Business insurance in the US: the policies a European-owned small business actually needs

Insurance is one of the first places where running a business in the US feels different from Europe. Lawsuits are more common, damages can be higher, and the people you deal with know it: a commercial landlord, a distributor, a large customer or a bank will often ask for a certificate of insurance before they sign. A small business can cover the main risks with a handful of policies.

Why insurance matters more here

A European founder is used to a legal system where most disputes are settled modestly and liability is predictable. The US system works differently. Each side usually pays its own lawyers, juries decide many civil cases, and a claim from an injured customer or employee can threaten a small company's existence. Insurance is how American businesses of every size live with that.

It also works as a door opener. In our experience, the certificate of insurance, a one-page document from your insurer or agent showing your policies and limits, is one of the most requested papers in American commerce. Retailers, distributors, event organisers, commercial landlords, general contractors and enterprise customers ask for it, often with a requirement to name them as an additional insured on your policy. A company that can produce one within a day looks established; a company that cannot loses the deal to one that can.

Insurance complements the liability shield of your company structure; it does not replace it. A properly run LLC or corporation keeps the business's debts away from your personal assets, and our guide to protecting the liability shield of a US LLC explains how to keep it intact. The insurance pays the claim so that the company itself survives.

The core policies, and who needs them

The Small Business Administration lists the common types of business insurance. Here they are with the question each one answers:

Beyond the SBA's list, four more policies come up often in our client work. Cyber liability covers data breaches and ransomware, increasingly requested by business customers. Directors and officers (D&O) protects the people who run a corporation, and investors in a startup usually expect it. Employment practices liability (EPLI) covers claims of discrimination, harassment or wrongful termination by employees. Commercial umbrella adds a layer of liability limits above your other policies at a modest cost. The exact terms of these policies vary by insurer, so read the exclusions as carefully as the coverage.

What the law actually requires

Much less is mandatory than many guides suggest, and most of it depends on the state. The SBA's own page says the federal government requires every business with employees to carry workers' compensation, unemployment and disability insurance. That is not how the statutes work: workers' compensation and disability insurance are governed by state law, and Texas shows how far the rules differ.

Workers' compensation in Texas

Texas takes its own approach. The Texas Department of Insurance states that private employers can choose to carry workers' compensation coverage and that it is not required in most cases. An employer that opts out, known in Texas as a non-subscriber, still has duties:

• report to the Division of Workers' Compensation that it has no coverage, using DWC Form-005 or the state's Employer E-File system;
• post the state's notice to employees about its coverage status (Notice 5, in English, Spanish and other languages common among the staff);
• report to the Division every work-related injury with more than one day of lost time, all occupational illnesses and all deaths.

Opting out is a decision to take with care. A covered employer has its liability limited when an employee sues, according to TDI; a non-subscriber faces such lawsuits without that limit. Some non-subscribers buy a private occupational injury benefit plan instead. If you hire in other states, check each state's rules before the first hire there, because they can differ sharply from Texas.

Unemployment insurance

Unemployment insurance in the US is a payroll tax, paid to the state and, through FUTA, to the federal government, rather than a policy you buy. It comes with running payroll; our page on US payroll for foreign companies covers it.

Commercial auto

If the company owns or uses vehicles, Texas requires liability cover of at least $30,000 for bodily injury to one person, $60,000 per accident and $25,000 for property damage, the limits in force since January 1, 2011 (Transportation Code 601.072). These are the legal floor. For business use we advise far higher limits, and personal auto policies often exclude business use, so tell the insurer how the vehicle is used. Our guide to buying, titling and insuring a car covers the private side.

Health insurance for your team

The US has no universal public health system for working-age people, so health cover is one of the largest benefits an employer provides. Whether you must offer it depends on size. Under the Affordable Care Act, an employer is an applicable large employer for a year if it had on average at least 50 full-time employees, including full-time equivalents, during the prior year. Full time means at least 30 hours of service a week, or 130 hours in a month. Below that threshold, the employer shared responsibility provisions do not apply, and offering health insurance is a choice.

