Understanding Liability Insurance


Ru Chen

- Updated May 7, 2024

Key Takeaways

  • Commercial liability insurance protects businesses from claims of negligence, property damage, and bodily injuries
  • Many types of liability insurance exist
  • Paying a monthly premium for liability insurance is better than paying $75,000+ for a liability claim
Understanding Liability Insurance

Day-to-day business operations are filled with potential liabilities. Slip-and-fall accidents, professional errors, and property damage can cost businesses hundreds of thousands of dollars. Liability insurance protects businesses from legal and financial risks.

Let’s go over the types of liability insurance, how to choose a suitable insurance policy, and other business liability insurance essentials.


Types of Liability Insurance

General Liability Insurance

General liability insurance is the standard business liability insurance policy. It covers claims related to:

Bodily injury: If someone gets injured due to your business products, operations, or services, general liability insurance can provide significant financial assistance. Customer injuries are particularly common if people frequently visit your business location in person. The most common bodily injury is a slip-and-fall.

Property damage: General liability insurance can also cover liability claims of property damage resulting from your business products, operations, or services.

Advertising injury: General liability insurance can also protect your business against claims of libel, slander, copyright infringement, stolen ideas, and invasions of privacy related to advertising.

Note: General liability insurance does not typically cover claims related to auto accidents, punitive damages, employee injuries, or intentional acts. Other liability insurance coverage would be needed.

Professional Liability Insurance

Professional liability insurance is also known as errors and omissions (E&O) insurance. It is important because it mitigates the financial impact of claims filed against you related to professional mistakes and negligence.

A professional liability insurance policy typically costs around $59 a month, or between $500-$1000 in a year. The average E&O insurance premium depends on your location, field, and how many claims have been filed against you before. While this can seem expensive, professional liability lawsuits easily exceed $150,000.

Professional liability insurance covers:

Errors and omissions: If a professional mistake or failure to perform an expected service leads to a customer’s financial loss, injuries, or damages. For example: You missed a deadline or failed to disclose a problem in a real estate sale.

Negligence: Your business may be found negligent if the services you provided did not meet the expected standards of the profession or industry. If this leads to financial loss, damage, or injuries to your customer, you may be sued for negligence. For example: A stock you recommend ends up plummeting in value.

Medical malpractice: Those working in the medical field need medical malpractice insurance. Covers expenses related to legal defense, arbitration, and settlement for malpractice suits.

Some professions require or are highly recommended to carry professional liability insurance. These include:

  • Architects
  • Accountants
  • Brokers
  • Consultants
  • Engineers
  • Financial advisors
  • Insurance agents
  • Real estate agents

When it comes to deductibles for professional liability coverage, most policies offer deductible options between $1,000 and $25,000. Lower deductibles come with higher premiums and/or less coverage. Choose the amount that makes the most sense to you.

Product Liability Insurance

If your business sells or manufactures products, it is important to have product liability insurance. Products can be found defective due to problems in design and manufacturing. Improper or lack of warnings on a product can also result in liability claims against you.

A product liability insurance policy can cover claims related to:

Bodily injuries: A defect in the product you sell could lead to customer injuries.

Property damage: If your product results in property damage, you may be found liable for the damages.

Legal fees: Good legal representation for defending against a product liability claim isn’t cheap. Product liability insurance can help you reduce the cost of defending your business.

Settlements: If you need to pay a settlement or judgment for product liability, insurance can help you lower the costs.

Workers’ Compensation Insurance

If your business’ employees get injured or sick because of work, workers’ comp can pay for relevant medical expenses, lost income, disability benefits, and ongoing care. Workers’ compensation is required by law.

The premium of workers’ compensation coverage depends on the number of employees, type of work done, state requirements, and claim history. By implementing safety measures, businesses can lower their workers’ compensation premiums.

Best liability insurance companies

Choosing the right liability insurance company is key to the success of a business. Here are some of the top liability insurance providers to consider.

  • Hiscox: Offers customizable business insurance products that protect small businesses.

  • The Hartford: An excellent insurance company founded in 1810. Helps small business owners mitigate their business risks.

  • Tivly: Gives you quick business insurance quotes for free. These comparisons allow business owners to easily find suitable insurance policies.

  • Simply Business: Gives you quotes without requiring a phone call. Convenient and free, Simply Business greatly improves the business insurance shopping experiences.


Coverage Limits and Exclusions

Business insurance coverage limit

The coverage limit is the maximum amount a policy will reimburse you for eligible expenses. Most liability insurance providers offer policies that pay up to $1 million per occurrence.

If you exceed the coverage limit of your liability insurance policy but still need coverage, commercial umbrella insurance provides extra protection. Umbrella insurance can cover costs that go over your policy coverage limit, such as:

  • Legal fees
  • Property damage bills
  • Medical bills
  • Settlements and judgments

Liability insurance exclusions

When choosing business liability insurance, take the time to review the insurance policy details carefully. Most policies contain numerous exclusions that will not be covered. Business liability insurance usually excludes:

  • Intentional acts from the policyholder
  • Contractual liability from assumed contractual obligations
  • Liquor liability
  • Workers’ compensation and unemployment benefits
  • Pollution and cleanup of pollutants
  • Damages caused by the use of aircraft or watercraft

Importance for Small Businesses

Liability claims against a small business can disrupt business operations and result in severe financial losses. Commercial liability insurance serves to protect small businesses from financial ruin.

