Introduction
Running a business comes with a range of responsibilities—and risks. From slip-and-fall incidents on your premises to professional mistakes or employee-related lawsuits, business owners and professionals alike face potential liabilities that could result in costly legal action. Business liability insurance serves as a critical safeguard, helping protect your company’s financial health by covering legal defense costs and potential damages. Whether you operate a small business, professional practice, or large corporation, understanding the various types of liability insurance—such as general liability, professional liability, and employer-related coverage—is essential to building a comprehensive risk management strategy.
What is it?
Even though business owners and professionals specializing in certain fields face some of the same risks, they need liability insurance to protect them against other special risks they face. This is particularly so since personal liability insurance policies do not cover losses related to business and professional activities. Both business and professional liability policies pay the cost of a legal defense if the insured individual or business is sued; and they pay damages up to the limit of the policy if the insured is found legally responsible for bodily injury or property damage.
What liability risks do businesses face?
Premises and operations
Businesses need protection against claims for bodily injury and property damage that are related to the ownership and maintenance of the business premises, or are the result of business operations conducted both at and away from the business premises.
Products and completed operations
Businesses may be sued for bodily injury and property damages resulting from faulty products or completed operations (work performed by the business).
Contingent liability
Businesses may be sued if they hire independent contractors who act negligently or perform substandard work.
Contractual liability
Businesses may occasionally be held liable for the negligent acts of others if they agree in a contract to assume responsibility.
Employer liability
Businesses that employ workers need protection against liability losses resulting from claims filed by their employees. Employers may be held liable if an employee is hurt or becomes sick as a result of his or her job, if the employee is fired or is discriminated against, or if the employee suffers a loss through mismanagement of an employee benefit plan.
Environmental liability
Businesses, especially those that manufacture certain hazardous products, are sometimes sued if any emitted pollutants damage the environment. Business owners can purchase environmental insurance to protect themselves against environmental liability.
Other risks
Businesses face many other risks that they may want to protect against, such as product recall, liquor liability, and steam boiler liability, to name a few.
Business liability insurance
Introduction
Business liability insurance is third-party insurance, which means that damages are paid to outside individuals who file claims, not to the insured business, business owner or employee. Policies can be written either on a claims-made basis or an occurrence basis.
Commercial general liability insurance
Businesses may protect themselves against liability claims and lawsuits by purchasing commercial general liability insurance. This insurance protects them against many of the risks businesses face, including premises and operations, products and completed operations, and contingent liability. Many companies buy general liability coverage along with other types of coverage they need, such as property insurance, by purchasing a Commercial Package Policy (CPP). The business chooses the types of coverage it needs, and the CPP packages them together. Coverage typically included is general liability, property, crime, and boiler and machinery coverage with other specialized coverage the business needs. The general liability section of the CPP protects the business against claims for bodily injury and property damage, personal injury and advertising injury, and provides medical payments coverage to individuals injured on company premises. This coverage can also be purchased separately as a Commercial General Liability (CGL) policy, which was formerly known as Comprehensive General Liability. Because the CGL excludes some types of losses, businesses may also need to purchase separate specialized policies, or add endorsements to cover certain losses.
Commercial umbrella policies
Businesses that need broader coverage or higher liability limits may want to purchase a commercial umbrella liability policy to supplement their existing basic liability coverage. Business owners generally need to own basic liability coverage with certain limits before they can be issued a commercial umbrella policy. If a claim is filed, the underlying policy first pays up to the limits of the policy. Afterwards, the commercial umbrella policy will pay up to the limits of that policy. The umbrella policy will pay first, however, if it covers a loss excluded under the basic policy.
Specialized policies or endorsements
Businesses that need protection from liability risks excluded from commercial general liability policies can purchase many types of specialized policies and endorsements. These include pollution/environmental liability insurance, employment practices insurance, and manufacturers and contractors insurance, among others. Although most CGL policies include product liability coverage, this coverage can also be purchased as a separate policy if excluded by endorsement.
What liability risks do professionals face?
Risk of making a professional error
Professionals can make errors in judgment or show lack of skill in their area of expertise. This can lead to suits for bodily injury and property damage.
Risk of professional misconduct
Professionals can be sued for bodily injury or personal injury if their professional conduct is harmful to others.
