liability insurance

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What is liability insurance and why does your small business need it?

Liability insurance for small business owners is any type of commercial insurance policy that protects the business from claims of damage, bodily injury, or loss. The protection provided by this type of insurance extends to both people and property and includes coverage for legal expenses and settlements where the insured business is found liable. Liability insurance differs from other types of business insurance and general limited liability company (LLC) insurance because it pays third parties directly, not just the policyholders.

Why do you need small business liability insurance?

When the topic of insurance comes up, the first question many entrepreneurs ask is, “Am I required to buy business insurance.” Answering the question is more complicated than a simple yes or no. There are several different types of small business insurance. While many types of insurance are recommended to small business owners, few are required by law.  The major factor contributing to your specific insurance requirements is the state in which your primary business operations occur. Almost every U.S. state requires workers’ compensation insurance for small business owners that employ at least one staff member. To check the small business insurance requirements in your state, reach out to your local small business development center (SBDC), or the state’s Department of Revenue, or take this brief quiz offered by The Hartford, one of many business insurance providers.

Even if liability insurance is not required by law, there are many other reasons to purchase a business insurance policy. By the time your business is ready to open for operations, you’ve already invested a lot of time, money, and more importantly innovative business ideas. Purchasing the right insurance policies as a startup owner will protect your business and your personal finances from substantial financial losses and legal fees.

  • Financial health – Safeguarding your business assets, operations, and personal assets from the financial strain of a lawsuit is the most important reason to purchase liability insurance for your small business. Lawsuits may come from customers making a claim for medical expenses if they sustain an injury at your business or other legal accusations. Even if you are sure that your business is not at fault, the costs to defend your business in a legal dispute could leave you in financial ruin and even result in being forced to file for bankruptcy.
  • Commercial leases – If your business plan includes leasing commercial space for a retail store, restaurant, to offer customer services, to use as an office space, or even for industrial storage, then you may find many commercial landlords have their own insurance requirements for tenants. Most commercial leases include insurance requirements that require general liability insurance. This protects your business, as well as the property owner, in the event of an accident or legal dispute.
  • Professional licenses – Certain industries require a professional licenses like real estate brokers, dental service providers, massage therapists, financial advisors, general contractors, accountants, and salon owners. Small business owners in those fields must first obtain the proper licenses and permits before being able to open for business. The eligibility requirements for each license vary, but many require that the business be insured or secure insurance within an allotted time after licensing. For example, businesses that sell alcohol must have liability insurance to get their liquor license and protect the company in an alcohol-related accident or legal claim.
  • New business – If you rely on government contracts or partner with large corporations to earn an income, you may need general liability insurance to be hired or to have an advantage over the competition. Some examples may be general contractors bidding on construction jobs or certified public accountants (CPAs) working with government agencies.

What does liability insurance cover?

What is covered by liability insurance typically depends on the types of business insurance you’ve purchased and the inclusions you elected when purchasing the policy. Most general liability insurance covers the following scenarios and more, but you can learn more about what is and isn’t covered by looking at the different types of coverage and reviewing your policy documents.

  • Physical injuries occurring to customers while in your store or benefiting from your services, like a slip and fall claim
  • Damage to a client’s business or personal property while performing contracted duties
  • Financial consequences to clients or customers as a result of your products or services

The exact costs and expenses the insurance company will cover will depend on the policy, but typically liability insurance covers court costs, legal representation, court-ordered judgments, and settlements. Business liability insurance does not cover contractual liabilities, criminal prosecution costs, or intentional damage. You can find the dollar amount your insurance policy will help with by noting your per-occurrence limit, which is the amount paid per incident, and the aggregate limit, which is the maximum the provider will pay during your entire policy period.

When discussing the different types of coverage available through liability insurance policies, most entrepreneurs think of general liability policies. However, there are several other types of liability insurance coverage to discuss before selecting the right policy.

Commercial general liability insurance

Liability insurance products protect small businesses from third-party claims of property damage, bodily harm, or injury. This insurance covers the costs associated with litigation, bonds, settlements, and judgments posted by the courts following damage to another person or property. If you run your business out of a leased office or retail space, expect your landlord or property owner to require general business liability insurance.

Errors and omissions insurance

Errors and omission (E&O) insurance may also be called professional liability insurance or malpractice insurance in some industries. This type of policy covers the business owner in the event of a mistake, oversight, or professional failure.

Commercial auto insurance

Liability policies on commercial vehicles are considered a type of business insurance coverage, even though they are sold separate from most general policies. Auto insurance will protect the company from financial devastation if the business vehicle is in an accident and the business is sued.

