How Does Liability Insurance Coverage Protect My Business?
Business liability insurance protects your business (and you personally) against formal lawsuits or third-party claims. This type of insurance will also pay any legal expenses related to your legal defense.
For example, business liability insurance protects your company’s assets if:
- Someone gets hurt on company property
- You or someone you employ causes property damage or injury when working on behalf of your company
- You cause damage to the rented property (e.g., fire or other covered loss)
- Damages for false or misleading advertising, libel, slander, or copyright infringement
Do You Need Business Liability Insurance?
The short answer is yes. Every business needs business liability insurance. It is your defense against negligence and simply the bad luck of everyday accidents on the job. Often, proof of business liability insurance is required to obtain a business license.
How is Business Liability Insurance Packaged?
You can buy a general business liability insurance as a single policy. However, general business liability insurance is often a part of a Business Owner’s Policy (BOP). The BOP includes property insurance, and insurers bundle both as part of the BOP coverage.
The U.S. Small Business Administration1 cautions that most bundled BOP’s provide low levels of business liability coverage, “in which case you may need additional coverage through a separate policy.”
How Much Liability Coverage Do You Need?
This largely depends on your type of business and risk exposure. A construction company obviously will need more coverage than an independent consultant. Another factor would be where your business is located. The SBA notes that some states “tend to award more in damages to plaintiffs claiming personal injury than others.”
You should consult with a licensed insurance broker before signing any insurance contract. For example, if your business is in the lower risk category, you could look for a BOP that combines all your business insurance at a cost-effective rate.
How Does a Business Liability Plan Work?
Your insurance policy will state the maximum amount the company will pay out in a liability claim. You are responsible for paying any costs above the maximum amount of your insurance. You could, however, buy additional coverage with excess insurance or umbrella insurance.2
However, it's always a good idea to conduct your own industry research. For example, a client contract could require your business have a higher coverage for you to perform work on their behalf. Also, some construction contractors add you to their own general liability policy for the duration of a project.
Steps to Buying Business Insurance
When shopping for or buying business insurance, the SBA recommends a four-step approach:3
Risk assessment is a vital element in business continuity planning. Depending on your business, you could be required by state and federal laws to do a formal risk assessment.4 That assessment could be the due diligence that will pay dividends in protecting your people and business property when disaster strikes.
Step 2: Locate a reputable licensed agent
Find an agent who is motivated by giving you the best and most cost-effective insurance coverage. Insurance agents usually work on commission. Make sure your agent puts your interests ahead of his or her own.
Step 3: Shop around and look for variances in pricing
Compare prices and coverage from several agents and insurers. If one policy is priced lower than the average of others, look at the coverage and deductibles. Insurance is like anything else: you get what you pay for.
Step 4: Reassess your insurance needs yearly
As your business expands in value, size, and scope of operation, so do your risks. Reassess your insurance needs at least yearly. Again, it is about risk assessment and your ability to recover from a disaster.