You’ve probably heard the phrase, “business is booming,” but that expression has never been more true. Business really is booming in the United States. And it’s no surprise that Millennials—often touted as the most entrepreneurial generation—are getting a piece of the pie.
Owning a business can be incredibly rewarding, but it also comes with a fair amount of risk. If you’re a business owner, regardless of the industry or the size of your company, having business liability insurance can be beneficial. Without it, you’re on the hook legally and financially for third-party lawsuits, which can get pretty pricey.
This guide will cover all things business liability insurance. What it is, who needs it, how much it costs, and where you can get it.
What is business liability insurance?
So, what exactly is business liability insurance? Essentially, it’s a collection of insurance policies that are designed to protect businesses from common lawsuits. It will protect your company legally and financially if you get sued by a client or customer.
Having business insurance is important because, without it, your personal assets are at risk in the lawsuit. If you lose the legal battle and your business doesn’t have the funds to cover the settlement, you might have to sell your house or pull money out of your retirement accounts to pay for it.
Is business liability insurance legally required?
You’re not legally required to carry business liability insurance in order to open a business or operate a business. However, that doesn’t mean you can get away without it.
There are a few situations where you might have to show proof of business insurance, like if you sign a lease on an office or a storefront. Plus, some clients will only agree to work with your business if you carry certain insurance policies that protect their potential risks.
What does business liability insurance cover?
Business liability insurance isn’t a single policy, like car insurance or homeowners insurance. There are a few individual policies that fall under the business liability insurance umbrella. Each policy is designed to cover a business in different areas, and depending on the nature of your business, you might not need all of them.
Here are the three main policies you should know about:
General liability insurance
General liability insurance covers third-party lawsuits related to bodily injury and property damage. Most businesses can benefit from general liability insurance, especially if you work with clients or customers. It covers the cost of things like
- Customer and client bodily injury claims.
- Accidental property damage repairs.
- Legal costs in the event of a lawsuit.
- Court settlements and judgments.
Here’s an example. Say that a client slips on a wet floor in your office and breaks their ankle, and they sue your company for their medical bills. In this case, general liability insurance would pay for their x-rays, physical therapy, and even lost wages if they are unable to work.
Now imagine that one of your employees accidentally breaks a window while installing some equipment in a client’s home. Fortunately, your general liability insurance would pay to fix the window, so the employee doesn’t have to pay for it out-of-pocket.
Professional liability insurance
Professional liability insurance, sometimes called errors and omissions (E&O) insurance, is a policy that protects your business from claims of negligence and unsatisfactory work related to a service that you provide to others. It will cover your legal fees and a settlement if a client sues your business for things like:
- Missed deadlines.
- Failing to deliver a service.
- Budget overruns.
- Poor business advice.
- Breaches of contract.
Time for an example! Let’s say that you own a contracting company, and you accidentally put the wrong address down on a materials shipment order. Now, the project is pushed back several weeks, and it causes the client to lose money. In this situation, professional liability insurance would reimburse the client for their losses if they took you to court.
One thing to know about professional liability insurance is that, in some cases, clients will require you to have it before they agree to sign a contract with your business. On a similar note, having professional liability insurance can help you attract more customers because it shows prospective clients that you care about protecting them.
Product liability insurance
If your business manufactures, sells, or distributes a physical product, having product liability insurance is a must. This insurance policy covers the cost of lawsuits related to:
- Bodily injury caused by the product.
- Property damage caused by the product.
- Lawsuits, settlements, and judgments with a third party.
Here’s an example of when product liability insurance would come in handy. Imagine you own a dropshipping store that specializes in electronics, and 1,000 customers purchase a drone that gets manufactured overseas. Unbeknownst to you, there was an issue during production, and now the drones are catching on fire. At this point, you have 1,000 unhappy customers who are suing you for selling a defective product. Fortunately, product liability will protect your business legally and financially.
If you’re not sure whether you need product liability insurance, it’s important to note that anyone can sue your business over a product you sell or create, even if they didn’t use it themselves. That means your business could also get sued by a regulation agency, like the Consumer Product Safety Commission (CPSC), if there are adequate consumer complaints.
