A Complete Guide to Business Liability Insurance

Considering the complex world we live in, there are many reasons a business may lose money to lawsuits. These may range from consumers lawsuits to employee protection. Thus as an entrepreneur, your best prevention or mitigation of these unforeseen loses may be an insurance coverage.

Business liability insurance or business insurance for short is the type of insurance coverage that protects business owners or companies in the event of a third party claims or formal lawsuit. Business insurance coverage includes all financial liability incurred together with expenses related to the company's legal defense. Business liability insurance policy is mainly of three main types which are generally known as product, general, and professional liability insurance.

Short Term and Long Term Liability

Businesses usually sort their liabilities into two categories. Short term or current liabilities are debts payable within one year whereas long-term liabilities are debts payable over a longer period. For instance, is a business takes out a loan payable over a period of 5 years, this loan constitute a long term liability. However, the loan payment that is due the current year are recorded in the short term liability section of the balance sheet and considered the current portion of the long term debt.

Generally, analysts always want to be sure a business or company can pay its short terms liabilities, due within the current year, with cash. On the other hand, analysts want to see that long-term liabilities can be paid with assets derived from future earnings or financing transactions.

Business Liability Insurance Break Down

This is a critical type of insurance especially for business owners and companies who may be held legally liable for injuries of others. In such a lawsuit, a small business owner could put all his personal finance at risk, even a limited liability company (LLC) may suffer severely.  Business liability insurance policy may provide you with greater insurance coverage compare to your legal structure.

Business owners or entrepreneurs may buy business liability insurance that protects them against employee accident or injury that occurred during business operations. For example, a lawsuit may arise from a purchaser or other third party who purchase a faulty product that cause them damage. Your business liability insurance will protect you against such claims, those, your insurance will pay for any losses that arise from the lawsuit including any court fee.

Caution should be taken when purchasing new or additional policies to include exclusion clause to eliminate any unneeded coverage and/or minimize cost by avoiding repetition or duplication of coverage provided in other policies.

Types of Business Liability Insurance

There are many types of risk to which a business owner can be exposed, any of which may subject their finances to substantial claims. These risk ranges from injury to employee, business properties like business vehicle, to consumers’ claims from faulty products. Every business owner need to have a protection plan built with respect to the necessary liability coverage. Below are the major types of business liability insurance which include professional liability insurance, product liability insurance, workers liability insurance, commercial liability insurance, and indemnity liability insurance

Workers’ or Employee’s Protection: This is a type of mandatory coverage for all businesses that have employee, which protects the business against liabilities arising from death or injury of an employee. Every business that hire different individuals either on permanently or part time basis need to protect them. An employee can have an accident or a health condition that could be related to their work or working environment that may be entitled to financial support, medical bills and lost earnings if you are found to be negligent. Employee’ liability is a legal obligation even if your employees are on a part-time or casual basis.

Product Liability Insurance: This is the type of insurance for companies manufacturing products (especially consumer’s goods) for the general market. This type of insurance provides coverage against lawsuits arising from damage or death to consumers cause by their product. The public or customers are the ones most likely to sue you when something goes wrong. For example if your product or services cause harm or injury to a member of the public, or your customer, your business could face compensation claims of hundreds of thousands of dollars. Your business can benefit from product liability insurance policy which ensures payments are made for you.

Damage to Assets insurance: Is it possible to run your business when your assets are damage or destroy? Of course no! You will surely want small business insurance that offer protection to your business assets. Theft or damage to your equipment, vehicle or premises can happen at any time and could handicraft your business. A failure of a key supplier or customer could mean financial losses or difficulties. Thus whatever the risks you face, the right small business insurance can provide protection tailored to protect you from them.

Indemnity insurance: This insurance type provides coverage against lawsuit due to financial damage resulting from mistakes or failure to perform (negligence claims).

Director and officer Liability insurance: This type of insurance is specifically for businesses that has a board of director or officers. Its aim at providing coverage to them (directors and officers) against liability that may arise from lawsuit against the company.  

Umbrella insurance: This insurance policy is a personal liability policy designed to provide coverage against catastrophic losses. In general, umbrella liability insurance comes in when the liability limits of other insurance are reached.

Business Owner’s Insurance:

A business owner policy (BOP) is a package of all required coverage a business owner may need (such as life insurance, liability insurance, property insurance, umbrella insurance,  auto insurance and home-based insurance). Based on your company’s specific needs, you can alter what is included in your BOP. A business owner will save money by choosing a BOP because the bundle of services often costs less than the total cost of all the individual coverage’s.

