Starting a small business: the insurance basics

A new business rarely fails for lack of insurance; it more often discovers, after a loss, that the insurance it assumed it had was personal and stopped at the point where the business started. A home policy excludes business liability and caps business property at a small sublimit. A personal auto policy excludes the car once it is used for deliveries or hire. Personal umbrellas stop at the same line. The first task of a new owner is to see that line clearly.

This guide is for a sole owner or a small partnership in its first year: a trades contractor, a consultant, a shop, a food business, a mobile service. It covers what the personal policies stop doing, which commercial policies replace them and in what order, who will demand proof and when, and where the timing goes wrong. It does not price anything; that depends on trade, revenue, payroll and location, and it is the last question rather than the first.

What your personal policies stop doing

The home policy is the first surprise. Its liability section excludes bodily injury and property damage arising out of a business, so a client who trips in your home office, or a customer hurt by a product you made in the garage, is not covered. Its contents section covers business property on the premises only up to a low sublimit and business property away from the premises up to a lower one, which does not stretch to a workshop of tools or a room of inventory. Some carriers offer a home business endorsement that lifts those limits for a small, low-traffic operation, and for many freelancers that is enough. For anything with employees, customers on site, or stock, it is not.

The personal auto policy follows. It generally covers occasional business errands in your own car, but excludes vehicles used for delivery, transport of goods for a fee, or carrying tools and equipment as the vehicle's main purpose, and excludes vehicles titled to the business. A van with a logo and a rack of ladders is a commercial vehicle to an underwriter regardless of what the title says. Health, life and disability coverage that came from a former employer ends with the job, and replacing those is a personal task that runs alongside the commercial list.

General liability: the policy everyone asks for first

Commercial general liability covers the business for injury to other people and damage to their property arising from its premises, its operations, its products and its completed work, and it pays the defence. It is the policy a landlord requires before handing over keys, a general contractor requires before a sub sets foot on site, and a corporate client requires before signing a contract. Each of them will ask for a certificate of insurance, a one-page summary issued by the agent showing the carrier, the limits and the dates, and most will also ask to be named as an additional insured, which extends your policy to cover their liability for your work. Read those requirements before binding: a lease that requires a higher limit than the quote carries is cheaper to fix before signing than after.

The limits are set per occurrence and in aggregate for the policy year. Landlords and contractors tend to specify both, and sometimes a products and completed operations aggregate as well. The policy is usually written on an occurrence form, meaning it responds to injury that happens during the policy period no matter when the claim is made, which is the right form for a business whose work stays in the world after it is finished.

Property and the business owner's policy

A business with a location, equipment, inventory or a build-out it paid for needs commercial property coverage for those things. For most small businesses the efficient vehicle is a business owner's policy, which packages general liability and property into one contract with one premium, and commonly includes business income coverage, which pays lost income and continuing expenses while a covered loss keeps the doors closed. Eligibility is by trade and size; contractors, restaurants with heavy cooking, and businesses with unusual exposures are often written on separate policies instead.

Two things to check on any property quote. Whether tenant improvements you paid for are covered as your property or assumed to be the landlord's, since the lease decides and the two policies must agree. And whether equipment breakdown is included, which pays for the failure of a walk-in cooler, a compressor or a server from an internal cause that standard property forms exclude.

Workers' compensation: the moment you hire

Workers' compensation pays medical costs and lost wages for an employee injured at work, without regard to fault, and in return the employee generally cannot sue the employer. Each of the four states sets its own rule for when an employer must carry it, and the rules differ on how many employees trigger it, whether family members and officers count, and how a sole proprietor or partner can elect in or out. Arizona, Nevada, Utah and Idaho all have their own thresholds and their own penalties for operating without it; write the mechanism into your plan and have us confirm the current rule for your state and structure rather than relying on a figure from a forum.

The trap is timing. Coverage should be in force before the first day of the first employee, not after the first payroll run, and a general contractor or client will want to see it on the certificate before work starts even where the state would not yet require it. Independent contractors you hire are a separate question: many states treat an uninsured subcontractor's injured worker as your employee for compensation purposes, and the fix is to require a certificate from every sub or to carry the coverage yourself.

The policies that depend on the trade

Beyond liability, property and workers' compensation, the rest of the list is decided by what the business does.

• Professional liability, also called errors and omissions, for anyone paid for advice, design, or a service where the harm is financial rather than physical: consultants, bookkeepers, designers, IT firms, agents of any kind. Usually written claims-made, so the retroactive date on the first policy is the date coverage begins for all future claims and must never be allowed to move forward.
• Commercial auto for any vehicle titled to the business or used for its work, and hired and non-owned auto coverage for employees running errands in their own cars.
• Cyber liability for any business that stores customer data or takes card payments; a merchant agreement often requires it.
• Inland marine for tools and equipment that leave the premises, since a property policy insures things at the listed address and a contractor's tools live in a truck.
• Surety bonds where a licence or a contract requires one; a bond is a guarantee to a third party, not insurance for the business, and a licence bond is often a condition of the trade licence itself.
• Liquor liability for any business that serves alcohol, which a general liability policy excludes.

A worked example

Suppose a mobile dog-grooming business starts in Boise with one owner, one converted van, and a plan to hire a second groomer in six months. The owner's personal auto carrier will not cover the van once it is fitted out and lettered, so a commercial auto policy on the van comes first, with, say, a $1,000,000 combined single limit because the van spends its day in residential streets. General liability follows, needed because a dog that bites another dog or a groomer who scratches a client's floor is the business's liability, and a client's homeowners association may ask for a certificate before the van is allowed in. Inland marine covers the clippers, dryers and tables in the van, perhaps $15,000 of equipment, which no property policy tied to the owner's home address would reach. Workers' compensation is bound the week before the second groomer starts, not after. Professional liability is not needed; the harm a groomer can do is physical and the general liability policy responds. The figures are illustrative and the order is the point: each policy is bound before the exposure it covers begins.

Order and timing traps

A sequence that keeps the business ahead of the people who will ask for proof.

• Form the entity first. Policies are issued to a named insured, and a policy in your personal name does not cover a limited liability company formed a month later without an endorsement.
• Read the lease, the client contract and the general contractor's requirements before requesting quotes; the limits and additional insured wording they demand set the specification.
• Bind general liability before signing the lease or starting the first job, since the certificate is due at signing, not at move-in.
• Bind workers' compensation before the first employee's first shift, and collect certificates from every subcontractor before they start.
• For claims-made policies, note the retroactive date and never let a renewal or a carrier change reset it; if you change carriers, the new policy must carry the original date or the old one needs tail coverage.
• Diary the renewal. A first-year policy is often audited at expiry against actual revenue and payroll, and a large gap between the estimate on the application and the audited figures produces an additional premium bill.

How to use this

Bring the entity paperwork, the lease or contract with its insurance section, a list of vehicles and equipment, the hiring plan and a rough revenue estimate. From that we specify what the business actually needs, in the order it needs it, and price it across the carriers we represent in Arizona, Nevada, Utah and Idaho. If a home business endorsement and a certificate of insurance are all a one-person consultancy needs this year, that is what we will recommend, and the rest waits until the business grows into it.