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Why Do You Need Business Liability Insurance?

Insurance Ranked - Updated January 15, 2023
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Why Do You Need Business Liability Insurance?

Wouldn’t it be great if you could buy insurance like taking a walk in the park? Unfortunately, insurance has plenty of complexities – not to mention, it can be quite expensive.

Liability insurance provides coverage for injuries, accidents, negligence, and more.

Business liability insurance is one of the most important insurance policies you need to get if you’re operating a business. It can keep your business afloat in case of a costly lawsuit against you.

Here is everything you need to know about whether business liability insurance is necessary for you.

Why do you need business liability insurance?

  1. To protect your business assets

Running a business comes with many unexpected or inevitable expenses. You never know when someone might file a lawsuit against you.

If you end up being found at fault, a liability insurance policy can help you cover the financial expenses. This can include legal fees, damages, and other relevant costs.

In cases where businesses don’t have business liability insurance, they may be unable to pay for the judgment. What happens then is your business assets may get seized in order to meet the payments.

Business liability insurance helps protect you from those costs and can prevent your assets from getting seized.

  1. To protect your personal assets

If you are sued and found to be at fault, even your personal assets could be at risk depending on the circumstances and judgment made against you. This could be quite disastrous if you didn’t have a business liability insurance policy to help protect you.

  1. To protect against unexpected events

Protecting against the unexpected is basically what insurance is for. If there is an accident and your business is found to be liable for what happened, a business liability insurance policy can help you cover the costs.

  1. To meet contract obligations

Even if you operate in a state where the law doesn’t require you to have business liability insurance, other companies might still expect you to carry a business liability insurance policy. Since it is frequently a condition of doing business with other organizations, it is critical to have adequate business liability insurance in order to meet contractual obligations.

  1. To protect against reputational damage

Reputational damage leads to various kinds of lawsuits. Sometimes, the point of suing a business is to hurt its reputation.

Liability insurance may be able to cover the costs of defense against being sued and taking a reputational hit. Being able to afford the defense can even help you minimize the chances of receiving widespread reputational damage.

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What are examples of business liability insurance claims?

Business liability insurance can cover numerous circumstances. Before purchasing a policy, it’s always a good idea to verify which occurrences are covered.

Here are some of the most common examples of business liability coverage:

Slip and fall accidents

If someone, whether an employee or customer, slips and falls while on your business premises, they might end up filing a liability claim against you. This generally occurs when the person who has fallen believes that they only got hurt because of your negligence.

Product liability

Businesses that sell products are highly recommended to have product liability coverage. If something goes wrong with the product, such as it causes injury or damage to those who buy and use it, then you may be found liable.

Professional negligence

If you offer professional services and your negligence results in financial loss for your clients, then this is considered professional negligence. They may file a claim against you.

Employment practices

Harassment and discrimination are issues in the workplace. If your business is accused of showing discriminatory practices or there is harassment, someone may file a claim against you.

Intellectual property infringement

In some industries, liability claims are commonly made out of intellectual property infringement concerns. Fortunately, business liability insurance may be able to provide you with the necessary coverage to deal with these types of claims.

Defamation

Sometimes, you might be the one causing reputational harm to some other individual or entity.

If you make false or defamatory statements against someone, they might sue you and try to find you liable. With business liability insurance, you don’t have to worry as much about defamation or advertising injury claims.

When do you not need business liability insurance?

Now that you know what the benefits of business liability insurance are, it’s also a good idea to know when you actually do not need it.

A lot of the time, it might not be legally required for you to have business insurance. But that doesn’t mean you don’t need business liability coverage. Liability claims can easily cost you thousands of dollars each, and not every business can reasonably pay that amount of money.

As with all insurance policies, assess your risk levels and determine whether you need business liability coverage. In the following situations, you may not need coverage.

  1. Small businesses may not need business liability coverage

If you don’t have employees or any physical premises, liability insurance might be unnecessary.

Note that if you don’t have business liability coverage, other companies may refuse to work with you. Small businesses might miss out on valuable work opportunities if they lack adequate coverage.

  1. Sole proprietorship or partnership

If your business is a sole proprietorship or partnership, you might not be legally required to carry business liability coverage.

When this is the case, it’s still critical to perform a risk assessment. Do you have a lot of liability risk? Are you in an industry that sees a lot of liability claims? If so, these potential risks may make it still worth it to purchase business liability insurance. With insurance coverage, you can gain much more control over your risks and potential legal losses.

