Small business owners have a lot on their plates – from managing day-to-day operations to business development and strategic planning. With so many responsibilities to juggle, it’s easy to overlook certain aspects of running a business, like getting proper insurance coverage. One type of insurance that’s essential for nearly every small business is liability insurance.
Liability insurance protects your business in the event that you or your employees are found legally liable for bodily injuries or property damage suffered by a third party. Without adequate coverage, a single lawsuit could devastate your company’s finances. When considering liability insurance for your small business, you’ll need to understand what it covers, why you need it, and how to pick the right policy.
Why Liability Insurance Matters
Liability insurance, often referred to as third-party insurance, is exactly what it sounds like – it protects you if a third party sues you or makes a liability claim against your small business. For example, if a customer slips and falls in your store, liability insurance covers their medical bills and any legal expenses arising from the incident. Or if your product is defective and injures someone, liability insurance pays for their losses.
Lawsuits and liability claims can happen in any industry and to any business. Without insurance, you would have to pay legal fees and damages awards out of your own pocket. A single substantial claim could force you to drain your business bank account, take out loans, or even declare bankruptcy. With liability coverage, your insurer handles the claim and pays the costs instead. This protection is essential because of how much lawsuits can cost small business owners. According to a 2018 study by Hiscox, the average liability lawsuit in the U.S. cost small businesses over $54,000.
Beyond purely financial reasons, having liability insurance is often legally required. Landlords may insist tenants carry liability insurance. Many states and municipal governments mandate coverage for certain professions like home contractors, childcare providers, accountants, and lawyers. Even if you don’t fall into one of these categories, liability insurance should be standard practice for every legitimate business. Customers and partners expect you to have coverage and may ask for proof of insurance. With so much on the line legally and financially, liability insurance is truly necessary for small businesses in every sector.
Types of Liability Insurance Policies
There are a few main types of liability insurance policies suited for small business owners. The needs and risks associated with your particular company determine what type(s) of coverage you should have and what policy limits you require. The most common liability insurance options include:
Commercial General Liability (CGL) Insurance
This coverage is designed for claims of bodily injury or property damage to a third party arising from your company’s operations and/or products. For example, a visiting customer slipping and falling on a wet floor or a short circuit in your product burning someone’s property. Nearly every small business will need CGL insurance at some level. It can cover attorney fees, medical expenses, repair/replacement costs, and any legal damages awarded to the injured party.
Errors & Omissions (E&O)/Professional Liability Insurance
For companies providing professional advice and services like consultants, accountants, architects, etc., Errors & Omissions (E&O) insurance is essential. It covers damages arising from mistakes you or your employees make that cause financial harm to a client or customer. Relatedly, cyber liability insurance covers mistakes specifically related to loss of digital data and IT security breaches. Any business storing customer data or providing professional services should strongly consider E&O or cyber liability insurance.
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Product Liability Insurance
If your business designs, manufactures, or sells products – especially products used/consumed by end consumers – having product liability insurance is vital protection. It covers claims alleging a defective product caused injury or damage. Product liability also applies if your product fails prematurely, doesn’t perform as advertised, or lacks adequate warning labels. Lawsuits involving faulty products can be catastrophic without insurance to fund legal defense and claim settlements.
Those are among the most common liability policies, but numerous other specialized options exist too like bailees insurance, copyright infringement insurance, event insurance, media liability insurance, Directors & Officers (D&O) insurance, and more. An insurance agent or broker will recommend the right liability coverage for your business model and operations.
How Much Liability Insurance Do I Need?
A small consulting firm with no physical premises, products, or employees has vastly different liability risks than a retail store, childcare facility, or construction contractor. Required liability insurance limits span a wide range based on the level of risk exposure involved. For lower risk businesses, $500,000 to $1 million in total coverage may suffice. Standard advice is to carry a minimum of $1 million in liability insurance coverage. However, many landlords and professional associations mandate $2 million. High risk sectors like security guards, healthcare, warehouses, and contractors often recommend $3 million to $5 million.
