The Small Business Insurance Guide: What You Actually Need (And What You Can Skip)

A single lawsuit can bankrupt a small business. A customer slips on a wet floor, an employee gets injured on the job, a cyber attack exposes customer data—any of these scenarios can generate legal fees and settlements that dwarf your annual revenue.

Yet many small business owners either skip insurance entirely or buy coverage they don't need while leaving critical gaps exposed. The average small business pays about $1,300 annually for insurance, but that number means nothing if you're buying the wrong policies.

This guide cuts through the confusion. You'll learn exactly which types of insurance your business actually needs, what each policy covers (and doesn't cover), how much you should expect to pay, and which providers offer the best value for small businesses.

The Four Core Insurance Types Every Business Should Consider

1. General Liability Insurance

What it covers: Third-party bodily injury, property damage, and personal/advertising injury claims.

Example scenarios:

• A customer trips over a cord in your office and breaks their arm
• Your employee accidentally damages a client's property while on a job site
• You're sued for slander after a negative comment about a competitor

What it doesn't cover: Your own injuries, damage to your property, professional mistakes, or auto accidents.

Average cost: $42 per month ($500 annually)

Who needs it: Virtually every business. Even if you work from home, client visits or offsite work create liability exposure. Many commercial leases and client contracts require proof of general liability coverage before you can sign.

2. Professional Liability Insurance (Errors & Omissions)

What it covers: Claims arising from professional mistakes, negligence, or failure to deliver promised services.

Example scenarios:

• An accounting error causes a client to face IRS penalties
• A consultant's recommendation leads to financial losses
• A contractor's design flaw requires expensive corrections
• You miss a critical deadline that costs your client a deal

What it doesn't cover: Intentional wrongdoing, criminal acts, or claims covered by general liability.

Average cost: $61 per month ($735 annually)

Who needs it: Any business providing professional services, advice, or specialized expertise. Consultants, accountants, architects, IT professionals, marketing agencies, and healthcare providers should all carry E&O coverage. Some states require it for licensing.

3. Workers' Compensation Insurance

What it covers: Medical expenses, disability benefits, and lost wages for employees injured on the job. Also includes death benefits for fatal workplace accidents.

What it doesn't cover: Independent contractors (though misclassification can create liability), intentional self-injury, or injuries occurring while commuting to work.

Average cost: $80 per month ($963 annually), though costs vary significantly by industry and claims history.

Who needs it: Almost every state requires workers' compensation as soon as you hire your first employee. Requirements vary—New York mandates coverage for all employees, while Florida only requires it for businesses with four or more employees.

Critical note: Four states (North Dakota, Ohio, Washington, and Wyoming) require businesses to purchase workers' comp exclusively from a state fund. All other states allow private insurance.

4. Business Owner's Policy (BOP)

What it covers: A BOP bundles general liability with commercial property insurance and often includes business interruption coverage.

Why it's valuable: Bundling typically costs less than buying policies separately. A BOP protects against the most common small business risks in one package.

What it doesn't cover: Professional liability, workers' comp, commercial auto, or flood/earthquake damage.

Average cost: $57 per month ($684 annually)

Who needs it: Any business with physical assets—equipment, inventory, office space—should consider a BOP. It's particularly cost-effective for retail stores, restaurants, professional offices, and service businesses.

Specialized Coverage You May Need

Beyond the core policies, certain businesses require additional protection:

Commercial Auto Insurance

Required if: Your business owns vehicles or employees drive personal vehicles for work purposes.

Average cost: $147 per month ($1,762 annually)

Key consideration: Personal auto insurance typically excludes business use. If an employee causes an accident while making deliveries or traveling to a client site, your personal policy may deny the claim.

Cyber Liability Insurance

Covers: Data breach notification costs, legal fees, regulatory fines, and credit monitoring services for affected customers.

Average cost: $56-149 per month, depending on industry and data volume.

Who needs it: Any business that stores customer data electronically. State data breach laws require notification of affected individuals—cyber insurance covers these costs plus potential lawsuits.

Commercial Property Insurance

Covers: Damage to your business property from fire, theft, vandalism, and certain weather events.

Average cost: $67 per month ($800 annually)

Key exclusion: Standard policies exclude flood and earthquake damage. If you're in a high-risk area, you'll need separate coverage.

Umbrella Insurance

What it does: Provides additional liability coverage above your other policy limits.

When you need it: If a lawsuit exceeds your general liability or auto policy limits, umbrella coverage kicks in. Consider it if your business faces significant liability exposure.

What's Required by Law?

Insurance requirements depend on your state, industry, and business structure:

Coverage Type	Legal Requirement
Workers' Compensation	Required in almost all states once you have employees
Commercial Auto	Required for business-owned vehicles in all states
Professional Liability	Required for certain licensed professions (doctors, lawyers, accountants)
General Liability	Usually not legally required, but often required for licensing, leases, or contracts

Check your state: Requirements vary significantly. Visit your state's Department of Insurance website or the SBA's insurance guide for specific requirements.

How Much Should You Pay?

