Q&A Business: Do I Need Business Insurance?

(Because knowledge of necessity can save you some serious green.)

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Am I legally required to purchase business insurance?
Which factor is most important to consider?
When is it the least risky to not have business insurance?
Expert(s) Found on this Page

Am I legally required to purchase business insurance?

I don't know all that much about insurance, but I feel like it's almost always required. However, I really want to better understand when business insurance is required vs. when it's just an option. Could you explain the difference?

Knowing when you're legally required to buy business insurance and when it's just an option is an important distinction. If you don't legally need it and you decide it isn't worth the added expense, you could save your business a lot of money.

Business insurance could be legally required in a couple different ways:

  1. Government: When I say government, I mean that there is a law in your state that requires a certain type of insurance. This isn't your general liability coverage, but could be something like workers' compensation.  Texas is the only state that doesn't require workers' compensation. This is a type of business insurance, so it's a form of government-required business insurance.
  2. Contract: Sometimes, a business contract requires that you purchase business insurance. The most common example is if you're a subcontractor. The general contractor on a job will typically require that you have business insurance for the job if you're hired to complete part of it. 

This is by no means an exhaustive list of examples, but it does represent the two primary reasons you could be required to have insurance. If neither applies, it's up to you whether you want to purchase it. I still recommend that the best way to make this decision is by speaking to your TrustedChoice.com independent insurance agent.

Which factor is most important to consider?

If I decide to purchase business insurance, even if it isn't legally or contractually required, what will be most determinative of costs? 

There isn't just one magic factor that determines everything when it comes to business insurance costs. But I can say with some certainty that if you want an answer as to which factor pulls the most weight, it's the stakes of what you're doing.

When I say stakes, I mean the kind of business you're running and how much harm you can do. If you're running a small photography studio, the stakes are low. You probably won't injure people on the job, and if someone does somehow get hurt, the damage will probably be minor. While you have equipment - some of which could be pricey - the chances of something happening to it are also slim (absent theft from your studio or some similar situation).

Contrast this with running a building demolition company. The stakes are automatically high because you're working with dangerous explosives. The stakes could be even higher if you're operating in an urban area where there are lots of other buildings and people around. 

When you're thinking about the stakes for your business, always think about:

  1. The property you own/could potentially damage or destroy
  2. The number of people you come into contact with and could harm

This will give you a better idea of your business's stakes before you ever talk to your independent agent.

When is it least risky to not have insurance?

I'm not a betting person, but I am curious whether you think there are any business scenarios where it's OK not to have business insurance. Or, on the flip side, do you think it's always better to be insured?

In my mind, having insurance gives peace of mind. If you want that, no matter how small or large the stakes, buy business insurance. After all, if your stakes and business are small, your annual premium could be as little as $1,000. 

That being said, it's least risky to forgo insurance when you are the only employee and the stakes are small. A teenager mowing a handful of yards every week is technically a "business," but the potential for damage or injury isn't big enough to warrant insurance. Truth be told, this teenager probably doesn't even think of themself as a business. 

It doesn't have to be a lawn care operation, either. Any business where you're the sole employee and you aren't doing anything really dangerous is a reasonable candidate for skipping insurance. If you aren't sure, I would still recommend speaking with a TrustedChoice.com independent insurance agent. It's really the best way to weigh the pros and cons and make an informed choice.

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