BY Michael Kelly - The Hartford
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Many small business owners wonder, “Do I need liability insurance for my business?” The quick answer is that you probably do.
A more thoughtful answer is that it depends on what type of business you run and the agreements you set with customers.
To decide if your business needs liability coverage (and again, it probably does), it helps to understand what business liability insurance covers, why most small business owners need it, and the types of circumstances under which businesses are covered.
The Basics of Liability Insurance
When you get down to the basics of liability insurance, the term “business liability insurance” is a broad concept that most often refers to either general liability or professional liability insurance.
General liability insurance helps cover the costs associated with bodily injury or property damage claims made against a business. It can also cover the costs of claims made against a business for false advertising. Common general liability claims typically involve “slip and fall” lawsuits. For example, if during a cold winter month, a clothing store forgets to salt the entrance to their store and a customer slips on the ice, injures his back and then files a lawsuit. In a case like this, general liability insurance could help cover the cost of the claim made against the business for causing the injury by not adequately maintaining their property.
Professional liability insurance is different from general liability insurance in that it helps cover costs resulting from the business making an error or omission in the services or goods they provided. It helps protect your business from the legal costs associated with an error in the services you provide or the goods you sell.
For example, an accounting firm that makes a mistake in a client’s financial statements that ends up costing the client a lot of money. If the client sues the accounting firm, professional liability insurance can help cover the costs the accounting firm incurs to handle the claim.
Basics of Liability Insurance: When Is Liability Insurance Needed?
So, when is liability insurance needed? Small businesses that sell goods and services are wise to consider buying general and professional liability insurance. Lawsuits by customers and clients against businesses are becoming increasingly common.
In fact, the cost and compensation of liability claims in the U.S. were $429 billion in 2016. This figure is about 2.25% of the GDP. Without business liability insurance, most businesses would not be able to handle the costs of a large claim against them.
For example, consider a tech business that makes a mobile app for a customer’s company and the mobile app doesn’t work correctly. Then the customer files a lawsuit claiming they lost $500,000 worth of business as a result. If the tech company is found liable and has professional liability insurance, the coverage can help with some or all the costs of that claim – depending on the limit of the policy.
If the tech company does not have professional liability insurance, or it does not have enough coverage, the tech company may have to pay for some or all that $500,000 by their own means. If the money isn’t there, this could cause the company to go out of business.
Do I Need Liability Insurance for My Business If Customers Sign a Waiver?
Many business owners ask themselves do I need liability insurance for my business if my customers sign a waiver, and the answer is yes. A waiver or release form is a contract designed to shift liability away from the business with the consent of the customer. Waivers are meant to significantly alter the legal landscape from a place where the business is responsible for a place where responsibility lies more with the customer. However, if a customer makes a liability claim, release forms may not always be enforced. If a business is found grossly negligent, the legal bodies overseeing the claim may ignore the waiver altogether.
That said, it’s possible a waiver could help your business avoid some liability claims. However, consider seeking legal counsel first. Have a qualified attorney draft your waiver and get guidance on how and when to have customers sign the waiver.
Still, waivers are not impervious and may leave your business vulnerable to liability claims. If a customer does make a claim against your business, and the waiver is not enforced, business liability insurance can help cover the costs of the claim.
Additional Basics of Liability Insurance
Consider a Business Owner’s Policy
A Business Owner’s Policy (BOP) combines business property insurance and business liability insurance into one business insurance policy. A BOP is a great option because it can be customized with different types of insurance to fit the needs of your business. For example, you can add commercial auto insurance to your policy if your business uses cars or trucks.
One of the most important ways successful businesses protect their assets is by ensuring they can survive big hits. Large threats — such as data breach, or liability claim — have the potential to devastate your business in the blink of an eye. Make sure your business is protected. At a minimum, you probably need general liability insurance, and if you sell goods and services you may need professional liability insurance as well.