How Liability Coverage Protects Your Business
Business liability insurance protects your business (and you personally) against formal lawsuits or third-party claims. This type of insurance will also cover any legal expenses related to your legal defense.
For example, business liability insurance protects your company's assets if:
- Someone gets hurt on company property
- You or someone you employ causes property damage or injury when working on behalf of your company
- You cause damage to a rented property (e.g., there is a fire or other covered loss)
- There are damages due to libel, slander, copyright infringement, or false or misleading advertising
Do You Need Business Liability Insurance?
The short answer is yes. Every business needs business liability insurance. It is your protection against negligence and the bad luck of everyday accidents occurring on the job. Also, proof of business liability insurance is often required to obtain a business license.
How is Business Liability Insurance Packaged?
You can buy general business liability insurance as a single policy. However, general business liability insurance is often a part of a business owner's policy (BOP), which also includes property insurance. Insurers tend to bundle both types of insurance together within a BOP.
How Much Liability Coverage Do You Need?
The amount of liability coverage you need largely depends on your type of business and risk exposure. A construction company obviously needs more coverage than an independent consultant. Another factor to consider is the location of your business because some states have additional insurance requirements.1
You should consult with a licensed insurance broker before signing any insurance policy. For example, if your business is in the lower-risk category, you could look for a BOP that combines all your business insurance needs and has a cost-effective rate.
How Does a Business Liability Plan Work?
Your insurance policy will state the maximum amount the insurance company will pay out in the event of a liability claim. You are responsible for paying any costs that are above the maximum payout amount of your insurance company. You could, however, buy additional coverage with excess insurance or umbrella insurance.2
It's always a good idea to conduct your own industry research. For example, a client contract could require your business to have higher coverage than what your current policy provides. Also, some construction contractors may add you to their own general liability policy for the duration of a project.
Steps to Buying Business Insurance
When shopping for or buying business insurance, the Small Business Association recommends using a four-step approach:1
Step 1: Assess your risks and vulnerability
Risk assessment is a vital element in business continuity planning. The assessment could be the due diligence that will pay dividends in protecting your people and business property if disaster strikes.
Step 2: Locate a reputable licensed agent
Find an agent who is motivated by providing you with the best and most cost-effective insurance coverage. Insurance agents usually work on commission. Make sure your agent puts your interests ahead of his or her own.
Step 3: Shop around and take note of price differences
Compare the price and coverage of policies offered by several agents and insurers. Pay particular attention to policies that are priced lower than average, especially the coverage and deductibles. Insurance is like any other product: you get what you pay for.
Step 4: Reassess your insurance needs yearly
As your business expands in value, size, and scope of operation, so do your risks. Reassess your insurance needs at least yearly. Again, it is about risk assessment and your ability to recover from a disaster.
1. SBA.gov, 2022
2. TheBalance.com, June 7, 2022
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.