  1. Corporations or limited liability companies (LLC)

Corporations and limited liability companies (LLC) work a bit differently from regular organizations. For this kind of organization, liability insurance coverage might not be needed. This is so long as you have enough protection through your own business structure.

If a liability claim is made against you and you have no insurance coverage, the LLC itself would be liable for the claims. This does tend to make it easier on the owners or shareholders.

When is business liability insurance legally required?

In most states, business liability insurance is required for organizations that have employees. This is because in general, most states view business insurance coverage as essential.

Some types of business liability insurance won’t be required if they don’t apply to you. For example, there won’t be a need to purchase commercial auto insurance if you have zero business-owned vehicles.

In some industries and fields, professionals will be required to purchase some sort of liability insurance. Real estate agents are required by states to purchase professional liability insurance (also known as errors and omissions insurance).

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Do states mandate business liability insurance coverage?

There are certain types of commercial insurance you may be required to purchase, such as:

Worker’s compensation insurance

Practically every state requires businesses with employees to have workers’ compensation, which the business has to pay for, and not the employees.

There may be exceptions to this and you might not need workers’ comp if you have very few employees or you hire help from non-eligible workers.

Workers’ compensation coverage kicks in when eligible workers who have been injured or gotten ill while on the job file a workers’ comp claim. If they accept the workers’ comp benefits, they essentially waive the right to sue.

Commercial auto insurance

Got a car? You probably have auto insurance in order to protect yourself and meet state requirements. Got a car for commercial use or for your organization? All business-owned vehicles should have commercial auto insurance, whether it’s a car, van, truck, or otherwise.

Commercial auto insurance will cover things such as:

  • Damage to your vehicle(s)
  • Injury (to the driver or someone else)
  • Damage to someone else’s property

Professional liability insurance

Also known as errors and omissions insurance (E&O), professional liability insurance provides coverage in case you make a professional mistake. It can help you cover damages, defense costs, disciplinary proceedings, loss of earnings, as well as subpoena assistance.

When that service you offer results in a financial loss, your client or customer may proceed to file a lawsuit against you. This may happen if they believe you have shown:

  • Negligence
  • Misrepresentation
  • Failure to give accurate advice
  • Created libel or slander (i.e. personal injury)

The frustrating part is, even if you are not found liable for something that happened and you made no mistakes, you still may get sued, resulting in the need to pay for expensive legal defense costs. Insurance coverage is a great way to protect you from having to pay for these expenses out of pocket.

Note that professional liability insurance does not typically include coverage for bodily injury, property damage, work-related injuries or illnesses, or data breaches.

Liquor liability insurance

Does your business sell alcohol? If so, you need to obtain a liquor license (though chances are, if you’re a bar or restaurant that sells alcohol, you already know all about this). In order to get licensed to sell liquor, you might be required to carry a liquor liability insurance.

Insurance is meant to help cover incidents in which an overserved patron causes any injuries or property damages.

What are the penalties for not having business liability insurance?

If you don’t have business liability insurance but you operate in a state where it is legally required, you will likely face penalties. Fines vary state by state, but noncompliance and violations of such liability insurance requirement laws can include costly fines and even jail time.

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Business liability insurance alternatives

If you don’t want to directly purchase business liability insurance because you aren’t legally required to, there are other insurance policy options you might want to consider instead.

If you are a small business, you could fulfill your insurance needs by purchasing a business owners’ policy (BOP), which bundles together business property insurance, general liability insurance, as well as business income insurance.

Do LLC or corporations need business liability insurance?

LLCs and corporations are able to protect their business owners from being found personally liable. This can protect the owners from the impact of business debts and judgments.

Still, owning a business entity does not preclude unexpected incidents like fire, floods, data thefts, or various kinds of lawsuits. In addition, someone may accuse the business owner personally of negligence. What would you do in this situation? With these things in mind, consider whether you need business liability insurance to mitigate your risk level.

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How do you decide if your business needs business liability insurance?

There are several things to consider when deciding whether your business needs liability coverage.

  1. Are you legally required to carry commercial liability insurance? If so, what kinds? This typically depends on what states you operate in. Be careful if you need multi-state coverage.
  2. What is your risk level? Do you have plenty of workers who perform risky work? Do you offer professional services to clients who may sue you for their financial losses? How does your industry treat liability insurance, is it widespread and essentially required in order for you to work alongside other companies?
  3. How much is your insurance premium? This will depend on factors like your industry, business size, and how many workers you pay. Typically, you can expect to pay around $50 a month for general liability insurance.

After weighing your options and assessing your needs, you can make a more informed decision on whether to purchase business liability insurance.


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