How does business liability insurance work?
Business liability insurance works like pretty much any other insurance policy you might have, such as home, auto, or renters insurance.
When your business experiences a loss, you can file a claim with your insurance company. A claim handler will review the case, and if it’s determined that the loss is covered, you’ll be compensated accordingly, minus your deductible.
So, for example, say your business recently settled a customer injury lawsuit, and your legal fees and court costs totaled $20,000. If your policy’s deductible was $2,000, you would get a check from your insurance company for $18,000.
I should also mention that every business liability insurance policy has a coverage limit, which is the highest amount of money the insurance company will pay you after a covered loss. If your business suffers a covered loss that is higher than the policy’s limit, you won’t get that money back. That’s why it’s important to choose an appropriate amount of coverage for your business (more on that later).
Cost of business liability insurance
Now it’s time to discuss the topic on everyone’s mind—how much is this going to cost me? The truth is, the cost of business liability insurance is different for every company. It mostly depends on the amount of risk that your company faces given the industry you operate in.
That means a contracting company will probably pay higher rates for business liability insurance than an online boutique owner. Similarly, if you run a private personal training business, be prepared to pay more for insurance than your friend who owns a social media management company.
However, there are some other factors that will impact the cost of your business liability insurance policies. The number of employees you have, the state your business operates in, the insurance company you work with, and the amount of coverage you need will also determine the rate you pay.
Who needs business liability insurance?
If you rely on your business for income, you likely have personal financial assets that could be at risk in the event of a business lawsuit. And yes, that includes your rainy day fund and the car you just recently paid off. That means every business owner should strongly consider purchasing business liability insurance to protect themselves in the event of a legal situation.
But wait, you might be thinking, “My business doesn’t have any risks—why would I need insurance?” The simple answer is, lawsuits can happen to any business, and they’re often unexpected. I was surprised to learn that as many as 53% of small businesses face a lawsuit every year, according to the Small Business Administration (SBA).
Now is a good time to debunk the myth that only big businesses need insurance. In reality, businesses of any size can get sued by clients and customers, and even small business lawsuits can be incredibly expensive. If you’re not prepared, it’s possible that a third-party lawsuit could cause your business to go under. Not to mention, it could also put you in a lot of personal debt.
Lastly, I want you to know that business insurance is a smart investment regardless of your company’s structure. Whether your business functions as an LLC, an S-Corp, or a partnership, business liability insurance can be incredibly valuable. If you’re a freelancer or a sole proprietor, business liability insurance is even more essential because you assume 100% of the liability.
How much business liability insurance do I need?
Before I wrap things up, let’s quickly go over one of the most important topics—figuring out how much business liability insurance you need.
The right amount of insurance is different for every business. Your coverage limit should be based on the amount of risk your business faces, the number of employees you have, how much insurance your clients require, and ultimately, how much you have to lose personally in the event of a legal battle.
Business liability insurance policies usually have two limits. The aggregate limit is the most amount of money that your insurance company will pay for all the claims you file during the policy period, which is usually one year. There’s also the per-occurrence limit, which is the maximum amount your insurer will pay after a single covered claim.
Typically, business liability insurance comes with high coverage limits by default. Per-occurrence policy limits usually start around $100,000 and often exceed $2 million. You can assume that an aggregate limit will be at least twice the per-occurrence limit, but every insurance company offers different levels of coverage.
You might be tempted to choose a low coverage limit to get a cheaper rate, but I strongly caution against that. Even frivolous lawsuits can be incredibly expensive, and regardless of the outcome, it could put you in a tough financial situation if you don’t have enough insurance coverage.
Business liability insurance is kind of like a security blanket. If you’re running a responsible business, the risk of a third-party lawsuit is probably low. But in the event that it does happen, you can rest assured knowing that it’s not going to take a serious toll on your business finances, or worse, your personal assets.
So here’s the bottom line—if you own a business that provides income, I strongly encourage you to get business liability insurance. In my opinion, it’s one of the best investments you can make. And once you buy a policy, don’t forget to review your insurance coverage every year to make sure you always have adequate protection.