What is Business Liability Insurance?

Business liability insurance protects the financial interests of companies and business owners in the event that they face formal lawsuits or any third-party claims. Such policies cover any direct financial liabilities incurred, as well as any legal defense expenses. The three main types of business liability insurance are:

  • General liability insurance
  • Professional liability insurance
  • Product liability insurance.

Key Takeaways

  • Business liability insurance protects the financial interests of companies and business owners.
  • Types of business liability insurance include general liability insurance, professional liability insurance, and product liability insurance.
  • This insurance protects the financial interests of business-owners from penalties they may face from litigation waged against them while also covering the associated legal costs.
  • The costs of coverage is influenced by the type of business in question. For example, an accounting firm may pay less than a building contractor due to the difference in on-the-job injury rates.
  • The locations of businesses also influences coverage costs. Those located in flood-prone regions are likely to pay more than those situated in drier areas.

Understanding Business Liability Insurance

Small business owners put their personal finances at risk, in the event of a business-related lawsuit. Partnerships and sole proprietorships are particularly vulnerable to exorbitant expenses, and are consequently in the greatest need of such coverage. Even under the structure of a limited liability corporation (LLC), an owner may still be exposed to personal risk.

Business liability insurance protects a company’s assets and pays for legal obligations, such as medical costs incurred by a customer who gets hurt on store property, as well as any on-the-job injuries sustained by employees. Liability insurance also covers the cost of a company's legal defense, while paying for any settlement offerings or awards a company is mandated to pay as per legal judgments leveled against them. These costs may include compensatory damages, non-monetary losses suffered by the injured party, and punitive damages.
For businesses that rent the commercial real estate property in which they operate, general liability insurance protects against liability from damage they may suffer due to fire, mold, floods, or other physical catastrophes.

Lastly, business liability insurance also covers claims of false or misleading advertising, including libel, slander, and copyright infringement. 

Determining Business Liability Insurance Costs

Coverage costs are generally determined by a business' perceived risk levels. For example, a building contractor who deals with heavy equipment and dangerous machinery such as cranes and forklifts will pay more for coverage than a proposal writer who sits safely behind his or her desk.

Businesses that fall into the lower risk category may want to consider a Business Owner’s Policy (BOP), which combines general liability and property insurance at a more cost-effective rate. Any new or additional business liability insurance policies should contain exclusions clauses to minimize costs by avoiding duplications of coverage from competing insurance providers.

Businesses that tend to carry higher risks than traditional liability insurance would cover may opt for the excess of loss reinsurance or umbrella insurance, in order to augment their coverage limits.