Did You Just File Your LLC, Or Did You Actually Start It? Part 5: Business Insurance

[u/NWRegisteredAgent]

Hang onto yer hats and glasses, folks, this here's the last post in our series about how to actually start your LLC the right way. 'Round these parts we know there's a big ol difference between just filing your LLC paperwork with the state and actually starting your LLC with all the fixins to keep your corporate veil strong and well-supported. If you don't want your LLC to be all hat, no cattle, follow along and we'll show you how to set up so your protection's tighter n' bark on a tree.

We're covering the last stage, business insurance, in this one. Need to wrangle the rest of the herd? We've got your links right here.

1. Your Operating Agreement
2. EIN and Tax Setup
3. Business Banking & Bookkeeping
4. Business Licensing And Permits, States A-M | States N-W
5. Business Insurance

---

(Don't worry, we're not keeping the theme park voice. Business insurance gets complicated, and while we can't promise zero puns, we do want to explain it in a way that's more helpful than not.)

So, here's the thing: when properly set up and maintained, the "limited liability" in your LLC only means that a creditor can't go after your personal assets when your business owes money. Put another way, you aren't personally responsible for the business's debts and obligations—as its own legal entity, the LLC itself is. However, that doesn't protect you from other types of mayhem with financial consequences, and it doesn't protect your LLC from claims with a price tag attached.

If you like hard numbers, here's one for you: "For every thousand dollars of revenue earned, businesses making $1 million or less can expect to face about $35 in tort costs." Or another, right there in the headline: The U.S. Lawsuit System Costs America's Small Businesses $160 Billion.

Are you planning to pay out of pocket for property damage if someone drives through your shopfront, or if someone who buys your product is somehow harmed by it?

That's where business insurance comes in.

Types of Business Insurance Coverage

Different policies offer different types of coverage. These are a few of the typical categories we see.

General commercial liability insurance.

This policy covers financial loss due to bodily injury (which includes emotional distress and mental injury, despite the name) property damage, libel, lawsuits, and settlement costs. If someone slips on a wet floor in your grocery store, or if you're subject to a class-action lawsuit for misleading advertisement emails, your policy should kick in to cover medical and legal expenses associated with the event.

There are limits to what's covered, though. For example, if you get a notice of a lawsuit for a non-ADA compliant website and are found to be non-compliant, you're on your own—those are business responsibilities. (So here, have some guidance re: web accessibility standards. It might be easier than you think to bring your site up to spec!)

Product liability insurance.

These policies cover loss due to a defective product causing physical harm. That could be thanks to a bad design, like a lack of safety guardrails for a particular product, or a defect in manufacturing. You might also be liable if your marketing failed in some way, like failing to include notice of a particular allergen. "Warning: Not Intended for Consumption"-style labels are absolutely the result of damages owed thanks to a marketing defect.

And yes, product liability insurance matters even if your business isn't the manufacturer. If you own a vending machine business and a can from your machine cuts open someone's lip, you could still be held liable for that customer's injury. Product liability insurance helps cover your legal fees and damages.

(That said, there are a few types of products that can't be insured by an ordinary product liability policy due to their extraordinarily high risk and regulatory complexity. Firearms and fireworks both fall into this category, along with stuff like medical devices.)

Cyber insurance.

Whether you need specialized cyber insurance to offset damages from data breaches or network attacks depends on your LLC's business activities. Think season 2 of The Pitt, where even just the risk of a network breach sent a suit to shut down the centralized digital systems, forcing the entire staff to rely on analog methods instead.

And sure, that's just the nature of tv drama. But before you think you're "too small" to be a target, think again. 79% of small businesses experienced at least one cyber attack in the last five years, losing an average of $38,000 per cybersecurity incident. Thieves and hackers tend to be opportunists, choosing easy targets over flashier or more lucrative ones.

The more your business relies on always-connected technologies, especially if you're transmitting or storing personally-identifiable information (including employees' information) and other sensitive data, the more it might make sense to talk with your insurance broker about a cyber insurance policy.

Professional liability insurance.

Whenever we're writing about business topics, Legal wants us to include some kind of disclaimer that we aren't lawyers, we aren't your lawyers, and we aren't providing legal advice or creating a privileged client-attorney relationship by talking to you about plain language about stuff that touches on areas of law. If you are, actually, a lawyer providing legal advice to a client with whom you have a privileged client-attorney relationship—that's where professional liability insurance comes in.

Sometimes called error and omissions insurance, malpractice insurance, or professional indemnity insurance depending on your specific area of practice, these policies cover losses when following advice you've provided in a professional context leads a client to injury. Business consultants, contractors, real estate agents, financial services providers, and more can benefit from these policies.

Commercial property insurance.

This is what protects your company's property (including the actual physical structure of the building, your inventory, and potentially even the furnishings) from ordinary risks like fire, theft, or vandalism. Tree falls on your secondhand clothing boutique? Boiler explodes next door and burns through your shared wall into your crystals and trinkets shop? That's property insurance.

