your business has unique exposures, I suggest a direct writer, insurance broker, or insurance agent. Purchasing insurance online, especially if you are an informed buyer, can often, but not always, save you money. The lower premium reflects insurers’ lower expenses as it doesn’t have to pay commissions or sales force expenses.
This article originally appeared on Your Money Geek and has been republished with permission.