Liability Insurance is a form of protection against losses (e.g., lawsuits). In any business, there is always the possibility of being sued by clients, or potential clients, who are unhappy with a product or service. Worse, your business may be sued for damage caused by a product or service. As a small business owner, you need liability insurance to protect your company from such possibilities.
What liability insurance does
Liability insurance protects your business in the event that a customer, or even a person passing by, is injured on your company’s property. For example, if someone trips over loose carpet or slips on a wet floor, liability insurance will help cover costs, such as medical expenses, associated with an injury. Should a person sue, liability insurance will also help cover your legal defense and settlement costs.
If you are renting property, liability insurance protects you against responsibility for damage you caused as a tenant (e.g., if you were to accidentally start a fire).
It is important to note that liability insurance does not clear you from fault in a legal case. While your business may be in the wrong, the policy protects you from being forced to pay all damages out of your operating funds.
When do you need liability insurance?
While having liability insurance is important, not all businesses require the same policy. The amount of coverage needed depends on the type of company you own, and the perceived risk that comes with it.
Here are some examples of industries that would benefit from a policy with high coverage limits:
- Manufacturers, in case of damage caused by faulty products.
- Service providers, for damage to personal property.
- Labor intensive companies, to cover employees who get sick or injured from business operations.
If you feel your business is at a low risk for incidents, the Small Business Association suggests looking into a Business Owner’s Policy (BOP). A BOP is a cost-effective way to bundle liability and property insurance policies together.
Types of coverage
Annual premiums for liability insurance are usually much lower than the cost of fighting a case in court—usually ranging between $750 and $2,000. Each policy will state the highest amount the insurance company is willing to pay against a claim.
There is a variety of liability insurances in terms of coverage, but in general, these three types are common:
- General Liability – broad coverage for injuries, accidents, and negligence
- Product Liability – protection from damage caused by a product defect in manufacturing
- Professional Liability – protection from damage caused by a service
You might decide you need additional coverage because of the nature of your business. For example, if you own a delivery service, you may need extra insurance for the possibility of getting involved in a vehicular accident.
E&O insurance, or Errors and Omissions, is additional coverage that protects professionals who provide advice, guidance, or services. When a customer claims that a business has provided them with incomplete or inaccurate information, or if they believe mistakes were made during a service, E&O insurance covers some situations that liability insurance does not.
Finding liability insurance
To figure out which liability insurance policy is best for your small business, do some research on what coverage is being used in your industry. Be sure to check out your state government requirements, as well as your specific needs regarding clients.
You may want to consult with a licensed insurance broker, who will give you professional advice on which policy is best for you. No matter what coverage route you choose, liability insurance is an essential step in protecting your business.
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