This article covers four basic but essential types of business insurance–general liability insurance, business owner's insurance, professional liability (errors and omissions) insurance, and product liability insurance. It discusses what coverage each one provides and what is not covered.
Small businesses also often have small budgets. When you are deciding how to allocate your business funds among necessary expenses, liability insurance may seem to be a lower priority. After all, you have outlined the best practices, safety checks, and procedures that you and your employees will follow.
You may think that you can let some types of insurance coverage go until your business budget has increased to the point you can cover it.
However, regardless of how careful you and your employees are, keep in mind Murphy's Law: "If anything can go wrong, it will." Some add that it will go wrong at the worst possible time. So instead, act on the motto of the Boy Scouts and Girl Scouts: "Be prepared."
Types of Small Business Liability Insurance
Different types of small business insurance protect small businesses from other areas of liability. Four important forms of small business insurance are:
- General Liability Insurance (Commercial Liability Insurance)
- Business Owner's Insurance
- Professional Liability Insurance (Errors and Omissions Insurance)
- Product Liability Insurance
Some states and professions require your business to carry certain types of insurance. For example, medical professionals who perform surgery must carry medical malpractice insurance.
General Liability Insurance
General liability insurance protects your company from claims of physical injury or property damage filed by a client, customer, or the owner of off-site locations where you conduct business. You should consider investing in this type of insurance if:
- Clients or customers come to your place of business
- You do business at a location owned by another person or business
- Your business rents equipment, cars, or vehicles that it uses in the course of conducting business
- You do work at a property owned by your client or customer, such as a remodeler, a home health care provider, or a carpet cleaner or maid-service provider
- You may enter into a contract that requires you to carry this type of insurance
General liability insurance can also protect your business if:
- Your employees, your temporary employees, or your contract employees make false, negative comments about a client or customer verbally or in writing and sue for slander or libel
- You unintentionally use a slogan or logo in your advertising that is identical or too similar to ones used by another company
- You work on electronic equipment, and one of your employees, your temporary employees, or your contract employees accidentally loses your client’s or customer’s electronic data
- You face expenses such as attorney fees or lost income related to the defense of your business from the claim
This insurance can protect your business from bodily injury, property damage, or personal injury claims caused by your employees, your temporary employees, or your contract employees.
General liability insurance does not cover:
- Your business’s property
- Vehicles or boats used as part of your business
- Professional services offered by your business
- Exposure of the personal information of your customers or employees
- Injuries to employees
Business Owner’s Insurance
A business owner’s policy combines two types of insurance—general liability and property insurance. It includes everything covered by general liability insurance while also covering property owned by your business. Specifically, the property insurance portion of a business owner's insurance policy covers your office furniture and equipment. In addition, if you own the building that houses your business, this policy may also cover that.
Consider business owner's insurance if:
- Your own the building and property where your business is located, and you need to insure it
- You have office furniture and equipment such as computers, printers, and a phone system, or you provide mobile devices for your employees
- Your business owns and works with considerable amounts of data that you could lose
- Your business owns and uses cars or other vehicles in the course of conducting business
- Your employees, your temporary employees, or your contract employees might damage or steal an employee's property
- Your employees, your temporary employees, or your contract employees might act dishonestly
- You need to protect your business from interruptions
- You need to protect your business from fire
- You need to protect your business from terrorism
Business owner's insurance does not cover losses or damage suffered by a client if:
- You, your employees, your temporary employees, or your contract employees fail to provide the client with all the information the client needs
- The information you or your business provides is incorrect
- A claim arises out of the professional services you or your employees provide
Professional Liability Insurance (Errors and Omissions or E & O Insurance)
Professional liability insurance and errors and omissions insurance are interchangeable terms that refer to the same type of insurance coverage. If your business provides a service, errors and omissions insurance offers protection if your client suffers financial injury or loss because the service or information was incomplete or in error. Errors and omissions insurance protects you whether the error or omission was due to lack of knowledge, lack of due diligence, or a mistake so long as the error or omission was unintentional.
This type of insurance covers settlements paid in lawsuits up to the limit described in the policy. It also covers the court costs of your legal defense, whether or not they find the client's claim legitimate. In addition, it covers damages or compensation awarded for emotional pain and suffering caused by the error or omission.
Professional liability insurance covers all claims that fall within the active dates of the policy. Commonly, coverage begins on the purchase date of the policy. In some cases, however, you can purchase a policy that covers your business retroactively.
Some professionals must carry professional liability or errors and omissions insurance by their regulatory or licensing boards. In addition, governments may also require errors or omissions insurance as part of their duty of care to clients.
Professional liability insurance covers:
- For example, claims of financial loss from a reduction to a home's value due to an error or omission in the information provided about the home before the sale
- Claims of financial loss due to the failure of a service, such as from a marketing plan to perform according to expectations
- Personal injury claims arising from alleged slander or libel
- Claims of misrepresentations
- Allegations of violations of fair dealing and good faith
- Damages awarded for emotional distress and suffering above and beyond financial losses
- Claims made in the present alleging losses due to services performed in the past
- Claims of copyright or trademark infringement
- Court costs and losses of income due to time spent defending the case
Professional liability insurance does not cover:
- Physical injuries to individuals
- Damage to property
- Deliberate acts of fraud
- Claims arising from dishonesty or criminal acts
- Loss or exposure of any individual's personally identifiable information, whether it belongs to a client or your employees, your temporary employees, or your contract employees
- Services rendered that are not in your policy
- Infringement of trade secrets or patents
- Claims of false advertising
Product Liability Insurance
Product liability insurance protects manufacturers, distributors, wholesalers, and retailers if the business they make, distribute, or sell causes property damage, illness, physical injury, or death. Those who sell products on eBay, Etsy, and Amazon, in consignment shops, and at festivals, fairs, and similar venues are among those who should consider product liability insurance.
Insuring your products not only protects your business if a product is defective but also from claims that the instruction was incorrect, mislabeled, or that there were no warnings or insufficient warnings of dangers associated with the product. Consequently, you may be liable even if someone was injured when your product was misused.
Product liability insurance can be included in your business’s general liability insurance or purchased as a separate policy.
Product liability insurance covers:
- The medical treatment needed by the injured individual
- Settlements or judgments paid by your business
- The costs of defending the case
Product liability insurance protects your business if the product:
- Has a defect in the design of the product
- Has a defect created in the manufacturing process
- Has a defect originating in the marketing; for example, you failed to include a sufficient warning of possible injury in the product labeling or instructions for use
Your business could also be liable for injuries, even if your company were not negligent.
The amount of coverage you should have depends on:
- Whether your product is inherently dangerous
- Whether you sell your product in a geographical area or a market where lawsuits are likely to be filed
- The number of units you manufacture
- The number of people required to manufacture your products
- The number of units you sell
The more products you manufacture and sell, the more likely some products will be defective.
Product liability does not cover products that do not cause bodily injury or property damage. For example, those who create software would not need product liability insurance unless running the app could cause the battery of a phone or tablet to overheat and cause physical damage or injury.
A Final Thought on Insurance for Small Business
When considering what type of insurance you need to protect your business, always consider the requirements of regulatory or licensing boards that govern your business and the requirements of state and local governments.