For small business owners, having comprehensive business insurance is a necessary element of smart financial planning. Liability insurance can safeguard a company from loss, protecting its assets from lawsuits and claims. However, it is not always easy to determine exactly what type of insurance that your company needs or the optimal level of coverage. Finding the best rates and most comprehensive coverage requires an understanding of what liability insurance is and an evaluation of your business’ particular needs. With this knowledge, you can work directly with a business insurance professional to find the best small business liability insurance for your company.
What Is Liability Insurance?
In general terms, liability insurance protects a business in the event that it is sued or a claim is made against it. Depending on the terms of the policy, liability insurance will typically cover legal defense costs and any settlements or awards from a lawsuit. It may also cover lost profits or wages for time spent in defending against the claim. There are several forms of liability insurance, each designed to address a particular need. The three primary types of include general liability insurance, product liability insurance, and professional liability insurance.
General Liability Insurance
General liability insurance protects businesses from lawsuits based on accidents, injuries or negligence. A commercial general liability policy will protect a company from a wide variety of claims, such as property damage, bodily injury, and advertising injuries. These types of claims often arise in the course of regular business activities, such as a customer slipping and falling inside of a store or an employee damaging a customer’s house during an installation process.
It may also provide coverage for losses to other businesses if an advertisement makes a direct comparison that was defamatory. If the policy has products-completed operations coverage, it would provide coverage for losses that may happen after a business has built or installed a particular product.
Product Liability Insurance
Product liability insurance offers a more specific type of coverage for products that cause bodily injury or property damage. Companies that manufacture, sell, distribute or repair products will often benefit from product liability policies. It covers the injuries or damage that occurs as a result of a product, often due to a design defect, manufacturing flaw or insufficient instructions or warnings.
For example, if a company manufactures gas grills and one of its products malfunctions, causing an explosion that damages the customer’s house and severe burns to the customer, a product liability policy would cover the costs of a lawsuit over the defective product. However, these policies do have specific exclusions that may exempt a particular product from coverage, such as if the manufacturer did not perform quality control checks before distributing the product.
Professional Liability Insurance
Professional liability insurance protects businesses that provide services. It is often commonly called malpractice or errors and omissions insurance. While it is perhaps best-known as the type of insurance that doctors and lawyers use, it is recommended for any small business that provides a service, from hair salons to architectural firms to mechanics to realtors.
If a customer believes that the company made an error or omission in providing a service, professional liability insurance will cover the cost of defending against a lawsuit and any settlement or award. For example, if a person is audited by the IRS, he may sue his accountant for failing to file his taxes properly. Professional liability insurance will typically cover the cost of that lawsuit, subject to the policy’s limits and exclusions.
In some industries, liability insurance is required for certain contracts or to perform work on behalf of another business. This may include working as a subcontractor on a construction project or having a contract with the government. For many professionals such as attorneys and doctors, professional liability insurance is mandated by their licensing board or state government.
How Small Business Liability Insurance Works
As with other types of insurance, a liability insurance policy will have a limit on the maximum amount that will be paid in the event that a claim is made. It will also exclude certain events from coverage. That is why it is critical to read and understand the terms of the policy before purchasing a small business liability insurance policy.
A liability insurance policy will typically cover two types of costs: the legal fees associated with defending against the lawsuit and the cost of paying a settlement or award. The two items are subject to a maximum limitation so that their combined cost cannot exceed the limit. For example, if your product liability insurance has a limit of $500,000, then this is the absolute maximum that the policy will pay in the event of a claim.
If a lawsuit results in a $450,000 award and $75,000 in legal fees, then you will be responsible for the remaining $25,000 in coverage. A business can also purchase excess coverage or an umbrella liability policy to guard against claims that go beyond the limits of their liability policies.
If an incident occurs that may lead to a claim against your business liability insurance, you should notify your insurance company or agent as soon as possible. Gather all documentation related to the claim, including the time and date of the incident, the persons involved, the names of witnesses, and any photographs or video of the event. Filing a timely claim is essential to obtaining compensation for the lawsuit or claim.
What Type of Small Business Insurance Do You Need?
With a range of options for liability insurance coverage, it can be difficult to determine which small business insurance options are best for your company. Establishing your business’ needs is the key to deciding which liability policies and what level of coverage is right for your company.
To figure out what your business’ needs are, first make a list of your liability concerns. Much of this will be based on the type of industry you are in; a restaurant owner will have different potential liabilities than a manufacturer of chemical products or a company that relies heavily on employees driving to customers’ homes, which would require restaurant insurance.
The type of claims that you may expect in your business will help you decide which types of small business liability insurance to purchase. Depending on what your business’ needs are, you may purchase general liability insurance, product liability insurance, professional liability insurance, or some combination of all three types. The key is to make sure that your insurance will cover all types of claims that your company may face so that your assets are protected in the event of a lawsuit.
If you own a business that provides physical therapy, for example, you will want to be covered for malpractice claims (professional liability insurance), accidents on your premises (general liability insurance), and injuries from defective products if you sell or provide products to your patients (product liability claims). Other types of businesses, such as an office that is not open to the general public and does not manufacture, sell, or distribute products, will not likely need the same type or amount of liability insurance.
Once you have determined what your risks are and the type or types of liability insurance that your business needs, the next step is to gather your financial documents. This may include a business plan, employee information, and financial records such as tax returns, loss and profit reports, and more. Using this information, you can figure out exactly how much liability coverage you need to protect your business. It will also help you determine what premium and deductible the business can afford. A benefits consultant can assist you in analyzing your company’s finances to decide the amount of insurance your company needs, and can provide a number of insurance options based on your budget.
How To Select Liability Insurance
After determining what type and amount of business liability insurance your company needs, you will need to sift through a variety of choices offered by insurance companies to pick the best option for your business. Selecting the right business insurance can be a daunting task, requiring an understanding insurance terminology and complicated policy limits and exclusions. It is difficult to know exactly what policy — and which insurer — will best protect the business that you worked so hard to establish.
A business insurance professional can help you with this task, offering experienced insight on the type and level of insurance coverage that your business needs and providing an evaluation of the best liability insurance choices for your company.
Technology-backed business insurance professionals can analyze a broad range of policies offered by different insurers, and help you select the most comprehensive, cost-effective coverage for your business. They can also help explain different insurance terms, including policy limits and exclusions that will impact the quality of the coverage for your business. By utilizing their in-depth knowledge of the insurance industry and different plan options, a business insurance professional can help you select the best small business liability insurance for your company.
After the initial liability insurance policy has been selected and purchased, a business insurance professional can potentially save your business money by negotiating a more favorable rate based on your claim history, safety procedures, and other factors.
Liability insurance can help to protect your small business from lawsuits and other types of claims. A business insurance professional can work with your company to help you decide what type and how much liability insurance you need and your business insurance professional may be able to get the best rates and coverage for your business.
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