Do I need business insurance if I have an LLC?

Business

Starting a small business takes courage and effort, whether it’s a passion project or a career move. To protect it from unexpected events like natural disasters, employee injuries, and lawsuits, you can register it as a Limited Liability Company (LLC).

This type of business structure limits your personal responsibility for business debts and obligations. However, it’s important to note that just forming an LLC does not guarantee complete protection from financial losses and potential lawsuits. You should also consider getting business insurance, which can be packaged specifically to meet the needs of your LLC.

Why is Small Business Insurance a Smart Choice for an LLC?

Small business insurance can protect your company’s assets and limit the personal liability of all LLC stakeholders in the event of claims or lawsuits.

It can protect your property: If something unexpected like fire or theft happens, property insurance can help you get back on track by covering the cost of repairs or replacement.
It can shield against lawsuits: If a customer or employee sues your business, liability insurance can help cover the cost of legal fees and settlements.
It can keep your business going: If a covered event stops your business from operating, business interruption insurance can help you recover lost income.

Which Business Insurance is Required for a Small Business or LLC?

When it comes to protecting your business, a single type of insurance might not cut it. Each risk requires a specific policy, so most LLCs need multiple policies for comprehensive protection.

Failing to have the required insurance — which can vary by the type of industry you’re in — can prevent you from getting your business off the ground. And if you’re already operating a business without adequate coverage, you could incur hefty fines or lose valuable business licenses.

Depending on where you do business, workers’ compensation, unemployment, and state disability insurance may be mandated by law. Even if they’re not, it’s highly recommended to have the following small business insurance:

Workers’ compensation: This insurance covers salary or wage supplements for employees injured on the job and unable to work, and it also protects employers from potential lawsuits. Some business owners require contractors and freelancers to provide proof of insurance or specify in their contract that workers’ comp is not included.
Unemployment Insurance: Even though it’s a federal program, this insurance is funded through payroll taxes paid by companies operating in your state. Businesses with larger payrolls contribute more to the state’s employment trust fund than smaller businesses.
Short-term Disability Insurance: Disability insurance coverage allows employers to offer partial wage replacement to eligible employees for non-work-related illnesses or injuries. It’s mandated in five states plus Puerto Rico.

Is a Business Owners Policy the Same as LLC Insurance?

A Business Owners Policy (also known as BOP Insurance) and LLC insurance are similar, but they’re not the same.

A BOP is an all-in-one insurance package that helps small businesses and LLCs manage their insurance needs and often saves money compared to purchasing separate policies. It covers common risks, such as property damage, liability claims, and business interruption.

LLC insurance is a term that refers to insurance coverage for a Limited Liability Company. It’s not a specific insurance “policy.” If you’re the owner of an LLC — or any small business — you can purchase various types of insurance policies, including a BOP, to protect against specific risks faced by your company.

What’s Included in a BOP Insurance Policy?

A BOP typically offers coverage for these three key areas:

Liability Insurance
- This coverage can help pay for legal expenses and damages if the business is sued for third-party claims of physical or property damage. This can include claims related to slip and fall accidents, product liability, etc.
- Won’t cover professional liability, workers’ comp, or health and disability insurance
Commercial Property Damage
- This policy protects business structures and their contents (equipment, furnishings, fixtures, displays, and inventory) from damage due to a fire or a natural disaster.
- Available regardless of whether you own or rent your business space.
Business Interruption
- This coverage protects you against lost business income, profits, and ongoing operating expenses if your business cannot stay open due to an emergency.
- Optional coverage is available to help keep the business financially afloat in case of a major supplier outage.

Which Add-on Coverage Should My LLC Consider?

Insurance options are available for almost every potential risk your business could face and can usually be added to a BOP as a policy rider.

Depending on state and local regulations, the industry you’re in, and the equipment and products you use, there may be additional types of small business insurance coverage which, if not required, may be highly recommended.

Some insurance coverage suggestions include:

Advertising Injury: Does your business do any online advertising or social media? This coverage can help pay for legal expenses and damages if you’re sued for claims related to advertising practices, such as rights usage, copyright infringement, defamation, and invasion of privacy.
Commercial Auto: This insurance can cover vehicles used for transporting employees, products, or equipment to protect against damage or accidents. If employees use their own cars for business purposes — like making deliveries or attending client meetings — non-owned auto liability coverage should also be considered.
Commercial Umbrella: This policy provides an extra layer of liability coverage beyond the limits of primary business insurance in the event of a significant financial loss.
Cyber Liability: We’re all susceptible to data breaches, cybercrime, and other cyber-related risks. Any small business that operates online or stores sensitive information — like credit card information, health data, or employee information — will likely need this policy to cover expenses related to restoring data, notifying affected parties, and paying for legal and public relations fees.
Directors & Officers: Typically associated with larger companies, this type of insurance protects the business from financial loss due to actions of upper management that threaten the business or profitability. Depending on how you structure your small business, it may be appropriate for you, too.
Homeowner’s/Renter’s Endorsement: If you operate your business from home, your personal homeowner’s (or renter’s) insurance policy may not include coverage for business-related losses. Also, if you are self-employed, you may need to provide health insurance for yourself, your family, and your employees.
Host Liability: If your business is a home-sharing operation, like an Airbnb, you’ll want coverage for bodily injury or property damage that can occur at your rental property, as well as protection against advertising injury and defamation claims. Standard homeowners insurance typically won’t provide adequate coverage for short-term rentals.
Professional Liability: Also referred to as errors and omissions insurance, this coverage can help pay for legal expenses and damages if your business is sued for mistakes or lapses while providing services. This can include consulting, financial advising, and malpractice claims and may be legally required in some states and industries.

Are There Risks Of Not Insuring My LLC?

If an LLC does not get business insurance, it exposes itself to significant financial risks. In the event of a covered loss or liability claim, your company and the owners could be responsible for paying for all out-of-pocket costs, including legal fees, settlements, and damages.

Without small business insurance, your LLC may also find it hard to secure contracts or work with clients who require proof of coverage. Additionally, if your company doesn’t carry certain types of insurance, such as workers’ compensation, a single on-the-job injury can put you out of business.

How Much Does LLC Insurance Cost?

The cost of insurance for your LLC will vary depending on several factors, including the size and type of your business, your location, and the coverage needed. According to a 2022 Forbes article, small business insurance costs can range from $14 to $340 a month, depending on which coverages you sign up for.

It is important to note that the cost of LLC insurance is not just the premium; it also includes the cost of any deductibles and the cost of any claims made. A higher deductible can lower the premium, but it also means that your LLC will have to pay more out of pocket in case of a claim.

How Frequently Should I Review My LLC Coverage?

The needs of a business can change over time, so it’s good practice to review your insurance annually to ensure you have sufficient coverage, remove any unnecessary policies, identify new risks or exposures, and look for ways to cut costs.

While LLC Insurance and a BOP insurance policy can provide a strong foundation, they may not fully address every risk you’ll come across. We can help you assess your coverage annually to spot any potential coverage gaps and determine if adding additional insurance policies would offer better protection for your business.