This guide is general information, not insurance or legal advice. Coverage, prices and rules vary by insurer and by state, so read your policy documents and check with your insurer, a licensed agent or your state’s department of insurance before you decide.
Key facts
- General liability covers claims of bodily injury, property damage and personal injury such as libel or slander connected to your business operations.
- An occurrence policy responds to incidents during its policy period whenever the claim arrives; a claims-made policy must be active when the claim is made.
- The declarations page lists the premium, policy period, named insured, limits, deductibles, endorsements and key exclusions, so read it before the detailed wording.
- A premium audit reviews the prior policy year’s payroll records and transactions to check whether the exposures used to set your premium were accurate.
- Workers’ compensation rules differ by state, so confirm the requirements with your state agency before hiring your first employee.
Business insurance comes with a vocabulary of its own, and much of it never appears in a personal auto or homeowners policy. When you buy liability, property or workers’ compensation coverage for a shop or a home business, the definitions written into the policy decide what you pay and what a claim pays for. This glossary collects the terms a first-time owner runs into most often. A short definition gives the general sense of a term; the policy wording is what shows how it applies to the coverage you actually buy.
General Liability and Professional Liability
Liability coverage responds when your business is accused of harming someone else. Two versions cover different kinds of harm.
General liability insurance: coverage for attorney fees, settlements and damages when your business faces lawsuits tied to its operations, including claims over injuries to people, damage to their property, or personal injury such as libel and slander.
Professional liability insurance: coverage for claims that your advice or specialized services caused a client harm, such as an error or negligence in the work itself. Businesses that sell expertise rather than goods often carry it alongside general liability.
The Declarations Page and What Drives Cost
Start any comparison at the declarations page. It is the summary sheet, and it tells you most of what affects your money before you reach the detailed wording.
Declarations page: the policy’s summary of what you bought. It shows the premium, the policy period, the named insured (the person or business the policy protects), the covered property or people, the limits, the deductibles, the endorsements, and the key exclusions.
Premium: the amount you pay to keep coverage in force. Payment schedules vary; monthly, quarterly and annual installments are common.
Deductible: the share of covered costs you may owe yourself before the insurer starts paying more of certain expenses, depending on how the policy is written.
Aggregate limit: the most the insurer will pay for a coverage over the whole policy period, no matter how many claims are filed. Limits work the same way across insurance types; our guide to car insurance liability limits uses a 25/50/25 example to show how the pieces fit.
Exclusion: policy language that narrows, limits, postpones or takes away coverage in certain situations, or attaches special conditions to it. This is where most claim surprises start.
Endorsement: also called a rider, a change added to a policy that alters what it covers. Endorsements are how a standard policy gets shaped to fit one business.
Package Policies and Temporary Proof of Coverage
Business owner’s policy (BOP): a package that combines several common business coverages in one policy. Because the parts are bundled, a BOP is often simpler to shop for than separate policies, and it is a common starting point for small shops and home-based businesses.
Binder: a temporary insurance contract issued by an agent or a company while the full policy is being prepared. Unless the binder says otherwise, it carries the same terms as the policy that follows, so you can show proof of coverage right away.
Certificates of Insurance and Additional Insureds
Clients, landlords and contractors often ask for proof of insurance before they will sign a lease or a contract. Three terms describe that paperwork.
Certificate of insurance: written verification that a policy is in force.
Additional insured: a person or entity other than the named insured who is also protected under the policy. A landlord who requires it in a lease is a common example.
Additional insured endorsement: the contract language that actually extends the policy to that additional insured. If a client asks to be added, this endorsement is what does the work.
Occurrence vs. Claims-Made Policies
Liability policies are built to respond to claims in one of two ways, and the difference is timing: when the incident happened, and when the claim was made.
Occurrence policy: covers incidents that take place while the policy is in force, no matter how much later the claim arrives. A customer hurt in your shop in one year who sues two years later would look to the policy that was active when the injury happened.
Claims-made policy: covers a claim only while that policy is active at the time the claim is made against you. Under this structure, the date the written demand arrives matters more than the date of the incident itself.
Risk to know
A gap between occurrence and claims-made structures can leave a loss with no policy in force to answer it. Ask which basis a liability policy is written on before you buy, and ask again before you switch insurers or let a policy lapse.
Business Interruption and Extra Expense
Property coverage repairs the building. These two coverages address the money a shutdown takes away.
Business interruption coverage: pays for losses caused by a necessary slowdown or shutdown of the business when a covered peril damages real or personal property. Those losses can include net profits and added expenses, and they are generally measured over the period during which the business feels the effects of the damage.
Extra expense: additional costs, outside normal operations, caused directly by the loss. Renting a temporary workspace or equipment to keep serving customers after a fire is the sort of cost this coverage is meant to address.
Workers’ Compensation and Employee Classifications
Hiring changes the picture. Workers’ compensation is treated differently from state to state, so the place to confirm what applies to your business is your state agency.
Workers’ compensation: coverage for employees who are hurt or become ill because of their jobs. The rules differ by state, so check with your state agency rather than assuming a small or home-based business is exempt.
Employee classification: the grouping of workers by the kind of work they do. Check that each employee’s listed type of work matches the work actually performed, so the policy describes your business accurately.
Premium Audits and Experience Ratings
Some business premiums start as estimates and become final numbers later. These terms explain the adjustment.
Premium audit: a look back, after the policy year ends, at records such as payroll, transactions and assets, carried out by the insurer or outside specialists to check the accuracy of the exposures used to calculate the prior year’s premium. If payroll ran higher than estimated, additional premium can follow; if it ran lower, the audit can reduce what you owe.
Experience rating: pricing that takes a business’s own record of claims into account, alongside the statistical calculations, known as actuarial work, that insurers use to price a defined risk based on usage projections and costs.
These definitions are a starting point, not a substitute for the policy wording. If you are still choosing coverage, our guide to how to insure a home-based business works through the decision step by step, and what small business insurance really costs explains what drives the price of a policy. When you move on to comparing quotes, the shopping terms to know covers vocabulary that shows up in any line of insurance.
Questions we hear
What is the difference between a certificate of insurance and an additional insured endorsement?
A certificate is written verification that a policy is in force. An additional insured endorsement is the policy language that actually extends protection to another party, such as a landlord or client; the certificate simply shows it exists.
Does a business owner’s policy cover everything a small business needs?
A BOP bundles several common coverages into one package, and it is a common starting point for small and home-based businesses. Many businesses add other coverages as they grow, such as workers’ compensation once they hire.
Why does it matter whether a liability policy is occurrence or claims-made?
The basis decides which policy answers a claim. An occurrence policy covers incidents that happened while it was in force even if the claim comes later, while a claims-made policy must be active when the claim is made against you.
What happens during a premium audit?
The insurer or outside specialists look back at the prior policy year’s payroll records, transactions and assets to confirm the exposures used to calculate your premium. If the estimates were off, the final premium is adjusted to match.