Most businesses need liability insurance to protect themselves from claims, such as malpractice or bodily injury, which may result in lawsuits or legal repercussions.
Because every business has unique risks, the level of coverage you require depends on your business type. To ensure you are paying the right amount for your general liability insurance, you can conduct a general liability insurance audit to examine your business’ payroll and risk exposure. It may be necessary to buy more liability insurance coverage for construction businesses than for retail stores. When choosing a policy, you need to consider the types of liability insurance coverage you need.
Liability Insurance: What Is It?
As a result of injury or damage to other people or property, liability insurance provides protection against claims. A liability insurance policy covers if an insured party is found legally liable for legal costs and payouts. Intentional damage and contractual liabilities are generally not covered. Liability insurance policies pay third parties, not policyholders.
Liability Insurance: How It Works
Liability insurance is important for those who are liable and at fault for injuries sustained by other people or in the event that the insured party damages someone else’s property. As such, liability insurance is also called third-party insurance. Liability insurance does not cover intentional or criminal acts even if the insured party is found legally responsible. Policies are taken out by anyone who owns a business, drives a car, practices medicine or law—basically anyone who can be sued for damages and/or injuries. Policies protect both the insured and third parties who may be injured as a result of the policyholder’s unintentional negligence.
For example, most states require that vehicle owners have liability insurance under their automotive insurance policies to cover injuries to other people and property in the event of accidents. A product manufacturer may purchase product liability insurance to cover them if a product is faulty and causes damage to the purchasers or another third party. Business owners may purchase liability insurance that covers them if employees are injured during business operations.
Notes on special considerations
Personal liability insurance policies are purchased primarily by high-net-worth individuals, 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). The cost of an additional 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.
A commercial general liability policy protects against most legal hassles, but it does not protect directors and officers from lawsuits, nor does it provide coverage for errors and omissions.
Insurance coverage for errors and omissions (E&O):
An errors and omissions liability insurance policy protects the business from lawsuits stemming from mistakes or failures to meet professional obligations. Lawyers, accountants, architects, engineers, or any business that provides services to a customer for a fee should consider purchasing this coverage. E&O insurance does not cover injuries resulting from criminal activity, fraud, or dishonesty. The insured is protected however for attorney fees, court costs, and any settlements up to the amount specified by the contract.
Insurance for directors and officers (D&O):
This type of policy protects directors and officers of large companies against legal judgments and costs arising from unlawful acts, erroneous investment decisions, failure to maintain property, releasing confidential information, hiring and firing decisions, conflicts of interest, gross negligence, and other mistakes. In general, D&O policies do not cover fraud or other criminal acts. Premiums vary according to the location of the company, industry type, and loss experience of the company.
Liability Insurance Types
A business owner is exposed to a wide range of liabilities, which can lead to substantial claims against their assets. All business owners should have an asset protection plan that incorporates liability insurance.
Liability insurance consists of the following types:
- It is mandatory for employers to carry employer’s liability and workers’ compensation insurance to protect themselves from liability arising from employee injuries or deaths.
- Generally, product liability insurance covers businesses that manufacture products for sale on the general market against lawsuits resulting from injuries or deaths caused by their products.
- An indemnity policy protects a business against negligence claims resulting in financial harm.
- In the event a company’s board of directors or officers are sued, director and officer liability coverage protects them from liability. Corporations generally provide some degree of personal protection to their employees, but some companies provide additional protection to their executive team.
- Coverage generally kicks in when the liability limits of other insurance are reached under umbrella liability policies.
- An ordinary commercial general liability policy, also known as comprehensive general liability insurance, provides coverage for lawsuits arising from injuries to employees and the public, property damage caused by an employee, as well as injuries caused by a negligent employee. Furthermore, intellectual property infringement, slander, libel, contractual liability, tenant liability, and employment practices liability may be covered by the policy.
- For small or large businesses, partnerships or joint ventures, corporations, associations, organizations, or even newly acquired businesses, comprehensive general liability policies are tailor-made. In addition to bodily injury and property damage, insurance also covers advertising injury, medical payments, and premises liability. The insurance companies cover compensatory and general damages, but not punitive damages for lawsuits.
What Is the Difference Between Personal Liability Insurance and Business Liability Insurance?
It protects individuals against claims arising from injuries or damage to other people or property sustained on the insured’s property or as a result of their actions. Business liability insurance protects companies and business owners from lawsuits and damages resulting from similar accidents, as well as product defects, recalls, etc.
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