What is Business Insurance?

Insurance is a method of sharing risk, in which each member of a group pays a small amount of money each month or year in return for protection from larger and unexpected financial perils. But how does small business insurance and in turn, business insurance services work?

Small business insurance services function similarly to other types of insurance. Policyholders are responsible for paying a relatively small premium in exchange for protection from financial risks they could not easily cover on their own.

Classification factors of small business insurance services:

Insurance companies ask four basic questions to classify your business and calculate its rate for a small business insurance policy.

Your type of business and the industry in which it operates helps insurance companies assess your risk exposure. For example, a business that operates a storefront faces different risks than one that operates out of a home.

Insurance companies also consider the types of customers or clients you serve. A residential plumber experiences dangers unique to a residential setting vs. those faced by a commercial plumber.

The amount of people you work with is also important when classifying your business. A business with multiple employees may be considered more at-risk than a sole proprietorship or one that outsources work.

The size of your business can impact the amount or degree of risk to which it is exposed. Each customer or client you service represents another potential liability; even though an expansive customer base may directly tie into higher income, you also have more exposure than a smaller business that provides the same service.

For example, a solo freelancer is exposed to fewer and less complex perils than a multi-department firm or agency, even if both businesses share the same types of risk.

Because the freelancer is one person, he or she is limited by a finite amount of work — and accompanying risk. However, multiply that risk by however many agency employees perform the same work as the freelancer, and the exposure balloons.

The location of your business, including where it operates, is also used to determine its classification and small business insurance rate.

Such differences exist because of varying:

  • claim experiences,
  • product offering
  • building and zoning codes,
  • laws and litigation,
  • natural disasters,
  • weather and temperature patterns, and
  • other factors.

Consider, too, the number of claims filed in one area compared to another. Businesses based in urban centers may be more likely to file claims compared to a business serving a rural community.

Insurance companies take into account your business’s experience, history, and longevity when classifying it. A company in business for 20 years may be deemed less risky than a new business without a proven track record.

The claims history of a business is also examined during classification. A business with numerous or repeated claims over a short or recent timeframe is riskier than a company with little to no recent claims.

As such, a business that performs quality work on a consistent basis, with little to no claims history, will pay less for insurance than one that’s new or likely to operate in a more shoddy or questionable manner.