Liability Insurance
If someone falls while visiting your business premises, or a customer is hurt by
a product your business sells, you can be held responsible. That’s the risk that
liability insurance covers.
In a 2004 survey released by the National Federation of Independent
Business (NFIB), 30 percent of small business owners ranked the cost and availability
of liability insurance as the second most important insurance concern they faced.
(Health insurance ranked first, while workers’ compensation
ranked third.) Concerns about liability insurance are significantly increasing.
In a 2000 survey, only 11 percent of small business owners cited cost and availability
of liability insurance as a critical issue.
Liability insurance, also called Commercial
General Liability (CGL), covers 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. CGL coverage pays
for the injured party’s medical expenses. It excludes your employees, who are covered
by workers’ compensation. Bear in mind that even trespassers can sue you if they
fall and get hurt on your business premises!
There are three types of legal damages people may sue you for
that are typically covered by a CGL policy:
- Compensatory damages:
financial losses suffered by the injured party and future losses they may suffer
resulting from an injury they claim in the lawsuit.
- General damages: non-monetary
losses suffered by the injured party, such as “pain and suffering” or “mental anguish.”
- Punitive damages: additional
penalties and charges the defendant must pay.
Request a Business Insurance quote.
Standard liability insurance does not protect a business
against:
Claims from sexual harassment, wrongful termination of employees, failure to employ
or promote, or race and gender lawsuits. These and other employee-related claims
are covered by employment practices liability coverage.
The cost of employment practices liability coverage
depends on a business’ number of employees, whether there is a history of the company
having been sued in the past, and other business risk factors. The policy also pays
for legal costs associated with a company’s defense of a lawsuit related to employment
practices.
Claims related to operating an automobile or truck. If you
own vehicles for your business, whether for deliveries or client consultations,
you will need separate commercial
automobile coverage
to protect you and your employees against liability claims resulting from car accidents.
Automobile liability insurance is required by most states. It
covers medical expenses and damages to another person’s property as a result of
a motor vehicle accident caused by the insured’s negligence. Some states mandate
“no fault” auto insurance, which provides coverage
for medical expenses, rehabilitation, funeral expenses, lost wages and in-home assistance
to the driver and his or her passengers, regardless of who is held at fault in an
accident.
Many policies offer or include uninsured or underinsured motorist
protection, which provides coverage for the insured and his or her passengers if
they are injured in a collision caused by an uninsured or underinsured motorist.
If your vehicle is primarily used for business, make sure your company’s name is
on the policy instead of your personal name to avoid complications later should
you need to file a claim. (For details, see commercial auto insurance section of
this site.)
Professional Liability insurance — or Errors and Omissions insurance
— is coverage for wrongful practices by professional service providers (e.g. healthcare
providers, lawyers and consultants). This type of insurance covers faulty service
(errors) or failure to provide a service altogether (omission).
Malpractice insurance is a specific type of professional liability policy
that protects physicians and other licensed professionals from liability associated
with bodily injury, medical expenses and property damage, as well as the cost of
defending lawsuits related to such claims.
As with other liability insurance policies, premiums for professional
liability coverage depend on the type of professional service being provided and
its level of risk.
Business Property Insurance (Business Owners Policy)
Property insurance protects small business owners from
losses due to damage to physical space or equipment and as a result of theft. For
insurance purposes, a business’ property includes the physical building in which
it resides, as well as its other assets. All of the following, owned or leased,
can be considered business property:
- The actual building
- Inventory
- Furniture, equipment and supplies
- Machinery
- Computers and other data processing equipment
- Valuable papers, books and documents
- Artwork and antiques
- Television sets, VCRs, DVD players, satellite dishes
- Signs, fences and outdoor property not attached to a building
- Non-tangible items such as trademarks and copyrights
There are three types of property insurance plans:
- Basic form, which includes losses resulting from a fire,
lightning, windstorm, hail and explosion, plus the cost of removing property to
protect it from further damage.
- Broad form, which includes basic plus extended coverage
for other types of perils, such as a roof collapse (e.g. caused by snow or ice),
riot and civil commotion, etc.
- Special form, which includes basic and broad, and covers
all direct physical losses except conditions specifically excluded as listed in
the policy.
With property insurance you can buy either actual cash value
or replacement cost insurance.
Actual cash value insurance reimburses you for the value of
lost, damaged or stolen goods after depreciation is taken into consideration. Replacement
cost insurance reimburses you the amount it would take to replace, rebuild or repair
damages with materials of similar kind and quality, without deducting for depreciation.
Business Property Insurance
It’s important to have your property value assessed before, and periodically thereafter,
any type of property insurance coverage is purchased. Be sure to keep copies of
receipts for equipment, furniture and other valuable items in the event your premises
are destroyed. Keep physical photos of your property in another location as well
as digital pictures that you store on your computer or with a Web service.
High-value specialty items, like antiques and artwork, should
also be assessed by a reputable appraiser before you buy property insurance. These
types of items are usually covered for an agreed-upon amount before a policy is
written. It is important to specifically tell your agent about these specialty items
so that the correct coverage is provided.
If you lease your building or offices, do not rely on your landlord
to provide coverage for your business property. The building will typically provide
insurance only for the basic structure and common areas. Read your lease carefully
– there may be other requirements or penalties in the fine print. Check to see what
is and is not covered so that you are fully protected if something happens to your
property and equipment or if someone decides to sue you for damages caused by you
or one of your employees.
A property insurance policy generally includes a statement specifying
the limit of liability. Be sure you understand how it works. The limit of liability
is defined as the maximum amount an insurer will pay for a covered loss. Typically,
the insurer will bear responsibility up to a certain limit, as stated in the policy,
with the policyholder liable for amounts above that limit.
Costs for business interruption coverage are tied to the type
of small business you operate. For example, less business interruption coverage
would be needed following a fire at a travel agency versus an art gallery, assuming
that it would take more time for an art gallery to recover from a fire.
Even if you purchase business interruption coverage, make sure
you have sufficient funds to tide you over the first few days. This type of coverage
typically doesn’t kick in for a specified time period after a disrupting incident
occurs. The time period will be listed in your policy.
Liability insurance premiums are typically based on a business’
sales and payroll estimates provided prior to policy inception. If the actual amounts
turn out to be higher after the policy has been issued, you may need to pay an incremental
premium. Conversely, if the amounts are less than estimated, you could get a refund.
Other factors that influence your liability premiums include
your type of business and the risks generally associated with it. For example, a
toy manufacturer may pay $3 per $1,000 of sales. Thus, on $10 million of sales,
the premium would be $30,000. A company that manufactures a less “risky” product
or engages in a less risky business, such as a florist, may pay $1.50 per $1,000
of sales, or $15,000.
Insurance companies evaluate a business’s risk for liability
coverage based on numerous factors: the number of claims filed within an industry
or probability of a claim for a similar type of company; the financial stability
and longevity of a business; state laws; business products and/or operation; and
a business’ approach to handling and preventing potential risks.