To answer this, let’s first think about what insurance is. It is part of risk management. The risks in business, as in life, are always present. They are managed by avoidance and by monetary coverage if they can’t be avoided. You can cover the money part of this management either by having money available to cover risk or by paying others to help you with money if you have a loss. This paying of others is what we usually call “insurance.” However, the concept of insurance also covers what some call “self-insurance.” This is when you do not buy an insurance policy from others, but cover any losses out of your own money.In non-business matters, we all self-insure to some extent. The deductible on your automobile insurance is self-insurance. You pay that first $500 or $1000 of loss. Your insurance policy pays the rest. Your hospitalization insurance has an element of self-insurance built into it, for you usually have to pay part of the medical bill. Your insurance only pays 80% or some other portion of it. To buy 100% medical coverage is very expensive – more expensive than most of us choose to pay.
What insurance you choose to buy for your business and what risks you decide to self-insure are business decisions you have to make. Usually these decisions are made on the basis of cost, probability, and severity. The cost of the insurance you buy is important because it is money out of your pocket that could be used for other business purposes. The probability of suffering a loss is important because some risks are highly probably and others are infrequent or not likely to occur. Finally, the severity of the loss if it does occur is important because some losses are so severe that they can wipe you out, such as a major fire or a legal judgment for a large amount of money.
In business, there are many types of risks. For most risks, outside insurance can be purchased. You can buy insurance against losses from fire, theft, natural disasters, loss of profits, lawsuits, mechanical failures, death, injury, hospitalization, and the list goes on. Which of these you decide to cover with insurance and which you choose to cover with self-insurance depends on an analysis of your business. Each type of coverage has a different cost. Some are cheap, such as liability insurance, and some are expensive, such as loss of profits.
An approach used by many small business owners is to assess the various risks in the business and then consult with an insurance broker on the costs of the various coverages. The owner can pick the coverage most appropriate for his business and can buy within the confines of his budget. Clearly, many small businesses can’t afford to buy much insurance.
As for what insurance your business MUST have, that also depends on the business. Unless some regulatory agency, lending bank, or landlord requires you to carry some form of insurance, you don’t have to have any. Many small businesses operate with little or no insurance coverage. They are essentially self-insured. If they have a loss, they either cover it out of their own funds, borrow what they need, or they fail as a business. It should be clear to you that there is no easy answer to this question.