Commercial liability insurance: Commercial insurance policy or comprehensive general liability insurance is the standard type commercial general liability insurance or commercial insurance which protects against lawsuits arising from injury to employees and the public, injuries caused by the negligent action of employees, and property damage caused by an employee. It may also provide protection against infringement on intellectual property, libel, tenant liability, slander and employment practices liability.

The comprehensive general liability (CGL) insurance policy is specially made for businesses of all size. It provides coverage to medical payments, property damage, bodily injury, personal and advertising injury, and premises and operations liability. In the event of a lawsuit, the insurers provide coverage for compensatory and general damages. The amount of risk associated with the business and the size of the business usually determines the total coverage.

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

The commercial general liability insurance policy provides protection against most legal claims but not against errors and omissions neither does it protect directors and officers from being sued. Thus business owners need specialized policies for these cases.

Professional Liability Insurance

Professional liability insurance (also known as error and omission insurance) is generally for business owners providing services. This type of liability coverage policy protects businesses against error, malpractice, and negligence in provision of services to your customers. In relation to your profession, you may be oblige or required by your state government to buy a professional liability policy. For example, medical practitioners are required to purchase malpractice insurance as a pre-condition of practicing in certain states. Any business, accountants, medical doctors, etc. providing a service to a client for a fee should this policy type.

Professional liability insurance usually provide coverage against legal, judgment and settlement expenses up to the limit of the policy. The potential exposure risks of the insured usually determine the coverage limit. This is due to the fact that some professional have more potential exposure than others. For example, a medical doctor has a higher potential risk associated to his profession than a lawyer. Coverage usually begins from $1 million and may have deducible of $1,000 to $25,000 per claim.

They are also some exclusion to the Professional liability insurance policy. Prominent among them are claims of bodily and property damage, criminal, fraudulent and dishonest acts and employment related claims and punitive,

Other factors influencing insurance cost include the type of business, claims experience of the individual and the industry, and location. Professional liability insurance policies may also have a retroactive date wherein the insurer will not cover claims arising out of the acts committed before the retroactive date. Retroactive coverage is also available but come with higher cost. Individuals may also buy “tail coverage”. This coverage allows for the reporting time of claims to be extended to claims made after you discontinue your professional liability coverage because of retirement. The goal of tail coverage is to protect the individual from claims that occurred during their active professional practice but that were reported only after they retire or quit practicing.

Board of Directors and Officers (D&O) Liability Insurance

This policy type provide coverage to directors and officers of large companies against claims arising from erroneous investment decision, failure to maintain property, hiring and firing decision, releasing confidential information, conflicts of interest, gross negligence and legal judgement.

There are basically three types of D&O liability coverage. These are known as Coverage A, B, and C. the minimum coverage limit of liability are $1 million (per policy and is not shared among individual policies) which may be used for expenses of a claim and damages, defense expenses, and judgments and settlements expenses.

Most D&O policies exclude coverage for fraud and other criminal acts including punitive damages, and bodily injury or property damage. The existence of a clause known as the “segregate clause” in many D&O provides coverage for the company and innocent parties that may be dragged into a lawsuit due to criminal actions of another company director.

Coverage A: This is a personal or employee coverage that protects past, present and future board of directors and officers to help them against claims alleging negligent and wrongful acts, and the personal liabilities they encounter for their acts. Some companies may not be able or allowed to indemnify its D&Os directly. This may be partly due to non-permission by law, or by company’s bylaws.

Coverage B: This is a corporate protection for the company to the extent that it can or may be permitted to indemnify its board of directors and officers for claims against them. But the company is not covered for its own liability. Hence, during a claim the company receives the compensation and later it reimburses the amounts to directors and officers.

Coverage C: Unlike coverage A and B, coverage C is the coverage type wherein the company is insured against securities claims. Because lawsuits connecting directors and officers along with other parties are common, companies buy coverage C policy to provide protection to the company for its own liabilities in such a situation. Coverage C basically renders allocation (the portioning off of blame) unnecessary for securities claims. D&O policies may also be composed of extensive allocation clauses that force the parties to negotiate an allocation agreement. In other instance whereby both parties cannot reach an agreement, the D&O policy may mitigate such situation by providing a default or force the parties to accept arbitration.

Additional insurance policy doesn't appeal to everyone, although most insurance companies offer reduced rates for bundled coverage packages. Personal liability insurance is only considered as last policy and may require policyholders to still purchase certain coverage limits on their auto and homeowners’ policies, which usually result in additional expenses.

Insuring your business shouldn’t be considered a waste but rather an avenue for meaningful investment. Just like any other aspect of your business success, you should devote time to plan your insurance policy and identify those that fit your business best. Your small business insurance is really a long term investment and should be tackled with an equal importance as you do your goals.

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