Small Business Insurance Needs and Types of Coverage (2025)

Running a small business means wearing a lot of hats—owner, accountant, HR manager. It’s no wonder small business insurance needs often slip down the list of priorities. 90% of small business owners aren’t sure they’re properly insured, leaving them open to serious financial risk.

Understanding insurance needs for small businesses helps protect everything you’ve built—your team, your assets, and your peace of mind. 

This guide breaks down the types of insurance a small business needs, what’s required, what’s recommended, and how to choose the best small business insurance for your needs.

TL;DR: Small business insurance needs

Here’s a quick summary of small business insurance needs, including legally required insurance and optional types that you should consider.

What is small business insurance, and why do you need it? It’s a financial safety net that protects your business from financial losses caused by liability, property damage, and employee injuries. Without coverage, a single incident—like a fire, theft, or injury—could derail your business.

Small business insurance requirements: Most states require workers’ compensation (for on-the-job injuries) and unemployment insurance (covers lay-offs), while a few states require disability insurance (for non-work injuries or illnesses).

Types of small business insurance needs:

• General liability insurance: Covers customer injuries, property damage, and lawsuits.
• Business owner’s policy (BOP): Combines liability and property coverage in one package.
• Commercial property insurance: Covers fire, theft, or damage to your physical assets.
• Professional liability insurance: Protects service providers against errors, missed deadlines, or client claims.
• Commercial auto insurance: Covers accidents and damage to business vehicles.
• Cyber liability insurance: Protects against data breaches, ransomware, and recovery costs.

LLC insurance: Even though an LLC limits your personal liability, you still need LLC insurance coverage for business risks, property damage, or client disputes.

How to choose business insurance: Start by listing your top risks and matching coverage to your assets and revenue. Compare multiple quotes, read exclusions carefully, and update coverage every year (especially when your business grows).

What insurance do I need for my business? Small business insurance needs by industry:

• Restaurants and bars: General liability, business owner's insurance policy, workers’ comp, and liquor liability.
• Retail: Business owner’s policy (BOP), commercial property, cyber liability, and general liability.
• Professional services: Professional liability and cyber coverage.
• Contractors: General liability, workers’ comp, and commercial auto.
• Home-based businesses: Add a home-business rider and general liability.

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What is small business insurance?

Small business insurance is a collection of policies designed to protect your business from financial loss caused by accidents, property damage, employee injuries, or lawsuits. Think of it as a safety net that helps you recover when something goes wrong.

Insurance helps cover legal claims, repairs, lost income, and assets (like equipment, inventory, or technology). This way, a fire, theft, or accident doesn’t drain your savings and put you out of business.

Small business insurance requirements: What's legally required

Most states require certain types of insurance coverage to protect employees and ensure workplace safety. Here’s what you’ll likely need:

Workers’ compensation insurance

• Who needs it: Any business with employees—full-time, part-time, or seasonal.
• What it covers: Pays for medical expenses, rehabilitation, and lost wages if an employee gets injured or sick on the job.
• Why it’s mandatory: Protects workers’ health and shields employers from costly lawsuits.
• State variations:
  
  • Most states require workers’ comp as soon as you hire your first employee, but Texas generally allows employers to opt out.
  • Some states exempt very small employers or specific job types (like farm workers or contractors).
• Average cost: About $30–$60 per month for small businesses (or about 1% of each employee’s total compensation).
• Consequences of noncompliance: You could face fines of over $10,000, jail time, stop-work orders, forced hiring freezes, and forced closures.
• Why it matters: One workplace injury can cost tens of thousands of dollars—coverage keeps your business and your team protected.

Unemployment insurance

• Who needs it: All employers with W-2 employees.
• What it covers: Provides temporary income to workers who lose their jobs through no fault of their own (like layoffs).
• Why it’s mandatory: Helps stabilize the economy and ensures employees have a safety net between jobs.
• How it’s funded: Employers pay federal (FUTA) and state (SUTA or SUI) payroll taxes.
• State variations:
  
  • Each state sets its own tax rate, wage base, and eligibility rules. Some states adjust your tax rate based on layoffs or claims history.
  • In Alaska, New Jersey and Pennsylvania, both employers and employees pay SUTA tax.
• Average cost: Usually 0.6%–6% of wages, depending on your state and experience rating.
• Consequences of noncompliance: Monetary penalties and interest, and sometimes even criminal prosecution.
• Why it matters: It’s legally required, protects your reputation as a fair employer, and ensures your business stays compliant.

Disability insurance (state-dependent)

• Who needs it: Employers in states with mandatory disability programs, like California, New York, New Jersey, Rhode Island, and Hawaii.
• What it covers: Replaces a portion of an employee’s income when they can’t work due to non-work-related illness or injury.
• Why it’s mandatory: Ensures workers have income protection outside of workers’ comp and helps reduce their financial stress.
• State variations:
  
  • California (SDI): Funded by employee payroll deductions.
  • New York (DBL): Employers must buy a policy or self-insure.
  • New Jersey: Shared funding between employer and employee for temporary disability insurance.
• Average cost: Around 1-3% of an employee’s annual salary, depending on state rules and coverage level.
• Consequences of noncompliance: You can face penalties and interest, a fine, or imprisonment.
• Why it matters: Supports employee well-being, helps retain staff, and keeps your business compliant with state labor laws.