Beyond those general benchmarks, determining adequate limits involves assessing your specific business exposures. Consider factors like:
- Industry – More regulations and risks for childcare, healthcare, etc. necessitate higher limits.
- Revenue/Assets Size – Larger companies face greater lawsuit risks.
- Physical Premises – More property exposure with stores, warehouses, etc.
- Use of Vehicles/Equipment – Motorized equipment raises liability if involved in an accident.
- Subcontractor Work – You can be liable for damage/injuries caused by your subcontractors.
- Type of Work/Products/Services – Complex or dangerous products warrant higher limits.
Though cost is a key factor when buying insurance, going with lower liability limits to reduce premiums can backfire terribly if you face a large lawsuit. Finding the right balance between prudent coverage and affordability comes down to objectively evaluating your business exposures and asset values you would have at risk in a lawsuit. An independent insurance broker can provide guidance to help determine suitable liability insurance limits specific to your small business situation.
How to Get the Best Rates on Liability Insurance
While liability insurance is crucially important, overpaying on premiums diverts money away from core business needs. These tips can help you secure the most cost-effective liability insurance for your small business:
Have Good Records
Insurers scrutinize your company’s records to gauge risk factors and set accurate rates. Maintaining neatly organized records demonstrates you operate professionally and likely present fewer risks. Provide insurers documentation like inspection reports, safety manuals, employee training protocols, sales figures, tax statements, client contracts, and quality control processes.
Maintain Safety & Security Precautions
Policy rates heavily factor in risk levels. Undertaking safety and security improvements lessens risks and leads to lower premiums. Minimizing hazards for customers/staff with measures like installation of cameras, guard rails, smoke detectors, proper lighting, cleaning protocols, secured access points, IT firewalls, etc. means substantial savings on liability insurance.
Review All Options Before Renewing
At renewal time, don’t reflexively accept quoted premium hikes from your current insurer. Different carriers utilize varied rate factors and formulas. Before renewing, have your insurance broker shop multiple insurers using the latest details on safety improvements, revenue fluctuations, claims history, employee training, etc. Updated data can warrant lowered rates from your existing or alternative carrier.
Ask About Discounts
Many insurers offer liability insurance discounts like multi-policy discounts when bundling multiple covers under one provider, paying annually discounts versus monthly installments, association member discounts, senior management experience credits, safety training discounts, and more. Be sure to inquire about any reductions for which your business may qualify.
Modify Coverage Layers
The typical liability insurance structure has a primary layer covering lower cost claims then supplementary excess layers that activate for larger losses. Increasing your primary layer’s deductibles and limits slightly while lowering excess layer limits can significantly reduce overall premiums. Just ensure total coverage still adequately protects your assets.
Adjusting liability policy structures takes expert know-how. Partnering with an independent broker well-versed in these optimization strategies can drive major savings without unduly sacrificing protection. Their access to many carriers also helps find you the best rates.
Choosing the Right Liability Insurance Company
Not all carriers specialize in small business clients nor offer competitive rates even amongst those catering to the segment. Working with an independent insurance broker grants you access to a diversity of options. They can match your situation with insurers best equipped to provide optimal liability insurance policies at affordable pricing.
In evaluating insurance companies, key indicators to examine beyond rates include:
- Experience handling your industry/niche – Do they possess relevant expertise insuring businesses like yours?
- Risk management guidance – Do they provide protocols to help mitigate your exposures?
- Ease of filing claims – Is their claims process relatively smooth and efficient?
- Customer service reviews – Do past/existing customers report satisfactory experiences?
- Financial strength ratings – Is the carrier financially solid enough to pay major claims?
While buying strictly on price is ill-advised, independent brokers have the market knowledge to secure very competitive rates from carriers meeting the above criteria relevant for small business liability insurance buyers.
Conclusion
Liability insurance, especially Liability insurance, especially commercial general liability insurance, is essential coverage for every small business to have. It protects your company assets in the event of a costly lawsuit or liability claim tied to property damage or bodily injuries caused to a third-party. The consequences of facing legal action or even a single substantial claim without adequate insurance can spell financial ruin for small business owners.
