Even the best-prepared business owners can’t plan for everything. Accidents, disagreements, and misunderstandings can have serious consequences for a business if the affected individual or group decides to pursue legal action.
Liability insurance can prevent unforeseeable events from having financial consequences that may be devastating to your business. This is what business owners need to know about liability insurance and how they can use liability insurance to protect themselves.
What Is Liability Insurance?
Liability insurance can refer to several types of insurance that serve a similar purpose. At its core, liability insurance is designed to protect businesses, business owners, and employees in the event that a person, group, or third party files a lawsuit or a legal claim against them. Different types of liability insurance policies can be purchased selectively, or you can utilize an umbrella policy that covers many different types of liability.
What Are the Main Types of Liability Insurance?
There are several different types of liability insurance. There’s some overlap in the types of claims that these insurances cover, but it’s best to choose a type of liability insurance specifically geared towards the best interest of your business.
The main types of liability insurance include:
- General liability insurance
- Professional liability insurance
- Commercial liability insurance
- Employer liability insurance
- Public liability insurance
General liability insurance is designed to protect people from damage for claims related to things like fire, mold, floods, property damage, and bodily injury. Commercial liability insurance, also known as commercial general liability insurance or CGL, serves the same purpose for a business.
Professional liability insurance is sometimes referred to as errors and omissions or E&O insurance. Professional liability insurance protects a business when its employees or representatives make errors in rendering professional services to customers or clients.
Employer liability insurance protects employers when an employee claims that an illness they’re experiencing or a bodily injury they’ve incurred is job-related.
Public liability insurance protects businesses against injury, property theft, property damage, or similar situations that occurred on your business property or as a direct result of patronizing your business.
What Does Liability Insurance Cover?
Liability insurance covers a multitude of things depending on the type of liability insurance policy you use. The underlying thread that connects all types of liability insurance is that it’s intended to protect you as a business owner in the event that someone decides to sue you for something they claim is your fault or your responsibility.
Liability insurance can cover all or part of your legal defense costs, depending on the type of coverage you receive. Most policies also cover medical expenses related to personal injury claims, repair or replacement costs for property damage, and sometimes costs associated with misleading advertisements.
Commercial general liability insurance coverage varies from policy to policy. Policies that come at a higher price tag tend to be more inclusive than budget-friendly policies that small business owners often gravitate toward.
How Does Liability Insurance Work for Businesses?
When you need your liability insurance for a lawsuit, you’ll make a claim with your liability insurance company. Your liability insurance will assume financial responsibility after your deductible if your claim is valid for your policy.
Taylor Fike, Partner at Fike Advisors and Expert Contributor for Mosey, clarifies that “It is important to work with a reputable insurance company and agent. If you ever need to file a claim, you will want to make sure the company is prepared to take financial responsibility. Before deciding on a company to buy a liability policy from, make sure to do your research on their previous handling of claims.”
How Does Liability Insurance Differ for Different Types of Businesses?
Businesses choose a liability policy that helps them meet their own unique needs. There are circumstances where a business might need more or less of a specific type of liability coverage.
Professional liability insurance acts as malpractice insurance, which protects businesses in fields like medicine. This type of insurance would be less valuable for a food truck, because none of the employees are performing services on customers.
It’s important for businesses to choose the types of liability insurance that they’re most likely to utilize. It’s an unwise business decision to spend valuable funds on a type of liability insurance that is highly unlikely to be relevant to your business, especially if you could redirect those funds to a stronger policy you’re more likely to utilize.
Navigate Liability Insurance
It’s a sound business decision for most businesses to use, at the very least, a general liability insurance policy. It’s better to have a liability insurance policy and never need it than it is to have a significant need for a policy and not have one. Your liability insurance provides a substantial amount of legal and financial protection for your business.
Some states require businesses in certain niches to have a liability insurance policy in order to obtain proper licenses and register their businesses. Requirements for different types of business insurance and workers’ compensation insurance are separate from liability insurance.
Mosey can help your business remain compliant with state, and local requirements. Our automated compliance platform gives business owners the tools they need to streamline compliance and focus on their day-to-day operations — schedule a demo with Mosey to learn how we can help you maintain compliance.
FAQs
It’s important to understand how liability insurance works before selecting the right insurance solution for your business. Here are some things to consider when comparing and contrasting policy options.
What are the key terms to understand in a liability insurance policy?
The most important term to understand about your liability insurance is coverage, including how much coverage you’re receiving and what types of coverage you’re receiving. Your coverage clarifies which circumstances and events your insurance policy applies to.
You’re likely to see terms like personal injury liability and auto liability. The liability refers to incidents related to the category you’ve received coverage for.
Your deductible is how much your business is responsible for paying before your insurance policy will kick in the remainder. A claim is a request you file for access to your insurance funds. If a lawsuit is filed against your business and the claim of the lawsuit is related to a type of coverage you have, you can file a claim with your liability insurance company.
How much liability insurance do I need for my business?
There is no specific correct amount of liability insurance you should receive for your business. It’s important to choose a policy specifically suited to the size of your business and your unique business needs. For example, a local small business wouldn’t need as much liability insurance as a multinational corporation. Liability insurance cost directly correlates to the scope of the insurance. “There are many agents who are responsible for selling liability insurance. Make sure you find an agent who is proactive. You want to have someone who knows your business and is willing to custom-build a policy for your specific company needs,” highlights Fike.
What is not covered under liability insurance?
Liability insurance won’t cover things like independent contractors who work with your business, intentional or criminal acts performed by your business or a member of your business, product recalls, issues related to cybersecurity or data breaches, or bodily injury of the policyholder. Your insurance company will be able to provide you with the most specific information.
How are liability insurance premiums calculated?
Liability insurance premiums are calculated based on a variety of factors, including the size of the business and the number of people who visit your business on an average day. In many cases, risk factors will be calculated. Professional liability insurance for someone who works in the medical field may be much higher because medical liability lawsuits tend to be more costly.
What is a liability insurance limit?
Most liability insurance companies allow you to set coverage limits for specific events. Liability limits are maximum caps for certain types of liability claims. You can purchase more or less coverage depending on the needs of your business. You may have a maximum dollar amount for how much your liability insurance is willing to pay out per circumstance, like damage to a person’s property or bodily injury — that limit is where your coverage stops.
Does liability insurance cover intentional acts?
Insurance policies are designed to cover costs incurred as a result of accidents or unavoidable situations if your business is found legally responsible. There is a significant difference between an accident and an intentional act.
If you purposely drove your car off of a cliff, your auto insurance wouldn’t buy you a new one. If you or an employee deliberately caused harm to a customer, your liability insurance wouldn’t help you. Insurance policies only cover unavoidable accidents to prevent people from misusing their policies.
Can I get liability insurance if I work from home?
There are home-based business liability insurance policies for professionals who work exclusively from home. These policies are usually substantially more affordable than policies for businesses with multiple employees who work at a commercial location.
What happens if my business is sued and I don’t have liability insurance?
If your business is sued and you don’t have liability insurance, you’re expected to pay your own legal costs. A lawsuit can cost your small business as much as $150,000, often not including things like medical bills or damage claims you’re found responsible for paying.
A legal bill that high can jeopardize your ability to continue to run your business. A liability insurance policy may prevent you from having to permanently close your doors due to financial loss.
Do I need liability insurance if I’m self-employed?
It’s a wise business decision to purchase a liability insurance policy no matter the size of your business, even if you’re a solo professional. The good news is that liability insurance for low-risk self-employed individuals tends to be very affordable.