Types of small business insurance: Recommended coverage beyond the basics

Even if you’ve met your small business insurance needs, most companies get additional coverage for peace of mind.

General liability insurance (Business liability insurance)

• What is it: Insurance that protects your business if you’re found legally responsible for injuries, property damage, or related claims.
• Who needs it: Almost every small business—especially retail, hospitality, or service types that interact with customers or visit client sites.
• What it covers: Bodily injury to customers or third parties, damage to someone else’s property, advertising injury (libel, copyright claims), and defective products claims.
• Average cost: $42/month or about $500/year, though your rate will depend on revenue, claims history, and risk profile.
• Recommended coverage: At least $1 million per occurrence for small businesses, but varies based on your business size, industry risk level, and other factors.
• Why it matters: Covers common accidents, like falls in your shop or your service work damaging someone’s property.

Business owner's policy insurance (BOP insurance)

• What is it: A bundled policy combining general liability and commercial property coverage under one package.
• Who needs it: Retail stores, offices, and small service firms that own or lease property and have inventory or equipment.
• What it covers: Liability claims plus damage or loss of your property, equipment, and sometimes business interruption.
• Average cost: Around $147/month, but can range greatly depending on location, risk, and other factors.
• Recommended coverage: $1–2 million per occurrence, depending on your business size, industry, and revenue.
• Why it matters: You get both liability and property protections in one policy—fewer gaps or overlaps and less paperwork.

Commercial property insurance

• What is it: Coverage for damage or loss of your physical assets—buildings, furniture, inventory, tools, and other owned property.
• Who needs it: Any business with physical assets (like furniture and inventory) on site—owned or leased—like retail shops, warehouses, or offices.
• What it covers: Fire, theft, vandalism, storm damage, and sometimes equipment breakdown.
• Average cost: Median cost of $67 per month, depending on location, building value, and risk factors like flood or fire zones.
• Recommended coverage: Enough to rebuild your location and replace equipment. Include “replacement cost” rather than “actual cash value” when possible.
• Why it matters: A single disaster (fire, vandalism) could shut down your operations. Without coverage, you’d have to pay out-of-pocket to rebuild or replace things.   

Professional liability insurance (Errors and omissions - E&O)

• What is it: Insurance that protects against claims arising from mistakes, oversight, or failure to deliver promised professional services.
• Who needs it: Consultants, agencies, freelancers, legal or accounting professionals, architects, designers, and other service providers.
• What it covers: Legal fees, settlements, and judgments if a client claims negligence, errors, or breach of contract in your professional work.
• Average cost: Around $61/month for small businesses, depending on your business type, size, location, and E&O claims history.
• Recommended coverage: Start with $500,000 to $1 million, but your clients may require you to have more.
• Why it matters: E&O protects you when a small error or missed deadline triggers a costly lawsuit or claim.

Commercial auto insurance

• What is it: Coverage for vehicles used for business, to protect you from liability, damage, or loss associated with business usage.
• Who needs it: Businesses with company-owned vehicles or employees who drive for work (like pickup trucks, delivery vans, sales fleets).
• What it covers: Vehicle accidents, liability, vehicle damage, bodily injury, and sometimes uninsured motorist.
• Average cost: Around $147/month, though this can vary widely by vehicle type, past claims, coverage amount, and your deductible.
• Recommended coverage: At least the state minimums, but often $1 million liability or more in high-risk usage.
• Why it matters: Without commercial auto insurance, you’re exposed to large liability and repair costs for business-use vehicles.

Cyber liability insurance

• What is it: Insurance that protects your business if data is lost, breached, or systems are hacked.
• Who needs it: Any business handling sensitive and private customer information, like email addresses, credit card data, or health records.
• What it covers: Breach response, notification costs, legal fees, forensic investigations, credit monitoring, ransomware payments, recovery costs, and civil claims.
• Average cost: Around $145/month, depending on data volume, business size, and risk exposure.
• Recommended coverage: $1 million in cyber coverage for small businesses, and more for high-risk businesses.
• Why it matters: Cyberattacks are growing. Cleanup and legal costs from a single breach often run into tens or hundreds of thousands of dollars.

Business insurance for LLCs: What entity structure means for coverage

What kind of insurance should an LLC have?

An LLC protects your personal assets, but not your business itself. Every LLC should consider these insurance types: 

• General liability insurance or BOP insurance, which bundles general liability and commercial property insurance.
• Professional liability insurance if you provide services or advice.
• Cyber liability insurance if you store customer data.
• Workers’ compensation if you have employees.
• Commercial auto insurance for vehicles used on the job.