1. Financial protection

Legal claims are often filed against larger companies. Enterprises have plenty of access to good legal representation. Unfortunately, small businesses often lack financial and legal resources. They can’t effectively defend against legal claims of liability. Even a lawsuit where a small business is not found liable can negatively impact a small business due to the associated stress and legal fees. Liability-related lawsuits average $75,000 per claim.

2. Profession-based insurance

Small business owners are highly recommended to obtain liability insurance. Businesses should have insurance coverage that aligns with their needs. For example, retailers, distributors, and manufacturers of products should focus on good product liability insurance. Accountants and real estate agents should procure sufficient E&O insurance coverage.

3. Predictability

Another benefit of general liability insurance is that the premiums of business insurance are predictable. Small businesses are in control of how much they pay for business insurance every month, able to fit these numbers into their budget and risk mitigation strategies.

If a legal claim is filed against your business, the costs can be extremely expensive, varying based on the unique situation details. This unpredictability frequently sinks small businesses that aren’t financially prepared to deal with lawsuits. Plus, most businesses should expect a legal claim against them sometime during their operations – lawsuits are commonplace, making insurance critical.

Cost Factors and Considerations

Numerous factors influence the cost of liability insurance premiums. Let’s go over what affects a business insurance premium.

Risk assessment

The type and amount of commercial insurance coverage your business needs depends on your potential losses and risks.

Size of the company: A larger company might require business insurance that is specifically tailored to its needs. In contrast, a startup might prefer a small business insurance bundle in the form of a BOP.

Annual revenue: Companies typically budget up to 10% of their annual revenue towards insurance coverage.

Industry: Some fields require specific forms of commercial insurance coverage that may be more expensive. For example, real estate agents need errors and omissions insurance.

Cyber security risk: Any business that digitally stores or uses sensitive information should obtain cyber liability coverage. The average data breach costs $9.48 million.

Tips for minimizing insurance costs

Businesses need to keep insurance costs reasonable while ensuring they have adequate coverage. Here are some ways you can decrease your insurance costs.

    1. Compare quotes: You can use an insurance company to help you quickly compare quotes that suit your business’ needs. Great options are Tivly and NEXT.
    1. Increase your deductible: Choosing a higher deductible can lower your insurance premium. However, make sure your business would still be able to cover the upfront, out-of-pocket costs in case of a claim.
    1. Review your insurance needs: If you change locations, downsize, or otherwise make an adjustment to your business, you might benefit from a policy change. Make sure to periodically review your business so you don’t carry any unnecessary coverage.

Legal Requirements and Compliance

Certain industries and regions have liability insurance requirements. Businesses need to comply with these regulations.

Businesses should be aware of the industry standards related to liability insurance. This can help them meet the minimum insurance required to work with other businesses. For example, other organizations often require you to carry enough liability insurance if you want to work with them. Without adequate liability insurance, your business may lose out on many opportunities and contracts.

In addition, businesses with employees are legally required to have:

  • Workers’ compensation insurance
  • Disability insurance
  • Unemployment insurance

Laws, regulations, and industry standards change over time and can vary based on location. Stay informed about legal obligations and maintain the appropriate insurance coverage.

Claims Process and Support

In the event of an incident, contact your insurance provider. The insurer will investigate the claim to see whether it is covered by your insurance policy. After an incident occurs at your business, it could be helpful to contact your insurance agent even if you haven’t been sued yet. Early notification can better prepare your business for incoming liability lawsuits.

When filing an insurance claim, you will need to provide various details, including:

  • Your name and business name
  • Contact information
  • Policy information
  • Type of coverage
  • Claim details

Your insurance provider may ask you for additional information and clarification. If your claim is accepted and you reached the deductible, your business will receive the financial assistance. After a business has filed a claim, insurance providers may charge higher premiums.

Claims process tips

Document. Everything. The more evidence you have to support your insurance claim, the more likely your business liability claim will be approved. Keep comprehensive records of any correspondence with third parties and your insurance company. Having complete documentation ensures that in case you need to dispute a claim, you have a better chance of success.

Insurance claims may be denied if the insurance company:

  • Doesn’t cover the claim
  • Suspects fraud
  • Notes you didn’t file the claim in time

Make sure to file claims within any time limits that your insurance provider may give.

Deciding how to resolve the claim

When an incident occurs, a third party may look to sue you. Businesses can try to settle, argue for a dismissal, or agree to go to court for a trial. Sometimes, offering a settlement is the optimal way to deal with a claim. Other times, you may be forced to go to court.



Liability insurance protects businesses from expensive lawsuits. At any time, a third party could claim your business is responsible for property damage, bodily injuries, or other losses. The ensuing legal battle could result in significant costs that can devastate businesses.

All businesses should prioritize obtaining adequate insurance to mitigate risks. The most common types of liability insurance for business include:

  • General liability
  • Cyber liability
  • Product liability
  • Professional liability
  • Commercial auto

About The Author

Ru Chen

Ru Chen

Content Writer

Ru Chen is a content writer with several years of experience in creating engaging and well-researched articles. She mostly writes about insurance, business, digital marketing, and law. In her free time, she can be found watching horror movies and playing board games with her partner in Brooklyn.

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