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7 insurance mistakes new business owners make in their first year
Whether it’s skipping coverage until it’s too late or underestimating their financial risk, many first-year business owners share some of the same regrets around business insurance coverage for their new venture.
ERGO NEXT conducted research with 501 small business owners this year, and the findings reveal some common insurance mistakes and the wisdom many SMBs wish they’d known earlier.
This guide offers quick solutions to these insurance bumps along the road, to help you avoid the most common insurance mistakes small business owners make in their first year.
Insurance mistake No. 1: Don’t assume you can skip coverage if it’s not legally required
“We’ve seen new owners win a great contract, then learn they do not meet the client’s insurance requirements,” says John Espenschied, an insurance broker with more than 25 years of experience. “That is a rough way to start a Monday.”
About 57% of new owners surveyed in the study cited “not legally required” as a reason they don’t currently have business insurance. Many small business owners check with the state and county to see what’s required to start a small business. They register their business name, apply for permits and request an EIN. They see that business insurance is not a legal requirement, so they don’t buy it.
But state law isn’t the only yardstick to use for making decisions about small business coverage. Often, lenders, landlords and potential clients are the ones who will require proof of insurance (called a certificate of insurance, or COI) to prove you have general liability insurance or other coverages, and you could miss out on important business opportunities if you don’t have a policy in place.
Insurance mistake No. 2: Don’t put off buying insurance until it’s too late
In the first year, small business owners often make insurance choices in a hurry, usually squeezing it in between a hundred other priorities. Eighty-four percent of small business owners say they prioritized other costs over insurance in the past six months, according to the study. But deferring coverage leaves your business unprotected exactly when cash is tightest.
“The biggest mistake is thinking, ‘I’m small, so my risk is small,’” Espenschied says. “A one-person business can still face a very expensive claim.”
If, for example, you own a landscaping business, you may think you don’t need insurance because you could replace your tools if you needed to. But what happens if:
- You injure someone while driving your work truck, and they need serious medical care.
- Someone passing by a property you’re working on gets hurt by flying debris, and they file a lawsuit against your business.
- You accidentally damage your client’s property, like breaking an expensive bay window, and you’re asked to cover the costs.
You could face steep bills if you’re found responsible for injuries and property damage, not to mention the price of legal assistance.
Without the right commercial auto insurance, general liability, or BOP insurance, those costs come out of your own pocket. If you haven’t been in business long, you may not be able to cover them. It’s better to have insurance than regret not having it later.
Insurance mistake No. 3: Only buy the coverage you actually need
Half of new business owners in our study said they wish they’d understood their coverage needs sooner, and 23% called the effort “too confusing.”
That’s understandable; small business insurance needs vary widely from one type of business to another.
“It just depends on what type of business, because they all have different needs,” Espenschied says.
For instance, a solo marketing consultant may require general liability insurance and professional liability coverage. But a construction company with a dozen employees and a fleet of heavy equipment could benefit from those policies plus commercial auto, workers’ compensation insurance and tools and equipment coverage. Their exposure to risk could be greater than that of an office-based business owner with no employees. Both businesses could benefit from small business insurance, but their needs are very different.
Insurance mistake No. 4: Don’t take insurance advice from AI without a second opinion
Research is an important step for finding the right coverage, and busy new business owners need fast answers. Many use tools like Gemini, ChatGPT and Claude to learn about coverage and understand their insurance needs. In the study, 36% of small businesses said they use AI to explore business insurance options.
Many entrepreneurs also use AI to research legal or policy concerns, according to a report about AI adoption among small businesses published by the Federal Reserve Bank of San Francisco.
AI research is a good start. But the mistake is trusting your legal and financial protection to artificial intelligence. AI lacks real-time knowledge of current risks and regulations affecting your business. It could even invent policies or coverages that don’t exist.
For instance, you might buy a commercial property insurance policy for your ice cream shop based on AI’s recommendations. But if AI didn’t mention that you need an equipment breakdown endorsement for coverage on a freezer failure, you could be at risk.
To make sure your coverage is accurate, look beyond AI. “If you’re in a business association for ice cream shop owners, you might want to ask them,” Espenschied says. “Because they’re very familiar with the risks that are involved: Food spoilage, delivery, workers’ compensation, slip-and-fall — all these different things that can occur in that type of a business.”
Do your own research, connect with an industry group, or speak to an insurance agent or broker.
