What Is Business Insurance and What Does It Cover?

 In 1992, 79-year-old Stella Liebeck bought a cup of coffee from her local McDonald’s drive-thru in Albuquerque. As she tried to remove the lid to add cream and sugar, the cup tipped over and  poured scalding hot coffee onto her lap, leading to severe third-degree burns. Liebeck later took McDonald’s to court, where the judge ruled in Liebeck’s favor, determining that McDonald’s was irresponsibly overheating its coffee, and awarded Liebeck millions of dollars in punitive damages.

This famous case is also a great illustration of why companies need business insurance. While McDonald’s was able to absorb the cost of the settlement, any business of any size can take a hard hit if faced with a lawsuit. And companies can be held liable for all kinds of incidents, including property damage, car accidents, or an injured employee. These things happen—and business insurance can help protect your company.

What is business insurance?

Business insurance protects businesses from the financial losses associated with unexpected events, including property damage, lawsuits, loss of income, theft, employee injuries and illnesses, and workers’ compensation. Put simply, in cases of injury or damage, your business insurance reimburses your company, either fully or partially, for the costs. Think of business insurance as a layer of protection.

What does business insurance cover?

“Business insurance”—sometimes called commercial insurance—is an umbrella term, not the name of a business insurance policy you can buy. In fact, when you start researching business insurance, you might notice there are nearly as many types of policies as there are businesses. Depending on the type of insurance you need and the policies you choose, business insurance can cover:

Liability protection policies provide legal liability coverage for all the ways your company could be sued. This includes bodily injury, property damage caused by your company (as opposed to damage to your company’s property), advertising injury, employment practices, and errors or omissions. Common types of liability policies include general, commercial umbrella, directors and officers, and professional liability insurance.

Even small business owners need business insurance policies: If your US-based business has three or more employees, you’re required by federal law to have workers’ comp and disability insurance. Workers’ comp covers your employees’ lost wages if they’re injured on the job and unable to work, and is generally used in place of litigation. Employer’s liability insurance covers additional costs if an employee’s bills aren’t covered by those two.

Disability insurance is either short term or long term. Long-term disability insurance is usually reserved for wealthy individuals or provided by the state, while short-term disability insurance is provided by the company. It’s used for injuries that lead to more time off of work than those covered by workers’ comp but usually lasts less than a year. It also can cover illnesses or injuries that happen outside of work.