Essential Insurance Guide: Navigating Legal Requirements for Small Businesses

While researching this blog post, we came across some really eye-opening stats from a recent article published by Forbes.

  • 99.9% of businesses across the US are small businesses
  • Nearly half of all U.S. employees are employed by a small business

That makes it even more important for you, as a small business owner, to make yourself aware of the various insurance requirements mandated by law. 

While insurance mandates that apply to your business will depend on the state where you operate, small businesses, in general, are required to carry the following: workers’ compensation insurance, unemployment insurance, and disability insurance. 

Let’s look at each of these insurance types and their legal requirements.

Workers’ Compensation Insurance

Businesses with employees are typically required to have workers’ compensation insurance, which is mandatory in most states. This type of insurance provides benefits to employees who get hurt or become ill while on the job, covering medical expenses, lost wages, and disability benefits. 

One of the advantages of workers’ compensation insurance is that it protects both the employee and the employer. Providing benefits to the employee prevents them from suing the employer for negligence and limits the employer’s liability for workplace injuries. 

The specifics of workers’ compensation insurance requirements differ from state to state, but generally, businesses with employees must obtain coverage from an authorized insurance company or a state-run program. The cost of coverage depends on factors such as the number of employees, the nature of the work performed, and the risk of injury associated with the work. It’s worth noting that some states exempt businesses with only one employee from the requirement to carry workers’ compensation insurance.

Here are the 5 facts SMBs must consider when thinking about workers’ compensation insurance:

  1. Every state but Texas mandates that companies purchase workers’ compensation coverage.
  2. If the business owner is the company’s only employee, you generally won’t need workers’ compensation insurance — but it still might be a benefit you’ll want to consider.
  3. The cost of insurance is based on the number of employees, the type of work they do, and the risk of injury associated with that work. 
  4. This insurance covers injuries that happen while an employee is performing their job duties and can include physical injuries, illnesses caused by exposure to hazardous materials, and repetitive strains.
  5. Having this policy in place limits the employer’s liability for workplace injuries. When an employee files a claim, the insurance company investigates and, if approved, pays out benefits to the employee. 

Unemployment Insurance

Unemployment insurance is designed to provide support for workers who have lost their jobs through no fault of their own. It offers a safety net to help cover basic expenses like food, rent, and utilities while workers search for new employment opportunities. 

To fund the program, employers are required to pay unemployment insurance taxes, which are based on the total amount of wages paid to employees, and their experience rating, which is determined by the number of unemployment claims filed by former employees.

Eligible employees can receive benefits for a set period of time after losing their job. This also varies by state, with some providing 12 weeks of assistance and others providing up to 28 weeks. Employee eligibility, how benefits are calculated, and the amount of payments also varies from state to state.

Small business owners should keep in mind these 5 things regarding unemployment insurance:

  1. Unemployment insurance is state-run, and requirements and benefits vary by state. 
  2. The cost of coverage can vary based on a business’s history of layoffs or terminations. If a business has a high rate of employee turnover, it may be required to pay higher taxes to fund the program. 
  3. Some states offer a credit or exemption to SMBs that pay their unemployment taxes on time or early.
  4. It’s important to keep accurate documentation related to the separation in case an unemployment claim is disputed in a court hearing.
  5. Employees who voluntarily quit are typically ineligible for unemployment benefits  — unless they demonstrate “good cause,” like unsafe working conditions or harassment. Definitions of good cause vary by state. 

Disability Insurance

Disability insurance provides benefits to employees who are unable to work due to an illness or injury. Typically, these are short-term and not work-related — that’s where workers’ compensation insurance comes in!) Short-term disability insurance generally covers the first few months of a disability. If, at that time, the employee can still not return to work, they may need to then apply for Social Security long-term disability benefits.

The requirements for disability insurance vary by state, and not all states have state disability insurance laws or programs. There are only five states requiring short-term disability insurance: California, Hawaii, New Jersey, New York, and  Rhode Island. Puerto Rico also has mandatory insurance requirements. Even though the benefits vary by state, businesses that have employees should consider providing disability insurance coverage.

Here are five key points for SMBs to know about disability insurance: 

  1. Typically, disability insurance covers a percentage of an employee’s income rather than the full amount.
  2. Employees may have to provide medical documentation and wait for a certain period before receiving disability insurance benefits. 
  3. Disability insurance covers various disabilities that prevent employees from working, including illnesses and injuries. These can include pregnancy, orthopedic conditions with impairment, cancer diagnoses, and behavioral health conditions.
  4. Personal disability insurance policies are available for employees, but those who receive benefits from an employer plan may have to pay taxes on the portion of benefits derived from the employer. 
  5. Benefits may be taxable or tax-free depending on whether the premiums were paid with pre-tax or after-tax dollars. 

What about other insurance for SMBs?

In addition to workers’ compensation, unemployment, and disability insurance, small business owners should consider several other types of insurance coverage to protect their business. 

These can include:

  • general liability insurance to cover claims of bodily injury and property damage
  • property insurance to protect against damage to business property
  • business interruption insurance to cover lost income when a business is unable to operate
  • cyber liability insurance to protect against data breaches and cyber-attacks
  • professional liability insurance to cover claims of errors or negligence in providing professional services 
  • commercial auto insurance for business vehicles
  • and directors and officers liability insurance to cover claims against a company’s directors or officers

The types of insurance coverage needed may vary depending on the nature of the business and its operations, so small business owners need to assess their risks and consult with an insurance broker or agent to determine the most appropriate coverage for their business.

Use a broker or do it yourself?

As a small business owner, it is important to understand the insurance requirements that apply to your business. Failure to comply with these requirements can result in fines and other penalties and can leave your business vulnerable to financial losses in the event of an accident or injury. 

Overall, working with an insurance broker can help your small business make sure it has the right coverage while also saving you time and money.

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  • Learn more about insurance for small and medium-sized businesses. 


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