Insurance is a tricky topic, especially when it comes to business insurance. The products are complex, and it’s easy to feel intimidated by the jargon.
On the other hand, insurance is an important way to protect your business, and if you ever end up relying on commercial insurance, it can be the difference between an unfortunate situation and a total disaster.
Getting the lay of the insurance landscape before you sit down to talk to a professional can help you both understand the process, and understand which insurance products your business might need as it grows.
And if you’re still feeling intimidated at the thought, remember: When it’s used correctly, commercial insurance is just another product you buy, and what you need depends entirely on your business. And you already know and understand your business.
So let’s dive in.
Who needs commercial insurance?
One of the big fears when you don’t understand financial products is that you’re going to be sold something you don’t need, simply because you don’t understand what you’re buying.
While there’s no definitive one-size-fits-all answer to whether you need business insurance, or which kinds, we spoke to Stephen Rischall, CFP®, a financial planner for business owners and entrepreneurs at 1080 Financial Group, to find out who might need to think about commercial insurance.
“If you’re a small business owner and you have revenue coming in from the products and services you sell, you should think about commercial insurance,” says Stephen. “When your business grows and starts to bring in significant revenue, that's when you really need to think about the next level of protection.”
Revenue is a good way to evaluate if you’re ready to think about commercial insurance, but there are other factors to consider as well.
Insurance, at its core, is a way to minimize risks in your business.
Insurance, at its core, is a way to minimize risks in your business, and there are some risks that wouldn’t be covered through your existing, personal insurance policies—like protecting your inventory in a worst-case scenario.
“Whether you have all your inventory in your garage, or you have an office or a warehouse somewhere, you need to make sure that inventory is insured,” says Stephen. “Your homeowner’s policy is not going to insure inventory sitting in your garage if it’s for your business.”
Insurance isn’t the only way to handle those risks, so at small levels of inventory and equipment, it becomes a judgement call. Could you really replace all of your inventory if it was lost in an accident, or get new equipment if yours was stolen? We can’t answer that for you, but it’s an important question to ask.
It’s also important to bring up your business with your personal insurance policies. If you run a business out of your home, it might not be covered, but it could impact or change your policies anyways. A good rule of thumb is that when anything major changes (like starting a business from home) you should tell your insurance broker.
In some cases, insurance is clear-cut
At certain stages of your business, you’ll know without a doubt that you need commercial insurance, because you’ll be faced with contractual obligations to buy it. If you’re working with a fulfillment centre or selling to a major retailer, they might specify you need a certain amount of liability insurance, property insurance, or other types of commercial insurance.
Whether it’s a clear-cut choice or not, if you decide you need commercial insurance, your next step is to figure out where and how to buy it.
Scaling up to work with big-box retailers?
There's a lot you'll need to know ahead of time, so we spoke with a business owner who's been through it to help guide you on your way.Read more about working with retailers
How do I buy commercial insurance?
Buying insurance is one of those purchases that can be much easier with the help of a trusted professional. While it can be tempting to apply a bootstrapper mentality to your insurance purchases, Stephen shares that it may not even save you money in many cases.
“In general, if you got a policy online, and then you went to a broker and got the exact same policy, the cost to you should be the same. The difference is the agent will get a commission of a portion of your premium, but if you didn't work with an agent, then the whole amount just goes to the insurance company.”
There are some places where brokers can add additional charges on top of the products they sell, called “broker fees,” so it’s important to do your research and understand how insurance sales are regulated in your area. However, even if additional fees are legal in your area, your broker has to clearly disclose their commission structure and fees in writing.
It’s important to do your research and understand how insurance sales are regulated in your area.
To find the right insurance broker for you, it’s time to do a bit of legwork.
- Ask business owners and mentors in your field for recommendations. When you’re asking for recommendations, your best sources will be people who have been through a similar stage of business, and in a similar line of business. If you can’t find anyone who fits the bill, you can expand to your broader network of business owners for recommendations.
- Find companies that specialize in commercial insurance. Ideally, you want someone who really understands the products and the scope of what you need, so the person who sold you personal insurance like your car insurance likely isn’t the best fit.
- Ask key questions as you interview potential brokers. You’ll want to find out if they’ve worked with and understand the needs of ecommerce businesses, and whether they can only sell products from certain companies. You’ll be able to find the best options if your broker can provide quotes from multiple companies, not just one or two.
What are the common types of commercial insurance?
Once you’ve found a broker to work with, they’ll sit down with you to look over your business and help you figure out where your business is exposed to potential risks, and help you find the right amount of insurance coverage to mitigate those risks.
However, being an informed consumer of financial products is important, especially when it comes to your business.
For ecommerce businesses, especially ones who are just getting started, here are three types of insurance that you’ll need to consider—although there are others you’ll need as well, and your broker will be able to help you determine which ones are a fit for you.
When you get homeowner’s insurance, it protects you if someone gets injured while they’re on your property—that’s an example of liability insurance.
When it comes to your business, liability insurance usually covers you in case someone gets injured while using your product, no matter where they are. And before you think that no one could possibly hurt themselves using your products, Carl Niedbala, Co-founder and COO at Founder Shield, shared that liability coverage is important for almost every type of product business.
