In today's litigious society, even small mishaps can result in large lawsuits. That's why general liability insurance, along with property and worker's compensation insurance, are essential for most companies. Liability insurance protects the assets of a business when it is sued for something it did (or didn't do) to cause an injury or property damage.
General liability insurance can be purchased separately or as part of a business-owner's policy (BOP). A BOP bundles property and liability insurance into one policy; however, the liability coverage limits are generally pretty low. Businesses that need more coverage usually purchase liability insurance as a separate policy. The amount of coverage a business needs depends on a couple factors:
- Perceived risk. Business owners should first consider the amount of risk associated with their business. For example, a business that manufactures heavy machinery is at a greater risk of being sued than a company that manufactures linens and would therefore need more liability insurance.
- The state in which you operate. Businesses that operate in states with a history of awarding high damage amounts to plaintiffs typically need to carry liability insurance with higher coverage limits. An insurance broker can offer guidance in this area.
How General Liability Works
Under a general liability insurance policy, the insurer is obligated to pay the legal costs of a business in a covered liability claim or lawsuit. Covered liability claims include bodily injury, property damage, personal injury and advertising injury (damage from slander or false advertising). The insurance company also covers compensatory and general damages. Punitive damages aren't covered under general liability insurance policies because they are considered punishment for intentional acts.
General liability insurance policies always state a maximum amount that the insurer will pay during the policy period. Usually these policies also list the maximum amount the insurer will pay per occurrence. For example, if a company has a $1 million occurrence cap in their liability policy and they are successfully sued for $1.5 million, the insurer would pay $1 million and the business would be responsible for paying $500,000.
To cover these types of situations, many companies purchase umbrella liability insurance, which picks up where their general liability coverage ends. Umbrella liability covers payments that exceed your other policy's limits and provides additional coverage for liabilities not covered in a standard liability insurance policy.
Most insurance companies require their policyholders to report as soon as possible any accidents that could lead to a liability claim. The insurer may then require the business owner to document the situation, forward all summons and legal notices, and cooperate fully in any investigations.
Taking precautions before an accident can help keep your liability and your insurance rates down. All businesses can take certain steps to lower the chance of a liability insurance claim:
- Set a high standard for product quality control.
- Make sure all company records are complete and up to date.
- Be sure employees are properly trained.
Checklist of Issues to Review for Liability Insurance
This is a checklist of key issues in analyzing the terms and conditions of a liability insurance policy.
- Is the dollar amount of the coverage sufficient?
- Is the insurer financially strong?
- Are the premium payments competitive?
- Is the deductible too large?
- Does the policy cover bodily injury to customers and guests on the company’s premises?
- Does the policy cover property damage caused by employees and third parties?
- Does the policy cover personal injuries?
- Does the policy cover advertising injury?
- Does the policy cover problems coming from the company’s products, or is a special policy needed?
- Does the insurer have a good history of timely paying claims?
- When does a claim have to be made?
- Are the exclusions from coverage too broad?
- Are there special endorsements that may be appropriate?
Understanding Business Owner's Policies
Basically, three types of insurance are available to protect your business: property, liability and workers´ compensation. Workers´ compensation insurance is required by law in all 50 states. Although property and liability insurance are not always mandatory, it makes sense to protect all of your company assets with property and liability insurance.
Business owner´s policies (BOPs) are insurance packages that provide both property and liability coverage at one affordable premium. These packaged policies are available to most small and medium-size companies and can be a good alternative to purchasing separate policies for liability and property insurance.
Large companies and businesses that are considered high risk usually don´t meet the criteria for a BOP. The criteria for BOP eligibility include the size of the premises, the required limits of liability, the type of business and the extent of offsite activity. Premiums for BOP policies are based on similar factors, including business location, financial stability, building construction, and security features and fire hazards.
What Does a BOP Cover?
A BOP includes property protection for an office building and its contents as well as other people´s property brought into the office building. BOPs cover standard perils, including fire and theft, although certain exclusions apply, such as damage caused by floods and earthquakes.
Under a BOP, a business selects the amount of liability coverage it needs based on its assets. Liability coverage pays for the cost of defending the business in a lawsuit and pays damages if the business is sued for injury or property damage. The liability policy also pays the medical expenses of those injured, other than employees, as a result of business operations.
A BOP provides coverage for both business interruption and replacement costs if an emergency disrupts or destroys the business. Business interruption insurance not only compensates for lost income and the expenses incurred when a company is forced to vacate its premises due to disaster-related damage, but it also covers operating expenses, such as payroll, which continue even when business activities have ceased. Replacement-cost coverage pays to replace damaged or stolen property, equipment and inventory without deducting for depreciation.
In addition to the basic BOP policy, businesses may purchase add-on coverage based on the particular risks associated with the company. For example, a dry cleaner might purchase additional coverage for mechanical breakdown, which would cover the machinery the business relies on. A retailer with numerous employees might carry coverage for employee dishonesty, which covers loss of business property due to embezzlement, fraud or another criminal act.
When purchasing business insurance it´s important to be sure that your company is neither over-insured nor underinsured. List all company assets — including property, equipment and inventory — to help you decide the amount of insurance you need. An insurance agent or broker can help you identify risks and determine the type of coverage needed in order to fully protect the company.