Insurance -Liability Protection

What is Business Liability Insurance

Business liability insurance protects a company and/or business owner in the event of a formal lawsuit or any third-party claim. Coverage includes any financial liability incurred in addition to expenses related to the company's legal defense. There are three main types of business liability insurance: general liability insurance, professional liability insurance and product liability insurance.

BREAKING DOWN Business Liability Insurance

Small business owners – especially partnerships and sole proprietorships – put their personal finances at risk in the event of a business-related lawsuit. Even under a limited liability corporation (LLC), an owner could still be exposed to personal risk. Business liability insurance provides greater financial protection than is offered by any legal structure. 

Business liability insurance protects a company’s assets and pays for legal obligations, such as medical costs incurred by someone that gets hurt on company property. It also provides protection against property damage or injury caused as a result of action by the company or its employees, operating on behalf of the company. Liability insurance also covers the cost of legal defense and any settlement or award if a lawsuit is judged against the company. Such associated costs include compensatory damages, nonmonetary losses suffered by the injured party and punitive damages. General liability insurance protects against any liability a business has as a tenant for damage to rented property, such as by fire or other covered loss. Business liability insurance also covers claims of false or misleading advertising, including libel, slander, and copyright infringement.  

Businesses with higher risks that exceed the coverage conventional business liability insurance may opt for excess of lost reinsurance or umbrella insurance that increases coverage limits. This will cover an organization for situations that may not be covered by conventional liability coverage. It will also ensure all costs are covered should someone file and win a claim against the business.


Determining Business Liability Insurance Costs

Coverage levels should be determined by the type of business under coverage and its perceived risks. For example, a building contractor will need more coverage than a writer. Business location also factors into the costs. For example, some states award more in damages to plaintiffs for personal injury than others.

Businesses that fall into the lower risk category may want to consider a Business Owner’s Policy (BOP) which combines general liability and property insurance at a more cost-effective rate. Any new or additional business liability insurance policies should contain an exclusions clause to minimize cost by avoiding duplication of coverage provided in other policies and/or to eliminate unneeded coverage.

Types of Liability Insurance

Business owners are exposed to a range of liabilities, any of which can subject their assets to substantial claims. All business owners need to have an asset protection plan in place that's built around available liability insurance coverage.

Here are the main types of liability insurance:

Employer’s Liability and Workers' Compensation: Mandatory coverage for employers which protects the business against liabilities arising from injuries or the death of an employee.

Product Liability Insurance: For businesses that manufacture products for sale on the general market. Product liability insurance protects against lawsuits arising from injury or death caused by their products.

Indemnity Insurance: Provides coverage to protect a business against negligence claims due to financial harm resulting from mistakes or failure to perform.

Director and Officer Liability Coverage: Insurance covers a company's board of directors or officers against liability if the company is sued. Some companies provide additional protection to their executive team even though corporations generally provide some degree of personal protection to their employees.

Umbrella Liability Policy: A personal liability policy designed to protect against catastrophic losses. Umbrella liability coverage generally kicks in when the liability limits of other insurance are reached.

Commercial Liability Insurance: A standard commercial general liability policy also known as comprehensive general liability insurance. It provides insurance coverage for lawsuits arising from injury to employees and the public, and property damage caused by an employee, as well as injuries suffered by the negligent action of employees. The policy may also cover infringement on intellectual property, slander, libel, contractual liability, tenant liability, and employment practices liability.

Comprehensive General Liability (CGL) Policy: Tailor-made for any small or large business, partnership or joint venture businesses, a corporation or association, an organization, or even a newly acquired business. Insurance coverage in a CGL policy includes bodily injury, property damage, personal and advertising injury, medical payments, and premises and operations liability. Insurers provide coverage for compensatory and general damages for lawsuits. Punitive damages are generally not covered, although they may be if they are permitted by the jurisdiction in which the policy was issued. The amount of risk associated with the business and the size of the business determines the total coverage.

The comprehensive policy provides compensation for defending or investigating a lawsuit, court costs including attorneys' fees, police report costs and witness fees, any judgment or settlement resulting from the lawsuit, medical expenses for the injured persons, etc. Insurers retain the right to defend any suit against the insured company arising from bodily or property damages. 

Key Takeaways

  • Liability insurance provides protection against claims resulting from injuries and damage to people and/or property.  

  • Liability insurance covers legal costs and payouts for which the insured party would be found liable.

  • Provisions not covered include Intentional damage, contractual liabilities, and criminal prosecution.


Closing the Gaps in General Liability Insurance

Commercial general liability insurance protects against most legal hassles, but it won't protect directors and officers from being sued, and it won't protect the insured against errors and omissions. Companies require special policies for these cases. Below, are lesser-known liability insurance policies worth considering for special professional coverage.

 Errors Omission Liability Insurance (E&O) offers coverage for lawsuits arising from rendering negligent professional services or failing to perform professional duties. Lawyers, accountants, architects, engineers, or any business providing a service to a client for a fee should purchase this form of insurance. This policy does not cover criminal prosecution, acts deemed to be fraudulent or dishonest, or any claim against bodily injury. The insured, however, is covered for attorney fees, court costs, and any settlements up to the amount specified by the insurance contract.

Directors & officers (D&O) insurance provides protection to directors and officers of large companies against legal judgments and costs arising from unlawful acts, erroneous investment decisions, failure to maintain the property, releasing confidential information, hiring and firing decisions, conflicts of interest, gross negligence, and other errors. There are three different types of coverage—personal/employee coverage, corporate coverage, and entity coverage—that provide companies with varying degrees of insurance protection. Most D&O policies exclude coverage for fraud or other criminal acts. Factors such as the size and form of the company, location, mergers and acquisitions, industry type and loss experience determine the premium rates in a typical D&O policy.


Why Buy Personal Liability Insurance

Personal liability insurance policies are purchased primarily by high-net-worth individuals or those with sizable assets, but this type of coverage is recommended to anyone with a net worth that exceeds the combined coverage limits of other personal insurance policies, such as home and auto coverage.

Personal liability insurance make sense for individuals who have a higher-than-average risk of being sued, such as landlords.

Homeowners insurance covers liability claims from accidents that occur on a policyholder's property, but only to a specified limit. Homeowners facing fees beyond that amount could face financial disaster.

Commonly called an Umbrella insurance policy, personal liability insurance makes payments on the policyholder's behalf in cases of property and auto accidents, as well as situations that involve libel, slander, vandalism, or invasion of privacy. The policy also covers injuries that occur at secondary residences or seasonal homes, within recreational vehicles, on the premises of rental properties, or on a boat or watercraft owned by the policyholder.

The cost of an additional insurance policy doesn't appeal to everyone, although most carriers offer reduced rates for bundled coverage packages. Personal liability insurance is considered a secondary policy and may require policyholders to carry certain limits on their home and auto policies, which may result in additional expenses.