“Liability insurance protects you if a third party gets injured either by interacting with your people at your company or your product. The classic example is a young child choking on a component part of the plastic toy that you sell,” says Carl.
But it doesn’t just apply to toys and products with small parts.
“Another prime example would be an allergic reaction to whatever material you’re using in your clothing, or an injury from certain makeup components interacting badly with someone's skin,” says Carl.
Liability isn’t something that’s limited by product category. Even if you think there’s no basis for someone claiming they were harmed by your product, that’s not a good reason to skip liability insurance.
“The thing you have to remember about this is that even if a legal claim is not well-founded, someone still has to pay for those legal fees for the claimant to go away, right? That's where insurance kicks in,” says Carl.
How is liability insurance priced?
Your next question is probably “but how much is this going to cost me?” Liability insurance is usually priced based on your volume of sales and the products you’re selling. Higher risk products like fireworks are probably going to come with a higher liability insurance price tag, as will a higher volume of sales.
If you sell physical products, you also need to insure those physical products just in case something goes wrong—but property insurance doesn’t just cover inventory.
“Property insurance covers any theft, loss, partial or complete damage or destruction of your business inventory and business property,” says Carl. “Just picture if you’re doing $30,000 in sales, if your house burns down and all of your inventory is in there, that's a devastating loss. That's where property insurance kicks in.”
In that case, property insurance would also cover any equipment that was damaged as well, and cover the full cost of replacing those items.
It’s important to note that your existing homeowner’s policy would cover your personal items, but likely won’t cover anything related to your business. If you run your business from home, it’s important to have both aspects covered unless you could replace all of the inventory and equipment out of pocket.
The other important thing to remember is that your property insurance will cover the replacement cost of your items, not the retail value.
“It’ll cover whatever you paid to get that property. You just need to show proof of the replacement cost. A classic example we deal with all the time is where people have laptops for their business and someone breaks into their office or home and steals the laptop. If you have a 2016 Macbook, you can't buy a 2018 Macbook Pro. Insurance will cover the cost of replacing what you have.”
Luckily, since part of bookkeeping for your ecommerce business is keeping accurate records of what you spent to acquire your inventory and your equipment, you should have no problem supporting any insurance claims that come up.
How is property insurance priced?
When you buy property insurance, your broker will work with you to tally up the total value of the property you’re insuring. That number is the primary variable that will impact your insurance premiums, so you’ll pay less to insure $5,000 worth of inventory and equipment than you would to insure $50,000.
Transit insurance (also called inland marine insurance)
While the first two types of insurance have some grounding in concepts you might be familiar with from your personal policies, transit insurance or inland marine insurance is a type you’d only need in a business context—and only in fairly specific contexts as well. However, it’s a type of insurance that can become highly relevant to ecommerce and physical product businesses as they grow.
Let’s say you’ve got a big batch of inventory, and you’re sending it to a fulfillment warehouse to streamline your shipping process.
You send it out, and you’re happy to have checked that item off of your to-do list, but the next day you get word that there was an accident en route, and 75% of the inventory that you shipped is damaged beyond repair.
Inland marine coverage protects your inventory when it’s being shipped in large batches like that. It’s not something every business will need, but if you do, it’s important coverage to have.
“If you’re getting large batches of inventory from distributors first, or if you’re shipping large batches out to a warehouse, inland marine insurance protects it en route. If your inventory is in transit and there's no other contractual protection, it’s a risk you need to manage.”
The key words there are contractual protection. When you’re working with suppliers, warehouses, or distributors, as basic as it sounds, you need to read and understand your contracts to figure out where you’re covered by their insurance, and where you aren’t.
“Generally speaking, warehousing companies will require their customers to get their own coverage,” says Carl. “It's very rare that I see a warehouse say ‘Yeah, we'll totally cover your property, no need to buy your own insurance.’”
Knowing where the gaps are in your coverage can be a make-or-break piece of information as your business scales. This applies broadly to all contracts you have, because there are terms involved in all contracts that will determine who is liable if something goes wrong. If it’s you, that’s a case where an insurance broker can help you find coverage to manage that risk if you need it.
They’ll also be able to work with you to determine other coverage you need as an ecommerce business. Founder Shield, which works on insurance for ecommerce companies, lists 11 different types of insurance you may need to consider.
Smart business planning takes risk into account
While buying insurance might not seem like a strategic activity, working with a broker who understands the specifics of your industry can be a good time to sit down and plan for the next phase of your business.
“Going through the insurance process is actually very good for young companies, because the questions that are asked in the process are important ones that aren’t always prioritized, like ‘What's the model? What's our future plan?’,” says Carl. “It's actually a healthy process look at your company from a risk management perspective, even at an early stage.”
There are always going to be some risks involved in running a business, but identifying and mitigating them is something that you do on a daily basis as an entrepreneur. Working through the process of buying commercial insurance with an informed broker can help you find and manage risks you might not have planned for in the first place, and take those worries off your plate.
There’s a big difference between putting your all into a business and realizing it won’t work out, and shutting your doors because of a preventable issue with damaged inventory, after all.
This post is for informational purposes only, and does not constitute legal or financial advice.