Employer’s liability coverage

Employer’s liability insurance provides protection to the business if they are sued by an injured employee. This type of coverage is typically included in the workers’ compensation insurance policy.

Cyber liability insurance

Cyber insurance is something most entrepreneurs hope they never need. The policy provides coverage for a business that has been hacked or suffered any type of data breach or cyber-attack. The cost to recover from a breach that makes customers’ personal or credit card information vulnerable can be significant, but most expenses are reimbursable by the insurance company.

Umbrella insurance

Business umbrella policies provide additional insurance above and beyond other liability coverages. For businesses that reach their policy limits on general liability, E&O policies, or company auto insurance can turn to their umbrella policy for additional coverage.

How much does liability insurance cost?

The average cost of general liability insurance policy for small business owners is $30 per monthly premium, or $360 per annual premium. Even in high-risk industries, a recent Hiscox study points out that only 1% of businesses pay more than $100 per month for liability coverage. While that doesn’t sound like a large expense for businesses with growing annual revenues, keep in mind that the general liability policy is only one type of insurance recommended for business owners. Combining general liability coverage with commercial property insurance, workers’ compensation coverage, and business interruption insurance policies can increase the annual expense to $4,000 (median cost) or more.

In addition to the type of insurance policy, other factors that affect an entrepreneur’s insurance rates include the coverage limits and selected deductibles. When a business selects the right insurance, its broker or agent can guide them through deciding which limits and deductible requirements will best fit the business needs, but each of these decisions affects the premium price. Other factors that are considered when determining the cost of coverage are the type of business, industry risks, state or region of operation, and the number of employees. For general liability policies, the following business characteristics carry the most weight in determining price:

  • Location – If your office or store is in an area considered higher risk for crime, you may pay more for insurance.
  • Risk – Certain businesses are considered low-risk by insurance companies, like a home-based sales company, while others, like landscaping companies are higher risk.
  • Physical property – Even though general liability coverage is separate from property insurance; bigger buildings tend to be riskier for insurance companies because the chances of an accident are escalated.
  • Annual revenue – Businesses that fall in higher net income brackets may be subject to higher insurance costs because of their higher transaction amounts.
  • Insurance claims history – Small business owners that have filed multiple liability claims in the past, with the same or different insurance provider, tend to pay higher premiums.

Other types of insurance for small businesses

General liability insurance is often bundled with other types of insurance in an owner’s policy. One of the most common insurance bundles that appeal to small business owners is the business owner’s policy (BOP).  In addition to the liability coverage, a BOP also includes:

  • Business property insurance – Commercial property insurance, which is similar to homeowners insurance, is designed to protect your business from property damage losses to your building, office, store, tools, and equipment. The types of losses covered by property coverage include fire, wind, burglary, and lightning. If you have a commercial real estate loan or another small business loan, the lender will require that you keep an updated property insurance policy.
  • Business interruption insurance – Business interruption insurance is protection for the business owner in the event that the business has to close or significantly reduce operations following damage from certain natural disasters, vandalism, or theft. The interruption insurance provides reimbursements for missed revenues during the recovery period. Having interruption coverage is important for business owners that have recurring operating expenses.

How to get the right liability insurance for your small business?

Just like any other business decision, there are several acceptable methods to finding the right insurance premium. Before you begin the process, consider your business’s insurance needs, and gather some basic information including:

  • Insurance requirements as set by landlords, agencies, or clients
  • Summary of products and professional services offered
  • Number of employees on the company’s payroll
  • Financial statements – including the balance sheet and income statement
  • Annual revenues – found on federal income tax returns

Insurance agent

The most efficient way to match your business needs to the right insurance policy is to work with an insurance broker. Insurance brokers, or agents, are licensed professionals trained to work with insurance companies to provide their customers with several business insurance quotes. The benefit of working with a broker is their knowledge in insurance and their ability to provide policy details from several insurance companies at once.

Direct contact

Some entrepreneurs prefer to work directly with an insurance company. This is a great option for entrepreneurs that already know which insurance company they want to work with or exactly what types of policies they need. Most insurance companies, like Insureon, offer online quotes if you go directly to their website.

Final thoughts

Liability insurance is coverage designed to protect small businesses from claims of damage, injury, or financial loss. General liability insurance is not required by law in all states for small business owners, but it may be required for a business to lease office space, apply for a business loan, or secure a government contract. Small business insurance costs vary, but most entrepreneurs can secure liability coverage for less than $50 per month. It is not uncommon for entrepreneurs to bundle their liability coverage with other policies, like in the business owner’s policy package.

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