Whether you call yourself an entrepreneur, an independent contractor, or a freelancer, you're a business owner in your own right. Businesses serve the public, and as a result, they are exposed to risks. So, understanding these risks and having the right insurance coverage is critical to protecting your small business from costly lawsuits.

Unfortunately, lawsuits against businesses aren't limited to major offenses such as fraud or intentional harm to another person. Even a small mistake or oversight can cost your business. This is why you should consider liability insurance to keep your business running smoothly.

Read on to learn more about liability insurance and the options available for your type of business.

What Is Business Liability Insurance?

Liability insurance protects companies and small business owners from lawsuits or any third-party claims. The policies cover mandated settlement payout and legal defense costs. It also pays for legal obligations such as the medical costs incurred by a customer who got hurt on business property or any on-the-job injuries sustained by an employee.

As mentioned, your business is exposed to a variety of liability risks. A business is considered liable when it's responsible for the damages suffered by a third party. For instance, if a customer slips and falls in your store, they could file a liability claim against your business. Likewise, if a customer developed an allergic reaction from your artisanal soap, they can also file a claim against you.

Any liability claim against your company can result in a costly lawsuit, which can seriously impact your cash flow and reputation. This is why having the right insurance coverage can keep your business on firm ground.

Am I Legally Required to Have Liability Insurance?

No, liability insurance is not a legal requirement for your day-to-day business operations. However, you should check with your state and local business offices to make sure. However, if you have employees, workers' compensation insurance is mandatory. You're required to have commercial auto insurance as well if you have a company vehicle.

If you need more guidance on the types of insurance needed for your business — whether it's optional or mandatory — ask a legal expert to be sure you're getting advice specific to your needs.

What Type of Business Needs Liability Insurance?

Almost all types of businesses need liability insurance. Partnerships and sole proprietorships are particularly at risk for business-related claims. These business structures don't provide separation between the owner and the company. So, your personal assets are at risk in case of lawsuits against your business.

Under a limited liability company (LLC) structure, an owner's personal assets are protected from litigation. But the company's assets are still at risk from seizure or liens from legal obligations. This is why having business liability insurance is highly recommended.

Types of Business Insurance

There are three primary types of business liability insurance: general liability insurance, professional liability insurance, and product liability insurance. Find out more about each type below.

General Liability Insurance

Most businesses carry a general liability insurance policy. It's also called business liability insurance or commercial general liability insurance. This policy helps protect small businesses from claims that happen from normal business operations.

General liability insurance coverage helps keep your business financially stable and protects your personal assets in case of lawsuits. Hence, it's recommended for companies that sell products, provide services, or work directly with customers in any capacity. You may also need a business liability policy to show as proof of insurance to rent a commercial space or enter into contracts.

As the term implies, it provides coverage from common business risks, such as bodily injury, personal injury, property damage, and advertising injury. In addition, it covers costs like legal fees and medical expenses for damages related to your services, products, or operations. You're also covered in case of personal injury claims, such as libel, slander, or copyright infringement.

Professional Liability Insurance

Professional liability insurance covers small businesses from the costs of lawsuits from unhappy clients. This type of insurance is recommended for service-oriented companies, such as hairstylists, freelance graphic designers, or photographers. This policy covers professional services providers if a client sues for negligence, mistakes, or advice with unsatisfactory results.

Professional liability insurance covers claims for:

  • Work mistakes and oversights
  • Undelivered services
  • Missed deadlines
  • Claims of negligence
  • Breach of contract

Professional liability insurance is also referred to as errors and omissions (E&O) insurance, a term used mostly for insurance agents, real estate agents, tax preparers, and IT professionals.

Product Liability Insurance

If your company makes or sells products, it means you're responsible for every one that leaves your store. It also means you can be held accountable if your product causes any injury to another person or damages property. Product issues could be anything, but the three most common reasons for claims are:

  • Design defect: Improper design issues can result in a product being unsafe or faulty.
  • Manufacturing defect: A mistake occurred during the manufacturing process, which resulted in the product being assembled wrongly or missing important parts.
  • Marketing defect: Issues involving incorrect food labels, inaccurate or lack of safety warnings, and vague instructions are common marketing defects.

Most product issues are not intentional, and most of the time, maybe you can appease a customer by offering an exchange or a discount. But as long as you make or sell products, you are at risk for product liability lawsuits, which can be costly and time-consuming. Therefore, it's highly recommended to ensure you have the right coverage for your type of business.

Additional Business Insurance Policy

  • Business owners policy: A business owner's policy (BOP) is an insurance bundle that includes general liability and property insurance. It's specially designed for small businesses in a low-risk industry. BOP insurance helps protect your business from issues related to fire, property damage, personal injury, and other claims. For example, with BOP, your products, equipment, and everything else in your store are covered in case of fire. You can also claim for business interruption expenses and loss of income.
  • Cyber liability insurance: Cyber liability insurance helps protect your small business from liability if your computer data is exposed or stolen. Cyber liability insurance provides coverage from damage, liability, and recovery costs in case of a data breach or if your company's computer system has been compromised.

Mandatory Liability Insurance

Although most liability insurance discussed above is optional in most states, two insurance policies are legally required for businesses: workers' compensation insurance and commercial auto insurance.

Workers' Compensation Insurance

If you have staff, most states will require you to have workers' compensation insurance. This state-mandated insurance program provides medical, disability, burial, and rehabilitation benefits to employees who are injured or have become disabled due to a work-related injury or illness. You'll need workers' compensation insurance if your company employs more than one employee who works full or part-time hours.

When an employee accepts benefits from workers' comp, they waive the right to take legal action against their employer. And since it's a legal requirement, civil and criminal penalties apply to employers who don't carry workers' compensation insurance.

Commercial Auto Insurance

If you make deliveries, ferry clients, or run errands using company vehicles, you must get commercial auto insurance. An auto insurance policy protects you from any unexpected liability or physical damage associated with your company vehicles. Refer to your state for the required amount of liability coverage.

Where Should I Start?

If you're ready to get the insurance coverage for your small business, start your search by talking to insurance companies you already know or have a contract with. There's a very good chance they also offer business insurance. You may also ask for recommendations for trustworthy insurance agents from other business owners. To make sure you get the best coverage for your company, work with a legal adviser or an expert who's familiar with the specific risks related to your business type and industry.

Grow and Manage Your Business With Skynova

Small business insurance helps protect you from the unexpected costs and liability of running your business. It provides you with peace of mind and a financial safety net in case of accidents. Lastly, it ensures that your business and personal assets are protected from costly claims against your company.

Do your own bookkeeping with Skynova's accounting software for small businesses effortlessly. Keep accurate records of your income, expenses, sales tax, and more. You can also use it to generate financial reports whenever you need them. It makes keeping track of your company's cash flow a breeze.

Explore how our software products and business templates can help you manage and grow your business.

Notice to the Reader

The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Check your state laws and consult with a legal adviser or insurance agent to ensure you're making the best decisions for your business.