Most small business owners are rightfully concerned with day-to-day operations like growing sales, managing cash flow, and managing employees. But always looming on the horizon is the potential for being sued. Whether you think you’re at risk for being involved in a lawsuit or not, most small businesses will, in fact, be faced with a lawsuit. A US Chamber Institute of Legal Reform study revealed that 43% of small businesses were threatened with or involved in defending a lawsuit at some point.
Lawsuits, even small ones, can be financially devastating for a small business. Even if the claims are unfounded, you have to hire legal counsel to defend yourself. And paying damages or financial settlements or judgments can be the final blow to your already cash-strapped business.
But if you’re prepared for a lawsuit with appropriate business liability insurance, much of the financial strain can be mitigated. By working with an independent insurance agent who understands your unique liability risks, you can purchase general liability insurance and additional specialized liability policies that protect all aspects of your operations.
The Truth about Lawsuits
The threat of a lawsuit is very real for small businesses. And they’re sued for a wide variety of reasons, some predictable and some less so. Employees and customers are the two most common sources of business lawsuits.
Nearly one in five small businesses will face employee lawsuits, many costing over $125,000 to defend. If a case goes to trial, 25% of them result in a judgment over $500,000.
Employees (current, former, and even prospective) sue for a variety of reasons, often when they feel they’ve been disciplined or terminated unfairly. Other employment-related lawsuits typically stem from things like wage and salary violations, workplace harassment, hostile work environments, violations of discrimination laws, employee injuries, and more.
Customers also sue for a wide range of reasons, from products that cause injuries to injuries on the company’s premises. Other common lawsuits stemming from customer interactions include discrimination claims (e.g., violations of the Americans with Disabilities Act), personal injury or property damage claims, contract disputes, and more.
And what might these lawsuits cost for a small business owner? The cost of a lawsuit depends on the cause of the action, whether or not the lawsuit is settled out of court or goes to trial, and if you win or lose. The costs of hiring an attorney, court fees, and discovery costs all add up fast, and that’s without the lawsuit ever getting to court. If your case isn’t settled and goes to court, the median cost for a business lawsuit begins at $54,000 for a typical liability suit, and can be as high as $91,000 for a contract dispute. And that’s before any damages or judgments are awarded to the injured party.
Remember that not every business has the same risk for lawsuits or the same kinds of lawsuits. A brick-and-mortar retailer, for example, has higher bodily injury liability exposures than an online-only retailer. And a fireworks manufacture as greater product liability exposures than a manufacturer of fine linens. Having employees, working under complex contracts, or being a professional like a doctor or a lawyer all increase the types of lawsuits you’re exposed to and the financial impact that they can have on your business.
What Is Business Liability Insurance?
Business liability insurance protects your business in a variety of scenarios in which your company is negligent or causes harm to individuals or other businesses. Commercial general liability insurance (CGL) is the most important component of your business liability coverage. It is the first line of defense from lawsuits and liability claims against your business.
Any business owner, no matter how many precautions he or she takes, is at risk for liability claims. Liability claims can arise from injuries or property damage that occur on your business property, or those that are caused by you or your employees in the course of doing business.
CGL policies pay for attorney fees and any judgments that you might have to pay if you are sued, and also provide coverage for claims of libel, slander, copyright infringement, and false advertising.
That’s a lot of coverage! But CGL insurance still does not cover every type of liability exposure that you might have. Let’s just say that it covers the basics, but since every business is unique, you may need deeper liability protection depending upon the type of business you do and the risks you face. You may need additional commercial liability policies, or you may need to add endorsements to other insurance policies in order to cover all the bases.
Why Do You Need Business Liability Insurance?
As a business owner, you can be sued at any time for any reason. Something as simple as a customer or a supplier tripping on a wet floor can cost you thousands of dollars in medical expenses if the person is injured.
And there’s always the possibility that you’ll be sued for additional damages. Even if the injury is minor or the accusations are unfounded, the costs to defend your business and pay out a settlement can be devastating.
Medical bills and other related expenses are a lot to cover for a small business. And they’re just the tip of the iceberg if you are sued in such a situation. Attorney fees, court costs, and court-ordered settlements or judgments can easily bankrupt you.
What Does Commercial General Liability Insurance Cover?
Commercial general liability policies cover three main types of liability exposures and resulting lawsuits:
- Premises and operations exposures: Claims against your business will be covered for bodily injury and property damage related to the ownership and maintenance of the business premises, or as the result of business operations conducted both at and away from the business premises.
- Products and completed operations exposures: Claims will be covered for bodily injury and property damage that result from faulty products or completed operations (work performed by your business).
- Indirect/contingent exposures: Claims resulting from the negligent actions of independent contractors and subcontractors that you hire will be covered.