For a small European-owned company that choice is still important. Good candidates expect health cover, and without it you compete for staff with one hand tied. Our overview of US health insurance explains the plan types, deductibles and premiums from the employee's side, which is the side your candidates will ask about.

Flood, storms and what property policies leave out

Standard commercial property policies commonly exclude flood damage, and in Texas, Florida and the Gulf states flood is a real risk. Flood cover for most small businesses comes from the federal National Flood Insurance Program or from private insurers. The NFIP's limits for commercial property are:

• up to $500,000 for the building;
• up to $500,000 for the contents (business personal property).

Two rules catch newcomers. First, a new flood policy generally takes effect only after a 30-day waiting period (42 U.S.C. 4013(c)), with exceptions such as a purchase in connection with a loan. You cannot buy cover when a hurricane is already on the forecast. Second, the NFIP does not pay for business interruption, the lost income while you cannot operate, nor for currency, valuable papers or property outside the building. Business interruption cover from a private insurer fills that gap, and for a business that depends on one location it is often the policy that saves the company after a storm.

Three example businesses

How the pieces fit together depends on what you do. Three patterns we see often among European clients:

A consultancy or software company

A two-person LLC in Austin selling services to US business customers. Core cover: professional liability (the main risk is a client claiming your advice or code cost them money), general liability, and cyber liability. Many enterprise contracts set minimum limits for each, so read the insurance clause before you sign the master services agreement.

An importer of European products

A company that brings goods in, holds stock in a US warehouse and sells to retailers and online. Core cover: product liability (often the largest premium), general liability, commercial property for the inventory, and cargo cover for goods in transit. If you are planning such a business, our guide to launching a product in the US covers the regulatory side, and our page on product liability and recalls explains why this policy matters so much.

A restaurant, shop or franchise run by an E-2 investor

A business with premises, employees and customers on site. Core cover: a business owner's policy or separate general liability and property policies, workers' compensation or a non-subscriber benefit plan, employment practices liability, and liquor liability if you serve alcohol. The landlord's lease will usually prescribe minimum limits and require that the landlord be named as additional insured.

Buying insurance as a foreign-owned company

The SBA's advice is simple: assess your risks, find a reputable licensed agent, and compare rates and terms from several sources. For a company owned from Europe, a few points make the process smoother:

1. Buy through the US company. The policyholder should be the entity that carries the risk, with its EIN, its US address and its US bank account for premium payments.
2. Use an independent agent or broker. An agent who places business with several insurers can find cover for a newly formed company with a foreign owner, which some insurers price as an unknown risk.
3. Describe the business accurately. A policy based on a wrong description of your activities, revenues or locations may not pay when you need it.
4. Check where the European policy stops. Your group's European liability programme may exclude the US and Canada, or cover them only with lower limits and US-specific exclusions. Ask the European insurer in writing.
5. Review every year. Revenue, staff, products and states change quickly in the first years, and so do the limits customers demand.

If you are still choosing the state and form of your company, the decision affects insurance less than taxes, but it affects where you need workers' compensation and which state's rules apply to your vehicles and premises.

How premiums are treated for tax

For federal income tax, IRS Publication 334 lists the business insurance premiums you can generally deduct, among them fire, theft and flood insurance, liability insurance, malpractice insurance, workers' compensation insurance set by state law, and group health insurance for employees. Contributions to a state unemployment fund are deductible as taxes where state law treats them as taxes.

Three limits are worth knowing:

• No deduction for a self-insurance reserve. Money you set aside to cover your own risks is not deductible, even if you could not buy insurance for them. Actual losses may be.
• No deduction in advance. If you pay a three-year policy up front, you deduct each year's share in that year, according to the IRS example.
• Some policies are not deductible at all, for example a policy that replaces your own lost earnings due to sickness or disability.

If your company is a disregarded single-member LLC, the deduction flows to your own US return; if it is a corporation, the company deducts it. Our team handles both in the annual business tax services for our clients.