Risk of breaching a professional confidence
It’s possible for professionals to be sued for personal injury if they breach a professional confidence, such as revealing medical information or the details of a client’s will without consent.
Other risks
Professionals also face many of the same risks faced by business owners besides the special risks posed by their own occupations. They may want to purchase both professional liability insurance and a commercial general liability policy to fully protect against possible loss.
Professional liability insurance
Introduction
Because CGL policies do not cover losses arising from professional acts or duties, professionals must purchase a professional liability insurance policy to protect against liability claims and lawsuits. They can purchase several types of liability coverage, including malpractice insurance, Errors & Omissions (E&O) insurance, and Directors and Officers Insurance, a type of E&O insurance. In general, professional liability insurance policies are expensive, tailored to the needs of the professional group covered, and are written on a claims-made, rather than an occurrence basis.
Malpractice insurance
Malpractice insurance protects professionals against liability for bodily injury resulting from their misconduct or lack of skill. Individuals commonly insured against malpractice are those in the medical field such as physicians, dentists, and pharmacists.
Errors & Omissions (E & O) insurance
Errors & Omissions insurance protects professionals against liability for damage to tangible or intangible property resulting from errors–something they did–or omissions–something they failed to do. Those commonly insured against errors and omissions include lawyers, accountants, real estate agents, financial planners, bankers, stock brokers, engineers, architects, insurance agents, employee benefit managers, and other professionals who manage money and property for others.
Directors and Officers insurance
Directors and officers insurance is a type of E & O insurance policy that protects directors and officers of corporations and tax-exempt organizations if they are sued while performing their duties. They may be named in a lawsuit when employees, shareholders, and others sue the corporation or organization for damages resulting from errors, omissions, discrimination, personal injury, etc.
Employers’ liability insurance
Introduction
Employers can be sued by employees who injure themselves on or away from the job while they are performing a work-related activity. Or the employee may sue the employer for job discrimination based on gender or race bias, because he or she believes that the employee benefits administrator mismanaged the benefit plans or gave incorrect information about benefits. Employers may want to protect themselves against these risks by purchasing one or more types of employer liability coverage. They may also want to bond their employees to protect the business against employee dishonesty.
Workers’ compensation and employers’ liability insurance
Workers’ compensation insurance protects insured employers when they must pay benefits to a disabled employee under state workers’ compensation laws. It also protects employers who are sued by employees suffering an occupational disease or work-related injury, or if they are sued by the employee’s relatives or a third party. Workers’ compensation insurance is mandatory in most states, although many states allow businesses to self-insure if they qualify. How employers purchase insurance depends upon the state in which they live. In some states, employers must purchase the state’s workers’ compensation insurance policy, while in others, employers can purchase private insurance policies.
Employment Practices Liability Insurance
Employment Practices Liability Insurance is a relatively new type of policy that protects employers who are sued by their employees for discrimination, sexual harassment, or wrongful discharge. This type of insurance may be necessary because employment-related practices are excluded from CGL policies.
Employee benefits liability insurance
Employers can purchase employee benefits liability insurance to protect against being sued for damages by employees who participate in the business’s employee benefits program. Employee benefits liability insurance may be issued as part of a pension fiduciary liability insurance policy, and may be considered professional liability E & O insurance.
Fidelity and surety bonds
Employers who want to protect against losses from employee dishonesty can bond their employees using a fidelity bond. This is a contract that guarantees that if an employer suffers a loss resulting from the dishonesty of a bonded employee, then the insurance company that issued the bond will pay damages according to the terms of the contract. Businesses can also protect themselves with surety bonds that guarantee certain contractual obligations made to or by will be fulfilled.
Conclusion
Liability insurance is not a one-size-fits-all solution. Depending on the nature of your business or profession, you may need multiple types of coverage to guard against the wide range of legal and financial exposures you face. From protecting against accidents on your property to addressing employee claims or professional missteps, the right mix of liability policies can help ensure your business is protected from unexpected events. As insurance needs vary based on industry, company size, and operations, consulting with a knowledgeable insurance advisor is key to creating a policy portfolio that aligns with your risk profile and future growth. Don’t wait for a lawsuit to test your protection—proactively securing liability insurance is a smart move for any responsible business owner.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our weekly newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