There are three types of claims for which you will receive payment from the insurance company:
- Accidental bodily injury or property damage that your business is legally responsible for
- Personal injury or advertising injury that the business is found legally responsible for
- Medical expenses for individuals injured on the premises of the business or by the business operations, regardless of fault
What Is Not Covered by Commercial General Liability Insurance?
While CGL coverage is quite comprehensive, not every type of business liability exposure is covered. After examining the exclusions, you might find gaps for which you have to purchase additional coverage.
Here are some of the most common CGL exclusions (not an exhaustive list).
- Certain types of liability claims covered under other types of insurance policies, including workers’ compensation, professional liability, commercial auto liability, and directors’ and officers’ liability coverage
- Pollution liability claims
- Claims resulting from damage to the property of others that is in the care, custody, and control of the business (e.g., vehicles at an auto repair shop)
- Product recall liability claims
- Any legal actions that do not involve a claim for bodily injury, property damage, personal injury, or advertising injury
- Most contract disputes
- Actions by a governmental agency related to failing to follow regulations
- Claims for back taxes
- Failure to provide a safe workplace
- Professional negligence, or errors and omissions claims
Business owners can purchase other types of liability policies to fill any gaps that they have, or you can often add endorsements to your CGL policy for certain types of liability coverage.
How Can I Fill My Business Liability Coverage Gaps?
CGL policies offer broad protection, but do not protect you from every type of lawsuit.
Depending on the type of work you do, you might need additional liability policies or endorsements (coverage add-ons) that supplement your CGL policy and eliminate any gaps in your protection.
An independent insurance agent can help you assess your need for additional liability coverage, such as:
- Cyber liability insurance: This pays for certain costs related to a cyber breach as well as any related legal costs if a customer or supplier who was harmed by the breach sues you.
- Employers liability insurance: This protects employers from financial loss if a worker has a job-related injury or illness that is not covered by workers' compensation insurance.
- Employment practices liability insurance: This covers your business against accusations of illegal employment practices such as discrimination and wrongful termination.
- Environmental liability insurance: This covers your business if an accident results in your company polluting the land, water, or air.
- Errors and omissions insurance/professional liability insurance: This covers lawsuits that arise from rendering negligent professional services or failing to perform professional duties. This coverage is typically recommended for lawyers, accountants, architects, engineers, IT companies, or any company where individuals provide a service to clients for a fee.
- Event liability insurance: This covers the varied exposures related to special events, with coverage tailored to your specific event, from small, one-time events to large, elaborate affairs.
- Fire legal liability insurance: This covers the insured's legal liability in cases where a tenant causes fire damage to a rented property.
- Liquor liability insurance: This provides coverage for bodily injury or property damage that is caused by contributing to a person’s intoxication, furnishing alcoholic beverages to a person under the legal drinking age, or violating any law or regulation relating to the sale, gift, distribution or use of alcoholic beverages.
- Media liability insurance: This usually covers claims of defamation, invasion of privacy, infringement of copyright, and plagiarism specifically for media companies such as publishers and broadcasters.
- Premises liability insurance: This covers third-party damage, injuries, or illnesses that occur due to an accident on your business property. Premises liability coverage is typically included in a CGL policy.
- Product liability insurance: This covers third-party damage, injuries, or illnesses caused by a defect in a product your company produces, sells, or promotes. Product liability coverage is typically included in a CGL policy, but businesses with extensive product liability exposures may need to purchase additional coverage beyond what is included in the basic CGL policy.
- Public liability insurance: This strictly covers injuries, accidents, and property loss suffered by members of the public (customers, visitors, delivery personnel) on your business premises.
How Much Does Business Liability Insurance Cost?
The cost of a general liability policy can range from $500 per year to thousands of dollars per year. Premiums vary significantly from business to business and industry to industry. What you pay will be based on factors like the size of your business, its location, and your industry. Costs also vary based on the coverage limits and deductibles that you select.
The most important factor in the cost of your CGL policy is the type of risks that are inherent in your business. A restaurant owner in a busy entertainment district will pay far more for a CGL policy than a freelance marketing consultant. The restaurant owner faces risks from customer slips and falls and several other exposures, while the marketing consultant never has customers on its premises and does not produce a product that can cause physical harm.
As you add additional liability coverage either through endorsements or by purchasing separate customized policies, your overall costs for liability insurance will of course go up.
Examples of industries that might expect to pay a lot for liability coverage are as follows:
- Janitorial or cleaning services
- Retail trade
- Wholesale trade
The Benefits of an Independent Insurance Agent
Business liability insurance needs will vary greatly from business to business. But the fact remains that it is the first line of defense from lawsuits and liability claims against your business.
Unfortunately in our highly litigious society, every business, no matter the size, faces the risk of being sued. By purchasing a commercial general liability and assessing your need for other business liability policies or endorsements, you will have the ability to protect your business should the worst happen.
An independent insurance agent can get quotes from multiple carriers who specialize in your line of work. You can choose the policies that best fit your needs and budget.
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