What Is Commercial Insurance?
January 25, 2023
Bad things happen to good companies. A fire destroys a manufacturer’s equipment, and it can’t ship products for weeks. A healthcare system’s computer database is hacked, leaving millions of records vulnerable. A usually dependable driver is distracted momentarily, resulting in three totaled vehicles, including the company’s new truck with its name on the side in big letters. When these things happen, they can carry high costs and trigger lawsuits.
What Is Commercial Insurance?
Commercial insurance, also known as business insurance, protects businesses, owners, executives and other key stakeholders from the financial repercussions of events such as fires, severe weather, theft, data breaches, lawsuits brought by employees, or someone getting hurt. For a fee, insurance companies promise to reimburse you—at least in part—if you suffer insured losses from covered perils.
The terms “commercial” and “business” are generally interchangeable. Be aware, however, that there could be situations in which specific terms are used for legal reasons or to describe specific types of coverage offerings. Always ask your insurance broker or provider to clarify commercial insurance definitions if you are uncertain.
How Does Commercial Insurance Work?
Coverage for companies is “written” by insurance companies that specialize in many types of commercial insurance. Let’s use fire and property insurance as an example. When a facility is built or purchased and the owner seeks coverage, an insurance company studies the building’s size, location, construction, intended use, contents and other details. It reviews measures taken to prevent loss, such as the quality of the building’s sprinkler system. It uses computer models to determine how likely a fire might be and the cost of replacing the structure and contents.
Based on the data, the insurance company sets an annual fee (known as a “premium”) for which it agrees to cover the cost of any damages. The building owner, or insured, agrees to set aside money (known as a “retention” or “deductible”) to pay for a portion of the loss. A higher retention can possibly reduce the amount of the premium.
Insurance brokers work with their insured clients to identify and address risks, a process known as risk management, which can result in lower premiums and, in some instances, better access to insurance markets and more competition for their business. For example, a company with effective cybersecurity controls and a thorough, up-to-date cyber incident response plan will be in a better position to mitigate cyber risks. It also will be more attractive to insurers than those without adequate controls. (Read “What Is Cyber Insurance?” to learn more.)
Another example of reducing the cost of commercial insurance through risk management is employee safety programs. When companies invest in and prevent on-the-job accidents, they improve their experience modification rate (MOD), which can positively impact their workers’ comp premiums.
Working with a Trusted Partner
Find a trusted commercial insurance partner to attain the greatest benefits of business insurance. Work together as a team to limit your company’s risks and make sure you are properly covered. Read “Smart Strategies for Selecting Your Next Broker” to learn how to find the right partner.
What Are Some Types of Commercial Insurance and What Do They Cover?
Business insurance can cover risks such as property damage, lawsuits against board members, cyber threats, accidents involving company-owned vehicles, kidnap and ransom, and more. Experienced brokers help their clients understand all their business risks and the best ways to address them—whether that involves purchasing insurance or some other option.
Common types of commercial insurance include the following.
Commercial Property Insurance
Like your home’s property insurance, insurance for businesses helps protect the value of facilities and contents from fires, storms, theft and other potentially devastating events. These commercial property policies generally do not cover damage from floods or earthquakes.
Commercial General Liability Insurance
If someone claims your business somehow caused them a bodily injury or damaged their property or reputation, they can sue you for damages. Commercial general liability coverage protects you from these risks.
Workers’ Compensation Insurance
Required in most states, workers’ compensation reimburses employees for costs related to their recovery from an illness or injury suffered in the workplace, including lost wages. The cost of a workers’ compensation policy varies based on the company’s size, the risks associated with the work performed, and past claims for medical expenses.
Cyber Liability Insurance
Cyber liability insurance, also referred to sometimes as cyber risk insurance, cyberattack insurance or cybersecurity insurance coverage, helps companies respond to and recover from the financial impacts of cyber-related events. In addition to data breaches, these events could include malware infestation, email compromise and denial of service/ransomware attacks. Read “Cyber Insurance Coverages 101” to learn more.
Directors and Officers (D&O) Insurance
A type of executive liability insurance, D&O coverage guards the personal assets of board members and executive officers if they are sued for actual or alleged wrongdoing while managing the business.
Employment Practices Liability Insurance (EPLI)
It is difficult for employers and human resources generalists to keep pace with employment regulations during the best of times. These are not the best of times. EPLI coverage limits damages from alleged non-compliance or wrongdoing. Read “How to Strengthen Your Employment Practices Risk Management” to learn other ways to protect your company.
More Details About Commercial Insurance
Here are some common questions people ask about commercial insurance.
What Commercial Insurance Do I Need?
Every business is different. Work with an experienced broker who can review your risks and recommend appropriate coverage options and risk mitigation techniques.
Small businesses may be able to take advantage of special policies that incorporate multiple types of commercial insurance coverage in a single policy, known as a business owner’s policy (BOP) and may be more applicable and affordable than purchasing several separate policies.
How Much Does Commercial Insurance Cost?
“How much is business insurance?” is one of those “it depends” questions. If you ask insurers “what is the average cost of business insurance?” they’ll tell you that costs vary widely based on what is being covered, the value of potential losses and the risks.
Is Commercial Insurance Tax-Deductible?
Generally speaking, premiums for business insurance are deductible as ordinary business expenses, but there are limits for some types of coverage or insurance strategies.
Is Commercial Insurance Required By Law?
Depending on the type of business, its location, the goods or services being sold, and whether the business retains employees, a company may be legally required to obtain certain types of insurance. Legally required insurance coverage for business often includes workers’ compensation, unemployment and disability insurance; professional liability insurance; and commercial auto insurance. Always verify requirements with your trusted insurance advisor.
When Do Businesses Need Insurance?
Why is insurance important for a business? The importance of business insurance is always clearest immediately following a loss. It can mean the difference between recovery and going out of business altogether.
Some growing businesses put off purchasing the coverage they really need longer than they should. Having the right business insurance before a loss occurs provides peace of mind that all your assets are as safe as possible.
Questions like “what is the average cost of business insurance?” and “how does commercial insurance work?” are common. The best place to get the best answer for your business is by working with a trusted and reputable commercial insurance broker like Hylant. Draw on their expertise to ensure you receive all the commercial insurance benefits you deserve.
Related Reading: What are Loss Runs?
The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.