How Liability Insurance Fits in the Picture

All small businesses need three different but essential types of insurance coverage: property insurance, worker's compensation, and liability insurance. Commercial property insurance protects your company's physical assets and workers comp covers your employees' injuries. What does business liability insurance do? It provides legal protection for lawsuits filed against your company.

Commercial liability insurance can be purchased by two methods:

  •  As part of a business owner's package
  • Under a separate policy

A business owners package includes business property insurance along with liability insurance as part of the same policy. However, liability insurance purchased as part of a package usually comes with lower liability limits, so companies needing higher coverage limits usually purchase a separate package for liability insurance.


What Level of Coverage Do I Need?

Every business requires a different level of liability coverage. The exact amount depends on the location of your business as well as the amount of risk associated with it. For example, a company that operates a great deal of heavy machinery is at higher risk than one with employees who sit behind a desk all day. If your business is located in a state with courts that historically award relatively high compensation verdicts to plaintiffs, then your level of liability coverage will need to be correspondingly higher.

What kind of coverage does liability insurance provide? Generally speaking, the insurer pays the legal defense costs of any lawsuit covered under the policy. These might include accidental bodily injury or property damage sustained by a third party, due to the actions of your company. The insurer also pays any general or compensatory damages awarded by the court. However they will not pay punitive damages, which are awarded for actions performed deliberately instead of accidentally.


What About Umbrella Coverage?

Commercial insurance policies always specify a maximum lifetime amount that will be paid out during the term of the policy. They usually also specify a maximum amount paid per occurrence, or per claim. For instance, if a company holds a policy that specifies a cap of $2 million per occurrence, and it suffers a judgment of $2.5 million to the plaintiff, then the company is still liable for the payment of the additional $500,000. An additional type of coverage called umbrella liability insurance can be purchased to cover these kinds of situations.

The way the world operates today, even a minor accident can result in a massive lawsuit against your company. In order to realize greater financial security and peace of mind, every small business owner should have a good liability business insurance policy in place.