Liability insurance is a necessary investment for every small business. Though it may seem like a costly nuisance at first, liability insurance could save you thousands of dollars in the long run. There are an infinite amount of challenges a small business can face—it’s important to protect against any associated risk that comes with the business you’ve worked so hard to build.
The Lowdown on Liability Insurance
So what does it do? Liability insurance protects your business from paying up-front costs for the damages or legal fees associated with claims brought on by clients, customers, or your own employees. If you’re still questioning just how much your business needs liability insurance, ask yourself these two questions:
- Does your business do work with clients where something could potentially go wrong?
- Is there any scenario in which your business might be sued?
If you answered yes to either of these questions, you definitely need liability insurance. Not insuring your business puts you at a great risk—and we’re not just saying that for the sake of being worry warts! For example, you could irreparably damage the property of data of others, your employees could be injured on the job, and not to mention the fact that pretty much every business has the potential to be sued.
According to Hiscox insurance expert Kevin Kerridge, “You actually don’t have to make a mistake to have your company sued,” and legal defense is just one of the things liability insurance can cover. You don’t want to be surprised by how litigious business culture can be.
Hiscox recommends getting liability insurance if your business or employees of your business do any of the following:
- Interact with clients face to face: If you visit a client’s place of work, or clients visit yours, an interaction could go very wrong and you could be served.
- Have access to a client’s equipment: For example, if you spill coffee on a client’s server, you could be responsible for property and data damages.
- Represent your client’s business in any way. Anything you or your employees say or do could be subject to liability claims.
- Use third-party locations for any business-related activities. For example, if you rent space for an event and the building gets damaged as a result, you would be responsible.
- Are required to have general liability insurance before entering into a contract. This is pretty big. You may not be prevented from doing business with clients who require having such insurance in the contract.
However, there are a few kinds of liability insurances a business can buy, which can certainly be confusing. How do you know what kind of insurance your business needs and what do they cover?
- General liability insurance. This insurance covers physical damage (or digital damage, such as data loss) to the property of others or injuries to others, as well as protection from claims of libel and slander. In other words, if you run a restaurant and a customer gets food poisoning, you’re covered. If one of your employees goes on an online rant about a client and the client sues you for libel, you are covered by general liability insurance.
- Professional liability insurance: Also known as errors and omissions insurance, this professional liability insurance covers anyone who presents themselves as an expert and provides advice or consulting services. If a project goes poorly and the client sues, you are covered for your legal fees and defense costs.
- Product and completed operations liability insurance: This provides protection for bodily injury and property damage that occurs away from your premises that are caused by your products or your work. The amount of coverage and the level of risk depend on your business type.
- Employment practices liability insurance: This extra insurance covers specific incidents in case you are sued for sexual harassment, discrimination, hostile workplace claims, and unfair employment practices.
- Commercial excess liability insurance: This insures your insurance. It is extra insurance in case you exceed the limits on your other policies. It typically costs a few hundred bucks to make sure you don’t pay thousands in overages if a claim exceeds your policy.
Based on what your business does and does not do, you might need multiple kinds of liability insurance. But liability insurance won’t protect you from everything, and should not be considered the only kind of insurance your business might need.
“Many small business owners mistakenly believe that if they have general liability insurance, their own losses are covered as well as the losses of their customers,” says Hiscox, “but a general liability policy does not protect you when it comes to your own property.”
As a result, you might need:
- Property or equipment insurance: This is for property you own, which liability insurance does not cover. If you own the building your business is run out of and there’s a fire, you’ll want to insure against the property damage.
- Business interruption insurance: Property damage isn’t the only risk associated with, say, your business catching on fire. You also want to protect against any business interruption caused as a result.
- Commercial auto insurance: If your company owns a vehicle, you’re required to insure it.
- Medical malpractice insurance: If what you do is FDA regulated, you could be subject to medical malpractice insurance.
- Technology insurance. If you work in software, you may want to consider protecting yourself in case you use—accidentally or otherwise—code that has been copyrighted by another company.
- Cyber theft insurance or data breach protection: More common than ever, there’s a new product on the market that covers your commercial business account against cyber theft or fraudulent wire transfers. Or, if your business handles sensitive digital information about employees or clients, you’ll want to cover that.
- Worker’s compensation: This is the law. You must have this insurance if you have employees. The pricing is regulated by the state you operate in. If you do not collect certificates of insurance from all 1099 or subcontractors, you are liable for them on your insurance policy.
Of course, the kind of insurance you buy depends on the type of business you own—you might need several kinds of insurance all at once. This is where the business owner’s policy (BOP) comes in handy. These umbrella policies can usually lump property, casualty, and other insurances along with your liability policy. A package deal can be much more cost effective than buying individual policies for each type.
How do you buy business insurance?
Easy. You need to go through an insurance broker or agent. LegalZoom recommends going through your local chamber of commerce or other businesspeople you trust to help you choose a trustworthy insurance professional.
Be prepared to shop around. Make sure you are clear on what your business does and does not do—that determines what kind of insurance you need. It helps for businesses to partner with insurance professionals who understand their business, too, so that the policy can be tailored to fit specific needs.
“For instance, if your business subcontracts some work to others, it is important for the policy to cover the work of those subcontractors,” recommends Hiscox. “Otherwise, you may be left out in the cold if one of the subcontractors makes a mistake and your policy doesn’t cover their work.”
Be wary of choosing the cheapest insurance or cutting certain types of coverage just to save money, warns LegalZoom: “A bare-bones policy may not protect you if you actually have to make a claim. Worse, many policies have ‘coinsurance’ clauses that may lead to only a partial payment if the insurance company determines you were underinsured.”
It’s important to manage your risk, as opposed to letting your risk manage you. Paying a small amount each month or year could result in enormous savings in the event of a liability or other insurance claim. Don’t wait: Find the insurance policy that’s right for you today.
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