Insurance mistake No. 5: Don’t underestimate your cybersecurity risk — no matter what business you’re in
A boutique owner may not think of themselves as a potential cybercrime victim, but hackers might. Nearly half of cyber attacks in 2026 were against small businesses, according to tech security firm Total Assure. Small businesses provide high-value targets to cybercriminals, with the average breach resulting in $254,000 in losses.
Why are they so often the target? Small businesses are less likely to have adequate security protection. And owners may not have considered the possibility of a data breach — or their liability if one occurs.
In addition to training employees in security, change your passwords frequently and use multi-factor authentication. Be on the lookout for phishing scams and wire fraud; scrutinize every email or phone call from anyone requesting payment. Small businesses can also protect themselves from cyber risk with cyber liability insurance. This type of business insurance could help cover costs related to the breach, such as lost business income or legal defense fees.
Insurance mistake No. 6: Professional mistakes could get coverage, too
To err is human, but some professional errors can have serious consequences, including costing a client money. Many small business owners assume a general liability insurance policy will cover them if they make a professional mistake, but that’s not usually the case. In fact, many general liability policies actually have explicit professional services exclusions. Errors and omissions insurance, or E&O (also called professional liability insurance in many professions), could help protect you if a client claims that your advice, service, or work caused them a financial loss.
Service-based professionals like insurance agents, real estate agents, consultants and property managers often benefit most from this protection. It could help cover costs if you’re sued for things like professional negligence or misrepresentation. Even if you didn’t make a mistake and only face the accusation, E&O insurance could help with legal costs if you have to defend yourself in court.
“The first time someone gets sued and it costs them $20,000 to hire a lawyer, they go, ‘Oh, I wish I would have had that coverage,’” Espenschied says.
Insurance mistake No. 7: Don’t skip the annual policy review
The coverage you buy at the beginning of your entrepreneurship journey may not be adequate 12 months later. Regularly reviewing your coverage is important to make sure you’re still adequately protected.
While it’s a good idea to review your coverage at renewal time, don’t wait if your business needs have changed. “Insurance should grow with the business, not chase it,” Espenschied says.
Review your small business insurance coverage at least once a year and at every business milestone to make sure your policies match your risk. Your coverage needs may change:
- When you hire your first employee: In some states, you’re required to carry workers’ compensation insurance immediately after your first hire — even if they’re part-time or seasonal employees. This type of policy could cover things like medical expenses and legal bills if an employee is hurt on the job.
- When you lease or buy your business building: Commercial property insurance could cover damages to your shop, store, office, warehouse, workshop or other commercial space as well as its contents (known as your business personal property), and landlords often require it to sign a lease.
- When you win a big client: Make sure your coverage matches your client’s requirements. More business can mean more revenue, and you may need to increase your insurance coverage limits across policies.
- When you lease or buy a business vehicle: Commercial auto insurance could cover business use of a vehicle. If your business buys a car, truck, van or trailer — or if you or your employees are driving personal vehicles for business — you may need to update your policy accordingly.
ERGO NEXT
Most common business insurance mistakes FAQ
Get answers to some of the most frequently asked questions about business insurance errors made by first-year small business owners.
Do new business owners need business insurance?
New business owners could benefit from the financial protection of business insurance. General liability insurance is the most common first policy. It helps protect your business from advertising injury, libel and slander, injuries to non-employees, and property damage.
What’s the most common insurance mistake most business owners make?
One of the biggest mistakes is not understanding what coverage they need. Learning more about insurance for your industry and business size can help you choose the right coverage. Some of the most common mistakes around business insurance that new business owners make include:
- Assuming that business insurance isn’t required
- Putting off buying insurance until it’s too late
- Not understanding what coverage they need
- Taking advice from AI without a second opinion
- Underestimating the details of their cyber risk
- Not understanding the fallout of professional mistakes
- Skipping the annual policy review
- Putting their personal assets on the line for their business
Can I ask AI what type of business insurance coverage I need?
AI can be a resource for learning more about small business insurance, including what coverages are useful for your industry. But it’s best to confirm your coverage needs with another source.
Do freelancers and solo entrepreneurs need business insurance?
Business insurance can cover many risks that freelancers and solopreneurs face, including liability, professional mistakes, injuries and damaged property. You don’t have to have employees to benefit from business insurance.
Methodology
ERGO NEXT Insurance surveyed 501 U.S. small business owners, founders and sole proprietors about their business risk profiles. The respondent pool consisted of 250 entrepreneurs in their first year of business and 251 entrepreneurs in their first 2-5 years of business. The survey was conducted between April 29 and May 12, 2026.
This story was produced by ERGO NEXT and reviewed and distributed by Stacker.