Average costs for small business insurance in 2025:

Policy Type	Monthly Cost	Annual Cost
General Liability	$42	$500
Professional Liability	$61	$735
Workers' Compensation	$80	$963
Business Owner's Policy	$57	$684
Commercial Auto	$147	$1,762
Commercial Property	$67	$800
Cyber Liability	$56-149	$672-1,788

Factors that affect your premium:

• Business size: Each additional employee typically increases costs 5-10%
• Industry: High-risk industries (construction, healthcare, manufacturing) pay significantly more
• Revenue: Businesses over $1 million in revenue see 15-25% higher premiums
• Claims history: Previous claims can substantially increase rates
• Location: State regulations and local risk factors affect pricing
• Coverage limits: Higher limits mean higher premiums

Top Insurance Providers for Small Businesses

Based on coverage options, customer satisfaction, and value:

The Hartford: Rated A+ by AM Best. Excellent for businesses needing comprehensive coverage options. Strong customer service reputation.

NEXT Insurance: Digital-first insurer covering 1,300+ business types. Fast online quotes and competitive pricing. Good for straightforward coverage needs.

Simply Business: Aggregates quotes from multiple carriers. Useful for comparing options quickly.

Nationwide: Strong financial stability and broad coverage options. Good for businesses wanting a single provider for multiple policy types.

Thimble: Flexible, on-demand coverage. Useful for businesses with varying insurance needs or seasonal operations.

Hiscox: Specializes in professional liability. Good choice for consultants, freelancers, and professional service firms.

Common Insurance Mistakes to Avoid

Underinsuring to Save Money

Minimum coverage limits might satisfy legal requirements but leave you exposed. A $1 million general liability policy sounds like a lot until you're facing a serious lawsuit with legal fees that can easily reach six figures.

Assuming Personal Policies Cover Business Activities

Your homeowner's insurance doesn't cover a client injury during a home office meeting. Your personal auto insurance may deny claims for business-related driving. When business activities are involved, you need business coverage.

Skipping Professional Liability

Many business owners assume "I'm careful, I won't make mistakes." But professional liability covers not just actual errors—it covers defending against claims, even frivolous ones. Legal defense costs alone can justify the premium.

Not Reviewing Coverage Annually

Your insurance needs change as your business grows. Adding employees, expanding services, or moving to a new location can all create coverage gaps. Review policies annually and update as needed.

Ignoring Cyber Coverage

Data breaches affect businesses of all sizes. Small businesses are actually attractive targets because they often lack sophisticated security. The average cost of a data breach for small businesses ranges from $120,000 to $1.24 million—far more than annual cyber insurance premiums.

Misclassifying Workers

If you treat workers as independent contractors but they're legally employees, you're exposed to workers' compensation claims without coverage. Proper worker classification protects you from significant liability.

How to Buy Small Business Insurance

Step 1: Assess Your Risks

List your business activities, assets, and potential liability exposures. Consider:

• Do you have employees?
• Do you own business property or equipment?
• Do you provide professional advice or services?
• Do you use vehicles for business purposes?
• Do you store customer data?

Step 2: Understand Legal Requirements

Check your state's requirements for workers' compensation and other mandatory coverage. Also review any licensing requirements, lease terms, or client contracts that specify insurance minimums.

Step 3: Get Multiple Quotes

Insurance pricing varies significantly between providers. Get quotes from at least three companies. Online platforms like Simply Business can aggregate quotes from multiple carriers.

Step 4: Compare Apples to Apples

When comparing quotes, ensure you're looking at:

• Same coverage limits
• Same deductibles
• Same policy exclusions
• Same coverage territories

Step 5: Review Policy Details

Before purchasing, read the policy carefully. Understand:

• What's covered and what's excluded
• Coverage limits per occurrence and aggregate
• Deductible amounts
• Claims reporting requirements
• Policy renewal terms

Step 6: Work with a Licensed Agent

For complex coverage needs, consider working with an independent insurance agent who can access multiple carriers and help structure appropriate coverage.

Making Insurance Affordable

If premiums seem steep, consider these strategies:

Bundle policies: A BOP costs less than buying general liability and property coverage separately.

Increase deductibles: Higher deductibles lower premiums, but ensure you can afford the deductible if you need to file a claim.

Pay annually: Many insurers offer discounts for annual payment versus monthly installments.

Maintain safety standards: Good safety records and risk management practices can qualify you for lower rates.

Shop around regularly: Insurance markets change. Shopping every 2-3 years can reveal better options.

Start with essential coverage: If budget is tight, prioritize legally required coverage and general liability, then add additional policies as your business grows.

Taking Action

Don't wait for a claim to discover you're uninsured or underinsured. The cost of insurance is minor compared to the financial devastation of an uninsured loss.

Start by identifying your legal requirements and highest-risk exposures. Get quotes from multiple providers. And review your coverage annually as your business evolves.

The peace of mind alone is worth the investment—but the real value comes when you're protected from the unexpected events that can otherwise destroy everything you've built.

Track Your Insurance Expenses Accurately

Managing multiple insurance policies means tracking premiums, deductibles, and claim reimbursements across your financial records. Accurate bookkeeping ensures you're capturing all deductible business expenses and maintaining proper documentation.

Beancount.io provides plain-text accounting that gives you complete transparency over your business expenses, including insurance costs. Track every premium payment and categorize your coverage expenses with auditable precision. Get started for free and take control of your business finances.