Single-member vs. multi-member LLCs

Single-member LLCs often skip coverage, assuming they’re protected. But lawsuits can still target business assets.

Multi-member LLCs should confirm each partner is equally insured and listed on shared policies to prevent coverage gaps or conflicts.

Watch out for these common mistakes with LLCs

• Assuming your LLC structure replaces insurance
• Forgetting to update policies as your business grows
• Overlooking coverage for leased equipment, vehicles, or inventory

How to choose business insurance: Making the right decisions for your business 

Step 1: Assess your specific risks

List your top risks—like property damage, theft, customer injury, or cyberattacks—anything that could stop your business. 

A café may need fire and liability coverage, while an agency should focus on professional and data protection.

Step 2: Determine the coverage amounts you need

Match your coverage to the value of your assets and at least one year of operating revenue. Don’t go for the cheapest plan—too little coverage can be as risky as none. 

A licensed broker can help estimate the right amounts for your business and ensure it complies with labor laws.

Step 3: Get quotes and compare policies

Compare at least three insurers to find the best business insurance and coverage for your needs (and check reviews for responsive customer support). 

Use licensed brokers who understand small business risks and compare their policies alongside your small business insurance checklist.

Step 4: Read the fine print

Before signing, know what’s not covered ( like floods or employee theft) and ask about any unclear terms.

Also, pay attention to deductibles and claim limits. And make sure your employee safety policies help prevent avoidable claims.

Step 5: Reassess annually as your business grows

Update your coverage as your business changes—new hires, new locations, or new equipment. 

Add reviewing your insurance to your yearly planning checklist, along with updating your team management tools to keep coverage and operations in sync.

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Small business insurance needs by industry: What your specific business requires

Restaurants and food service

• Risks of managing a restaurant, café, or bar: Slips, fires, and food spoilage.
• Start with general liability, BOP insurance, and workers’ compensation insurance. 
• Add equipment breakdown coverage and liquor liability insurance if you serve alcohol.

Retail businesses

• Risks of operating a retail business: Customer injuries, theft, and damaged inventory.
• Get commercial property insurance or a BOP, plus general liability for slip-and-fall claims.
• Add cyber liability for POS and customer data protection.

Professional services (consultants, agencies, freelancers)

• Risks of professional services: Client lawsuits and data breaches.
• Get professional liability (E&O) and cyber insurance.

Contractors and construction

• Risks of construction and trades businesses: Job site injuries, property damage, and vehicle accidents.
• Get general liability, workers’ comp, commercial auto insurance, and coverage for tools and equipment.
• A thorough construction handbook can also help prevent avoidable mistakes. 

Home-based businesses

• Risks of home-based businesses: Broken business equipment, client injuries, and professional liability.
• Add a home-based business rider or small business insurance policy.
• Get general liability coverage if clients visit your home.

Protect your business and your team 

The cost of insurance and the different types of insurance a small business needs can seem intimidating and expensive, making you wonder if it’s all worth it. 

But business insurance isn’t just about risk—it’s about building long-term stability. The right mix of coverage will:

• Protect your business from financial loss.
• Match your specific business risks.
• Keep pace with your business as it grows and changes.

And when you’re ready to simplify operations beyond insurance, Homebase helps you with payroll compliance, scheduling, and team management—so you can focus on running your business instead of reacting to emergencies.

"I really love how Homebase just has you covered as a business owner. Over the years that Homebase helped me cutoff all the other websites, apps and software. Thank you for understanding what we need." — Brenda “DeeDee” Palmer, CEO, Family Bandz LLC

Try Homebase for free and see how easy it is to help your team and protect your time.

Common questions about small business insurance

What insurance is required for a small business?

Insurance required for a small business includes workers’ comp, unemployment, and sometimes disability insurance—all depending on your state and type of business.

What are the 5 P's of insurance?

The 5 Ps of insurance are person, property, peril, policy, and premium—the foundation of any insurance plan. Together, they explain who’s covered (person), what’s protected (property), what risks are included (peril), what the agreement says (policy), and what it costs (premium). 

What is the 50/100/50 rule for liability insurance?

The 50/100/50 rule for liability insurance means $50,000 bodily injury per person, $100,000 per accident, and $50,000 for property damage. It’s a standard minimum for auto liability coverage in many states. 

How much does small business insurance cost?

Small business insurance typically costs at least $500/year for general liability and $1700/year for a business owner’s policy insurance (BOP). The price depends on factors like your industry, number of employees, and coverage limits.

Do I need business insurance if I work from home?

Yes, you may still need business insurance if you work from home because standard homeowner’s or renter’s policies usually don’t cover business equipment, client visits, or professional liability.

When should I increase my business insurance coverage?

You should increase your business insurance coverage when your business grows (new hires, new locations, or new equipment). Each milestone increases your exposure and potential costs in an emergency.

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