Many small business owners wonder whether or not they need business liability insurance. The quick answer is: You probably do.
A more thoughtful answer is: It depends on what type of business you run and the agreements you set with customers.
To decide if your business needs liability coverage (and again, it probably does), it helps to understand what business liability insurance covers, why most small business owners need it, and the types of circumstances under which businesses are covered.
Business Liability Insurance in a Nutshell
Business liability insurance is a broad term that most often refers to either general liability or professional liability insurance.
General liability insurance helps cover the costs associated with bodily injury or property damage claims made against a business. It can also cover the costs of claims made against a business for false advertising. Common general liability claims typically involve “slip and fall” lawsuits. For example, if during a cold winter month, a clothing store forgets to salt the entrance to their store and a customer slips on the ice, injures his back and then files a lawsuit. In a case like this, general liability insurance could help cover the cost of the claim made against the business for causing the injury by not adequately maintaining their property.
Professional liability is different from general liability insurance in that it helps cover costs resulting from the business making an error or omission in the services or goods they provided. It helps protect your business from the legal costs associated with an error in services you provide or goods you sell.
For example, an accounting firm that makes a mistake in a client’s financial statements that ends up costing the client a lot of money. If the client sues the accounting firm, professional liability insurance can help cover the costs the accounting firm incurs to handle the claim.
Why Do I Need Business Liability Insurance?
Small businesses that sell goods and services are wise to consider buying general and professional liability insurance. Lawsuits by customers and clients against businesses are becoming increasingly common.
In fact, the cost and compensation of liability claims in the U.S. was $429 billion in 2016. This figure is about 2.25% of the GDP. Without business liability insurance, most businesses would not be able to handle the costs of a large claim against them.
For example, consider a tech business that makes a mobile app for a customer’s company and the mobile app doesn’t work correctly. Then the customer files a lawsuit claiming they lost $500,000 worth of business as a result. If the tech company is found liable and has professional liability insurance, the coverage can help with some or all of the costs of that claim – depending on the limit of the policy.
If the tech company does not have professional liability insurance, or it does not have enough coverage, the tech company may have to pay for some or all of that $500,000 by their own means. If the money isn’t there, this could cause the company to go out of business.
Do I Need Business Liability Insurance If Customers Sign a Waiver?
A waiver or release form is a contract designed to shift liability away from the business with the consent of the customer. Waivers are meant to significantly alter the legal landscape from a place where the business is responsible to a place where responsibility lies more with the customer. However in the event that a customer makes a liability claim, release forms may not always be enforced. If a business is found grossly negligent, the legal bodies overseeing the claim may ignore the waiver altogether.
That said, it’s possible a waiver could help your business avoid some liability claims. However, consider seeking legal counsel first. Have a qualified attorney draft your waiver, and get guidance on how and when to have customers sign the waiver.
Still, waivers are not impervious and may leave your business vulnerable to liability claims. In the event that a customer does make a claim against your business, and the waiver is not enforced, business liability insurance can help cover the costs of the claim.
One of the most important ways successful businesses protect their assets is by ensuring they can survive big hits. Large threats — such as data breach, or liability claim — have the potential to devastate your business in the blink of an eye. Make sure your business is protected. At a minimum, you probably need general liability insurance, and if you sell goods and services you may need professional liability insurance as well.
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