Business Liability Insurance – Tips for Protecting Your Assets with the Right Coverage

As a small business it’s critical that you protect your assets and your interests with a wide array of business insurance options, but what about your business liability?

Liability insurance protects you against injuries and damages suffered by a third party.  It essentially pays for the obligations that you may incur should someone get hurt while on your property or when there are property damages or injuries caused by you or your employees. Liability insurance will cover the cost of your defense and any settlement or award. 

This article explains what business liability insurance is, what type you need, who needs it, and what the law requires.

What is Business Liability Insurance?

Business liability insurance protects your small business against four categories of events for which you could be held responsible: bodily injury; damage to others’ property; personal injury, including slander and libel; and false or misleading advertising.

Small businesses that provide a service to their customers should consider professional liability insurance. Depending on your business type, you may also be required by your state government to carry such a policy. For example, physicians are required to purchase malpractice insurance as condition of practicing in certain states.

Liability coverage excludes your employees, who are covered by worker's compensation.

Do you Need Business Liability Insurance?

About two thirds of all U.S. businesses are structured as partnerships or sole proprietorships, if this is you then depending on the nature of your business, your business and personal liabilities could be at risk. Even if you operate as an LLC or are incorporated you can still be liable particularly if you have personally injured someone or have acted in an illegal or irresponsible manner. 

While there are a few exceptions in certain states, there is no requirement in the law that states that you must have liability insurance, but given the litigious nature of the society we live in, it makes sense to protect yourself and your business from any possible legal threat.

What Forms Does Business Liability Insurance Take?

There are a number of business liability insurance options that protect a business from significant losses. Below are the most common ones.

• Commercial General Liability (CGL) – A CGL policy is the most common form of liability insurance and is often packaged with property insurance. CGL covers claims of bodily injury or other physical injury or property damage – for example if your company is sued because your employee damage’s someone’s property. CGL can also cover claims of false or misleading advertising.  There are three types of legal damages people may sue you for that are typically covered by a CGL policy compensatory damages, nonmonetary losses suffered by the injured party, and punitive damages.
• Professional Liability Insurance –Provides coverage for errors and omissions (E&O), or malpractice. Basically if your client considers your business has made errors or omissions in the delivery of services or was otherwise negligent, this coverage takes care of the associated and oftentimes costly lawsuits.
• Product Liability Insurance – If you are in the business of manufacturing or distribute a product, this insurance protects you against claims arising from accidents or injuries caused by your product. It covers the cost of recalls, the removal of sold items from stores, and legal defense fees and claims.
• Employment Practices Liability Insurance – This protects a business, its directors and officers from lawsuits by current, prospective and former employees.
• Pollution and Environmental Liability – Rarely is pollution and environmental damage included in a liability policy, if your business is at risk it’s worth considering the benefits of this insurance which can protect you from the costs of clean-up of your property and any lawsuits arising from the accident.

What Business Insurance does the Law Require?

Your state government* determines insurance requirements for businesses but generally, most states require businesses with employees to pay for workers' compensation insurance, unemployment insurance, and state disability insurance. Your state may also require insurance of specific business activities. For example, if you own a car or truck and use it for business purposes, you may be required to purchase commercial auto insurance. Finally, your financial lender or investors may require you to maintain life, business interruption, fire, flood or other types of insurance to protect their investments.

Read more about business insurance and get tips for buying it on SBA’s Business Insurance resource page.

How to Buy Insurance

Confused about where to start? Take a look at these Five Tips for Buying Business Insurancefrom the SBA. It includes tips on assessing your risk, shopping around, Business Owners’ Policies (BOP), and maintenance of our policy.

Related Articles and Resources

• Small Business Insurance: Protect Your Business with the Proper Coverage
• Small Business Insurance, Part 1: What Type of Insurance Do I Need?
• Small Business Insurance; Part 2: Finding and Buying the Right Policy
• Insurance Resources: Resources and educational materials that provide in-depth guidance on insurance matters, including links to state offices of insurance.

*Note: Hyperlink directs reader to non-government website.

Caron Beesley has over 15 years of experience working in marketing, with a particular focus on the government sector. Caron is also a small business owner and works with the SBA.gov team to promote essential government resources for entrepreneurs and small businesses.

About the Author

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley