Liability Insurance protects your business in situations where you are sued for damages.
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One common term you will come across when you research business insurance is liability insurance. There are many situations in which a company could be held liable, so it’s important to understand what liability insurance is, how it works, and what liability coverages are relevant for your company.
Table of Contents
- What is Liability Insurance?
- Liability vs. Casualty Insurance
- Who needs Liability Insurance?
- Types of Liability Insurance
- Occurrence vs. Claims-Made Policies
- Deductible vs. Self-Insured Retention
- Limits of Insurance
Liability Insurance protects your business in a broad range of situations where your company has caused another person or company to suffer losses, whether it’s a physical injury, damaged property, financial loss, or other personal injury. There are many types of liability policies available, but they all share one thing in common: They serve to protect you and your business when you may be held liable for damages and sued.
Every business is unique, and your business may require a different set of liability policies than another company finds necessary. It’s important for every business owner to understand the types of business insurance policies that insurers offer and how the specific risk exposures of your business can be adequately protected.
Casualty insurance is a broad term used for insurance coverage that consists primarily of liability coverage. You’ll often hear the term “property and casualty insurance,” which is a wide-ranging category of insurance that does not include life or health insurance. The “property” portion of property and casualty insurance covers losses resulting from damaged or destroyed property that is owned or leased by your company, including buildings, equipment, computers, furniture, artwork, and other items. Casualty insurance, on the other hand, covers injuries to people and damage to others’ property for which you might be held legally liable. Casualty insurance and liability insurance are often considered interchangeable terms.
The majority of businesses will need some form of liability insurance, but the specific policies that are necessary for your business depend on the nature of your industry and what types of risks your business is exposed to. It’s critical to obtain a range of liability coverage that will protect your assets and help you stay in business in the event of a major claim.
The following are common types of liability insurance:
General liability insurance provides coverage if you cause accidental harm to a third party. This is a crucial type of insurance since almost every industry has some level of risk for these claims — even industries that are not considered physically dangerous. If your business causes injury to someone who is not your employee, general liability insurance would pay for any resulting legal fees and damages.
Bodily injury, property damage, and personal and advertising injury are all typically covered by general liability insurance. The bodily injury and property damage portion of general liability insurance will cover situations such as a person being injured on your property or someone else’s property being damaged in the course of your work. The personal and advertising injury portion of coverage would cover non-physical injuries, including copyright infringement, libel, slander, wrongful arrest, and a number of other types of claims.
- A customer at your optometry office trips over an uneven piece of carpeting and falls, sustaining a head injury. Your general liability insurance would pay for the customer’s medical bills and would cover any resulting lawsuit or settlement if the customer sues.
Professional liability insurance, also known as errors and omissions insurance, is a type of liability insurance that will provide financial protection if your company is sued because of its professional services. Because the professional risks faced by different professions can vary widely, professional liability insurance policies are typically designed for specific industries. This is a key coverage for many industries since mistakes or failures in professional work can result in heavy financial losses for clients. If someone sues you because the professional advice or services you provided were unsatisfactory or negligent, your insurer would pay to defend you in a lawsuit and cover any resulting judgments or settlements.
- You own a web development company, and a client hires you to create a new website for their home decor company. Unfortunately, a mistake in an update to the website makes it impossible for customers to complete purchases. The client loses thousands of dollars in revenue and fields many complaints until the issue is resolved. They sue you for damages. Your professional liability insurance would cover the lawsuit and any resulting settlement.
Commercial auto liability insurance is a must-have for any company that owns vehicles titled under its name. If you or your employees are at fault in an accident while driving a company car, your insurer will pay for any resulting third-party bodily injury, property damage, or pollution cleanup. Commercial auto liability coverage is not only important but also required in most states. Commercial auto insurance policies can cover anything from a single vehicle to a large fleet, and covered vehicles can range from cars and SUVs to large trucks and other specialized vehicles.
- You run an electrical contractor business. While driving a company van, one of your electricians becomes distracted and runs a stop sign, colliding with another vehicle in the intersection. Your commercial auto liability insurance would cover bodily injuries that the other driver suffers, as well as damages to the other driver’s vehicle.
Cyber liability insurance protects your company from financial losses and liability caused by data breaches, cyberattacks, and other cyber incidents. Cyberattacks can be very expensive for companies to deal with. Companies could directly incur expenses, such as the costs of hiring experts to remove a virus or recover data, notifying customers whose data was exposed as required by law, lost income, and more. In addition, third parties could sue you for failing to keep their information safe. Legal fees, settlements or judgments, and regulatory fines can all put a major strain on your company’s resources. Cyber liability insurance would provide funds to help you recover in the case of any cyber event.
- Hackers breach your e-commerce website’s customer database and access the personal information of hundreds of customers, including credit card numbers, addresses, and email addresses. Your cyber liability insurance will pay for the losses incurred due to the cyberattack, including lost income and data recovery, and legal costs to defend your company against customer lawsuits.
Product liability insurance is a critical type of liability insurance for companies that sell goods or products. Even if you perform rigorous quality control, there’s always a chance that a faulty or defective product could be released to customers, potentially causing them bodily injury, property damage, or financial losses. Product liability insurance can protect your company from financial losses if you are sued because of your goods and products.
- Your company sells electric griddles. A manufacturing defect in a batch of griddles causes them to smoke and spark, starting fires in the homes of several customers. Customers sue you for damages. Product liability insurance would cover your legal fees and any resulting settlements or judgments against you.
In most states, workers’ compensation insurance is legally required for companies with employees. Workers’ comp covers your employees if they are injured or fall ill in the course of their duties. It will pay for their medical bills, rehabilitation, and a portion of their lost wages while the employee is unable to work. If an employee should die as a result of their job, workers’ comp would pay for funeral costs and death benefits for their spouse and children.
- An employee in your warehouse injures his back after lifting heavy boxes. Workers’ compensation insurance would pay for his medical costs and a portion of his lost wages while he is unable to work.
Employers liability insurance is a related coverage that is most often included as “Part B” of workers’ compensation policies, although in some cases you may need to purchase it separately. This coverage comes into play when an employee suffers an injury or illness that is not specifically covered by workers’ comp. Each state defines what is covered by workers’ comp, and employees cannot sue their employer for an injury that is covered. However, if an employee’s injury is not covered by workers’ comp, they could sue your company. Employers liability insurance will defend any cases brought against your company for injuries not covered by workers’ comp, covering legal fees, court costs, and any settlements or judgments against your company.
Directors and officers liability insurance protects your company’s executives from lawsuits in which they might be held personally liable. Executives make many decisions that could have financial consequences for clients, customers, vendors, competitors, shareholders, and others. If the company is sued for an action taken by its executives, they could be personally named in the lawsuit, which would put their personal assets at risk. Directors and officers liability insurance would provide funds to defend the lawsuit and protect their assets.
- Your advertising company hires a senior executive from a prominent competitor. The competitor sues your firm and your board of directors, alleging that their former employee used knowledge of the competitor’s clients inappropriately. Your directors and officers policy would provide funds to defend the case.
Employment practices liability insurance (EPLI) protects your company against lawsuits brought by current, former, or prospective employees. When you operate a company, you have control over hiring, firing, promotions, compensation, and many other aspects of employment. This means that if your employees feel that they were treated unfairly, they could sue you with claims of wrongful treatment, which could include discrimination, harassment, retaliation, or a number of other employment issues. EPLI provides funds for lawsuits and settlements that result from these claims. Policies typically include coverage for your company, directors, officers, managers, and current and former employees.
- A salesperson at your software development company uses crutches. The employee alleges that she was not given the opportunity to go on sales trips because of her disability, which reduced her earning potential. She sues for disability discrimination because she has been deprived of career opportunities.
Any person or organization that has responsibility for employee benefit plans is a fiduciary. When your company administers health care plans, retirement accounts, or pension plans for employees, the person or group that manages these employee benefit plans has a responsibility to manage them appropriately. Even if you hire a third party to manage employee benefits, you still have a fiduciary responsibility. If employee benefit plans are mismanaged, whether it’s an administrative error or intentional wrongdoing, you could be held liable for employees’ losses. Fiduciary liability insurance will cover legal fees and settlements if you are sued for alleged wrongdoing in your role as a fiduciary.
- Your company offers a health insurance plan to employees through a third party provider. An employee fills out paperwork to obtain health insurance for his new spouse after getting married. The insurer requires that new spouses be added to coverage within 60 days. Unfortunately, the HR department at your company makes a mistake with the paperwork, and it isn’t submitted in time. The employee’s spouse falls ill and incurs significant medical costs that the insurer won’t cover because the paperwork wasn’t filed in time. The employee sues you for failing to manage health coverage correctly.
Media liability insurance is a form of professional liability insurance designed for companies that produce publicly visible content, such as publishers, marketing and advertising companies, broadcasters, PR companies, web designers, and others. Because these companies have an elevated risk of being sued for copyright infringement, slander, and libel, media liability insurance provides coverage for those types of claims. Media liability coverage is similar to professional liability policies for other industries, and it will also cover you if you are sued for any failures or errors in your professional services and work.
