Risk management: liability insurance for small businesses

All businesses, big or small, face uncertainties. An unseen catastrophic loss can drain the financial resources of a company. This is why insurance is critical for any business. One type of insurance that any business should have is liability insurance.

How liability insurance for small businesses work

A business owner who purchases this type of insurance is provided with financial coverage in case the business is hauled to court for damaging someone.

When the case reaches settlement and the judge establishes that the business is liable for causing the damage to another person, this insurance will help out with the payments. While the case is still being heard, liability insurance will also help cover the legal costs.

Types of liability insurance

There are three types of liability insurance available to small businesses:

  • General liability
  • Product liability
  • Professional liability

All about General Liability Insurance

If you are a small business owner, this type of insurance provides coverage to your business when a third party makes a claim against it for a loss suffered as a result of action or inaction.

What it covers

This policy covers third party losses arising from bodily injury, or damage to property. It covers expenses such as litigation costs, court judgments that are in favor of the claimants, as well as costs involved in out-of-court settlements.

This policy may also take care of claims of false and misleading advertisements and copyright violations in a business' marketing efforts. A business that only rents space can also get coverage if claims are made that it caused damage to the place being rented.

What it does not cover

  • The business owner's or workers' personal properties
  • Incidents where workers get injured in off-site locations
  • Professional or unethical errors
  • Damage to rented or personal cars
  • Punitive damages
  • Vandalism acts that are done willfully or intentionally or out of neglect.

How to know if your business needs this insurance

You need general liability insurance if your small business requires you or your employees:

  • to pay your clients a visit or have your clients visit you
  • to have an access to your clients' equipment, for example servers or similar hardware
  • write or talk about your clients' business
  • rent out an office space or third-party site for your business or activities related to your business.
  • are required to get a policy when entering a contract

Determining how much coverage your business needs

The type of business will dictate the amount of coverage. For instance, a web designer will not need as much coverage as a building contractor.

Location of the business will also have an impact. For instance, in certain states, plaintiffs tend to be awarded greater damages than in others.

While small businesses tend to have unique needs, the general minimum limit applicable to many is $1,000,000. If the business you are in affords you lower risks, an alternative would be a Business Owner's Policy or BOP.

How it can be purchased

It can be purchased as a stand-alone policy or it can be bought as a part of a BOP bundle along with property insurance. A small business, which is inclined to get a BOP, should check if the limits are sufficient to cover the potential risks. Any additional coverage may require a separate policy.

How much it costs

Costs can vary from one insurer to another and the difference could be significant. For small businesses it can be as low as $100 per month to as high as $1,000 or more per month. 

Add-ons and riders

  • Employee Theft - this rider will provide you protection against theft committed by employees you hire. This can be important especially if people you employ have access to money or bank accounts.
  • Owned Autos - this covers cars owned by the business. Cost of a rider will depend on depreciation and year of the car.
  • Personal Umbrella - this provides personal coverage to the business owner. This is important, as many standard policies do not provide coverage to the owner but only to the business.

All about Product Liability Insurance

Some business owners think that the responsibility over a product lies only with the product manufacturer. This is far from the truth as wholesalers as well as retailers also have their share of responsibilities. This is where product liability insurance can come in.

What it covers

It covers claims made against the business arising from damages, injuries or death of consumers caused by the use of product that a business manufactures, wholesales or retails.

Small businesses that export their products should also consider getting this policy for their markets abroad. If an individual is awarded with a claim over a personal injury, this policy can cover the expenses in relation to that individual's hospital treatment.

What it does not cover

  • Recall items
  • Poor workmanship
  • Injuries or damages suffered by the company's own workers related to the use of the product sold by the business.
  • Damages suffered by the company or by its own vehicles or properties arising from the use of the products sold by the business.

How to know if your business needs product liability insurance

If your small business operates a factory or is involved in the wholesale or retail of a product, you may need this type of coverage. This coverage is highly recommended for businesses, which produce food, toys, clothing, or similar products, which potentially could cause harm to anyone.

Determining how much coverage your business needs

How much coverage you need would depend on the size of the business, the type as well as the potential risk. The general advice for small businesses is to buy the minimum of $1 million per incident. If you want a better estimate, you can check with similar businesses and see how much coverage they have on their product liability policy.

How it can be purchased

It can be purchased as a separate policy and sometimes it is offered as part of a general liability policy. An individual policy may fit your needs better but it can cost you more. If you are considering a general liability policy, better check if product liability coverage is enough to cover the risks of your business.

How much it costs

The cost of a policy would depend on the type of product and business along with the volume of sales. Some products can be more costly to insure than the others.

For instance, high performance car parts can be costly to insure than school items like pens and pencils. Products that are considered low-risk will cost around $3,000 to $4,000 a year to insure.

All about Professional Liability Insurance

This type of insurance covers a small business or professional in the event a claim is made by a client that the services provided or which the business failed to provide, caused them to encounter a financial loss, or did not provide the promised or expected results.

This policy is recommended for consultants, independent contractors, architects, accountants, and engineers. It is also highly sought by dentists, chiropractors, doctors to whom it is referred to as malpractice insurance.

What it covers

This covers the omissions, negligence, and errors of a business even if these are found to be groundless. It takes care of the costs to defend the company, settlements reached with the claimants as well as judgments rendered by court. It covers the errors and omissions of all the employees of a small business including the owner.

For self-employed professionals, it covers them against claims arising from mistakes in the delivery of service.

What it does not cover

Claims related to employment practices like sexual harassment, wrongful dismissal or wrongful termination. It also does not provide coverage for general liability claims like damage to property, injuries or accidents in the office, and advertising injuries, among others.

How to know if your business needs professional liability insurance

This type of insurance is available in many forms to suit different types of businesses and professionals. For instance, doctors have different risks compared to an accountant or an attorney but all require professional liability coverage.

Also, a professional liability plan is a requirement by law for certain professions in many states. Those who are in the legal or medical field may be required to maintain a policy with a minimum amount of coverage. These requirements may vary from one state to another.

In some of these states, the law only applies to the person who is actually practicing the profession. In others, it may extend to other persons or businesses, which operate in the industry.

Determining how much coverage your business needs

Start with the minimum amount of coverage dictated by your state laws for your type of business or profession. Establish the risk of encountering multiple losses in a year. If the risk is high, get an aggregate limit that is sufficient to cover multiple cases. Many policies of this type start with a minimum coverage of $1 million.

How it can be purchased

Generally, you purchase it as a stand-alone policy as this coverage is not part of a standard general liability plan.

How much it costs

The premium you pay would depend on certain factors like the type of business you run and the industry you operate in, among others. The cost can range greatly. One insurer offers a $350 a year premium. But, there are policies, which cost more than $10,000 a year in premium.

Add-ons, riders, special features to consider

  • Defense coverage - this takes care of the expenses in relation to defending against a claim but it will not cover the fine decided by the judge.
  • Reimbursement expense - this covers the time that an employee or the business owner spends while helping in the defense against a claim.
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