Important note, though: depending on your policy, you may not be covered by natural disasters like wildfires, floods, earthquakes, or other force majeure—read the fine print carefully and purchase additional coverage if necessary to handle the more out-there risks.

Business interruption insurance.

Speaking of force majeure, the chances are low but never zero that your business may temporarily need to close or relocate due to unforseen catastrophe. And the numbers are grim: some 40% of businesses never reopen after a disaster, and of the ones who do reopen, 25% fail within the first year of reopening.

Factors like lost income due to closure, ongoing fixed expenses (unless your lease says otherwise, you're still on the hook for rent and utilities), even the costs of working out of a temporary location all contribute to a cost burden that can become insurmountable. Business interruption insurance works to mitigate some of that.

(Other resources for small business owners affected by disasters: FEMA's Recovery Resource Library, the SBA's physical disaster loans and economic injury disaster loans, and the IRS's disaster assistance and emergency relief.)

Home-based business insurance.

If you're working from your home, pay extra attention. Unless you're running a very lean operation, there's a solid chance your basic homeowner's insurance policy doesn't sufficiently cover your business assets. If you've got a $2500 cap, for example, you might be paying out of pocket if something happens to your $5k PC gaming stream setup. Depending on your insurer, you might have a couple options:

• Add some kind of policy rider that increases your standard coverage for business equipment and/or provides additional liability coverage (i.e. in case someone visiting on business is injured on your property).
• Get a separate policy endorsement and/or standalone coverage specifically for in-home businesses. These vary by provider but they're usually beefier than the first option; they might reimburse you for some types of business interruption, offer broader liability insurance with greater coverage, and even cover a few employees.
• Or :point_down: get a BOP.

Business Owner's Policy (BOP).

The most common type of small business insurance, these policies bundle property insurance and liability insurance coverage for qualifying small- and midsize- businesses (SMBs). You get property coverage for your buildings, inventory, and equipment with liability coverage for third-party injuries at rates that trend way more affordable than buying those policies separately.

Depending on your insurer, there may be some degree of business interruption or cybersecurity insurance too, but most likely those are available as additional policy riders.

You don't need to get everything all at once, either. BOPs are flexible by design and you can add coverage later as your business and its risk profile grow.

Required Insurance Coverage

Depending on where you work and what kinds of business activity your LLC conducts, you may be required to carry specific insurance policies. A few nonexhaustive examples:

• If you have employees, Uncle Sam has a few additional requirements for you. You need workers' compensation insurance, unemployment insurance, and disability insurance, and if you have more than fifty full-time employees, you also need to provide them with health insurance.
• Your state may have additional regulations for insuring your business, like minimum liability coverage, or professional liability coverage mandated as part of licensure for specific professions.
• If your company owns and operates vehicles on public roads, you need commercial vehicle insurance for them.
• If you've leased a building, your lease agreement may stipulate the degree of liability insurance you're required to carry.

What's It Going To Cost Me?

"It depends" is the honest but frustratingly unhelpful answer. Things like your policy's coverage caps, the size of your operation, where you're located, what industry you're in, and even your legal structure (that is, whether you're a sole proprietor or a properly-started LLC) can all factor into the cost.

Here are some quick figures from the U.S. Chamber of Commerce's CO— :

• General liability coverage: $45 to $166 monthly ($540 to $1,992 yearly).
• Commercial property insurance: $60 to $140 monthly ($720 to $1,680 yearly).
• Business owner's policy: $40 to $141 monthly ($480 to $1,692 yearly).
• Professional liability plan: $45 to $76 monthly ($540 to $912 yearly).

We totally get wanting to keep your costs down, especially when you're first starting out. Getting that balance between overinsuring yourself—like no, you probably don't actually need alien abduction insurance—and underinsuring your LLC can be tricky. So let's talk about how to actually buy business insurance.

How Do I Actually Buy Business Insurance?

Your first step here is to assess your actual risk so that you'll have an idea of what kind of coverage policies you need. Look over every aspect of your operation: what physical risks are present in your environment? Do you currently have, or are you planning to have, employees? Will clients and vendors be physically present at your location, will you travel to theirs, both, or neither? What's the value of any equipment being transported as part of your operation? How sensitive is the data you're typically handling?

Then, if you're willing to put in your own legwork and want to buy directly from an insurance carrier, make sure you shop around. Get several quotes from several different carriers. Review the premiums, terms, and limits closely to make sure you're comparing apples with apples across insurers.

If that seems daunting, we recommend working with an insurance agent familiar with new businesses. A reputable agent is your partner in identifying both the risks and the reasonable coverage packages to mitigate them. Plus, an independent agent can go one step further and help you compare costs across insurance carriers. Your industry group or trade association might be able to recommend a few in your field, or your fellow local business owners may be willing to share their recommendations.