- In an email marketing campaign for a client, your digital marketing company uses illustrations that look very similar to designs by a professional artist. The artist sues for copyright infringement. Your media liability insurance would cover the lawsuit and any resulting settlement.
Commercial umbrella insurance extends the limits of your primary liability policies, providing extra financial protection. If your company suffers one very large claim or multiple claims in a single year, it’s possible that costs could exceed the maximum amount of funds available from your underlying liability policies. If this happens, your commercial umbrella insurance would step in to continue covering the claim up to its own limit of insurance. Commercial umbrella insurance can extend the coverage of your commercial general liability policy, commercial auto liability policy, or employers liability insurance policy. It can also provide coverage above more than one underlying liability policy.
- While driving a company van to a client’s home, an employee of your HVAC company hydroplanes on a wet road and collides with another car, severely injuring its driver. The other driver sues and is awarded $1.6 million in damages. Your commercial auto insurance policy has a combined single limit of $1 million. Your primary policy would pay for $1 million of the claim, after which it would reach its limit. Your commercial umbrella insurance would pay the remaining $600,000.
Business insurance policies can be written on either an occurrence basis or a claims-made basis. In liability coverage, general liability policies are typically occurrence policies, while other, more specialized policies such as professional liability are more likely to be claims-made policies.
An occurrence policy covers any incident that occurs while the policy is active, even if the claim isn’t filed until after the policy has lapsed. For example, if someone suffers lung damage from exposure to asbestos in 2010 but doesn’t file a claim until 2015, it would still be covered by an insurance policy that was active in 2010, even if the policy has lapsed since then.
In contrast, claims-made policies will only cover claims that are filed while the policy is still active for incidents that occur after a policy’s retroactive date, which is the date that coverage begins. Even if the incident that led to a claim happened while the policy was active, if the claim isn’t made until after the policy has lapsed, it will not be covered. For example, your accounting firm has a professional liability policy active in 2018 but lets it lapse in 2019. If a client sues in 2019 over a mistake made when their taxes were filed in 2018, your insurer would not cover the claim even though the policy was active when the error occurred.
Some liability insurance policies will require either a deductible or self-insured retention (SIR). Deductibles and SIR are similar concepts: They both make you responsible for a portion of the costs of a loss. The key difference is that when you have a deductible, you would typically notify your insurer of the loss and they would begin coverage. The insurer then sends you a bill for the amount of the deductible. In contrast, in policies with SIR, you would be responsible for paying the full amount of the SIR before the insurer begins providing coverage. Once the SIR amount is reached, the insurer would take over and begin paying for the loss.
Companies that experience frequent small claims and have the funds to support an SIR may prefer this type of policy because it gives them more flexibility to negotiate smaller claims without involving the insurer. However, companies that don’t want to expend time and resources on handling insurance claims might be better suited to a policy with a deductible.
Liability insurance policies have limits of insurance, which is the maximum amount your insurer will pay for losses during a policy year. Policies typically have a per occurrence limit as well as a per year maximum. The per occurrence limit is the maximum the insurer will pay for a single incident, while the per year maximum is the amount the insurer will pay for all incidents over a single year. You can select your limits of insurance with your insurer; higher limits will result in higher premiums.
It’s important to be aware that legal fees affect your limits of insurance differently depending on the type of insurance. Some types of liability policies, such as general liability insurance, do not typically count legal fees against your limits of insurance.
- You have a general liability policy with a per claim limit of $1 million. You are found liable for a judgment of $1 million. Your legal fees cost $400,000. Because legal fees do not count against the limits of insurance, your insurer would cover all $1.4 million in costs.
However, for other types of liability insurance, legal fees are a major part of the costs associated with claims. These types of insurance typically have “shrinking limits.” This means that legal fees are subtracted from the limits of insurance, reducing the amount of funds available to you.
- Your professional liability policy has a limit of $2 million and you are held liable for a claim of $1.7 million. Your legal fees cost $400,000. Because your policy has shrinking limits, it would pay a total of $2 million and you would be responsible for the remaining $100,000.
There are many situations where your company could be held liable for harm to another person or company, and the costs for legal defense and settlements are significant and continue to rise. Liability insurance is an important type of coverage that protects your company if you are sued for damaging a third party. There are a wide variety of liability policies available, and which specific ones your company needs can vary based on your industry and risk exposure. With a broad range of liability coverage targeted to your company’s needs, you can ensure that your company will be able to cope with any major incidents and continue to focus on building your business.