Table of Contents
Table of Contents

Business Liability Insurance: Meaning, Overview, Types

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 cost of coverage is influenced by the type of business being insured as well as its location (companies located in flood-prone regions are likely to pay more).

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 this type of insurance 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.

Businesses that tend to carry higher risks than traditional liability insurance covers can augment their coverage limits with an excess of loss reinsurance or umbrella insurance. 

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 the 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.

The Cost of Business Liability Insurance

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

Businesses that fall into the lower risk category may want to consider a business owner 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 avoid duplication of coverage from competing insurance providers, thereby minimizing costs.

What Is Directors and Officers (D&O) Liability Insurance?

Directors and officers (D&O) liability insurance is business insurance that is intended to protect the directors and officers of a company. Directors and officers can be sued by third parties, such as their suppliers and customers, or they can be sued by their employees. D&O liability insurance protects the personal assets of directors and assets in the event they are sued.

What Are the Different Types of Business Insurance?

A business can purchase a variety of insurance policies to protect it from a multitude of risks. Each type of insurance policy insures against different risks. Depending on the business, it may need a few different types of insurance. Common types of business insurance include general liability insurance, which protects against bodily harm to others, property damage, and personal injury; commercial property insurance, which protects against damage to the property that you have bought or rented for your business; business income insurance, which protects against the loss of business income; professional liability insurance, which protects against errors that your business has made in the products/services it sells, and data breach insurance, which protects against damages caused by data breaches/cyber attacks.

Is a Sole Proprietor Personally Liable for Debts?

Yes, a sole proprietor is personally liable for the debts of the company. A sole proprietorship is typically one individual running a business who is responsible for all debts and other issues, such as if they were sued. There is no protection against the owner's personal assets. An LLC, on the other hand, separates a business from the owners, so that in the event an LLC is sued or there are outstanding debts, legally the personal assets of the owners of an LLC cannot be claimed.

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