Most businesses should have at least some liability insurance. Without it, a single unfortunate accident could destroy your company.
General Liability Policies
If your business has even minimal direct contact with customers or clients, you should have a general liability policy. Imagine that a customer or client suffers bodily injury while on your business premises, such as in your office or store, or because of the negligence of one of your employees while the employee is working outside of your principal place of business. In such cases, the injured person may be able to collect for medical bills, lost wages, pain and suffering, and other items. Moreover, apart from physical injuries, your business also may be liable for damages for such things as libel, slander, false arrest, and false imprisonment.
General liability policies provide coverage for judgments relating to these types of injury lawsuits up to the limits of the policy, as well as covering the cost of defending the lawsuits. The policies cover a range of possible injuries to your clients or customers; for example, slipping and falling at your place of business, or otherwise being harmed by a physical object located on your business premises. (Note, however, that some amounts awarded in lawsuits usually won’t be covered by a general liability policy—such as if your business is required to pay punitive damages for willful or malicious actions.)
Just to be clear, having general liability insurance is a good idea whether or not your business is legally structured to limit personal liability (for example, if your business is a limited liability company or corporation). Even if you personally are protected from liability, a single serious injury suffered by a client or customer could lead to damages that would bankrupt your business if it’s uninsured.
General liability policies typically have dollar limits for each incident, as well as an overall limit for the policy year. For example, a policy may pay up to $1,000,000 per claim and up to a total of $3,000,000 for the policy year.
If your business leases its space from someone else, the building owner likely will have liability insurance; however, you can and should still have your own general liability policy.
Product Liability Insurance
If you design, manufacture, or sell products, you should seriously consider getting product liability insurance. This is insurance that covers your business in the event a person is injured by a product that is defective or lacks adequate safety warnings or instructions.
While product liability insurance is expensive, you need to consider the potential cost of going without. More particularly, if you manufacture items that clearly may injure people, such as chemicals or construction equipment, product liability insurance is worth the cost. However, if you’re a retailer selling products packaged by the manufacturer, and you do not service, assemble, or provide advice regarding the products, your potential liability is far more limited, with the manufacturer generally bearing most of the legal responsibility. Consequently, you may well have adequate coverage under your general liability policy.
Determining the appropriate amount of product liability insurance will depend largely on what kind of product you’re dealing with. A company that manufactures spiral-bound notebooks and has five million dollars in annual sales should not need as much coverage as a company that manufactures artificial knees and also has five million dollars in annual sales.
Your business’s vehicle insurance should cover not only cars and trucks owned by the business, but also those belonging to your employees, to the extent the employees’ vehicles are being used for business purposes. This type of employee-vehicle insurance, technically known as “employer’s non-owned automobile liability insurance,” is generally not very expensive, and usually is worth the cost. The coverage it provides is not included under a general liability policy.
While you may want to investigate employees’ driving records before sending them out in company vehicles, or on company business in their own vehicles, a failure to check should not be a problem under most policies. One exception would be where the insurer has specifically excluded an employee from coverage. This may result from your providing the names of employees you want covered to the insurance company, the insurance checking the employees’ driving records, and finding a bad driving record for a particular employee.
Also, if your company leases vehicles, you should be able to add coverage for injury or property damage under either your vehicle insurance policy or your general liability policy. (This is referred to as “hired vehicle” coverage.)
Workers’ Compensation Insurance
Workers’ compensation insurance covers injuries to employees, and all businesses with employees are required by law to have this type of insurance. Workers’ compensation insurance protects your business from being sued for negligence with regard to its employees. Instead of a lawsuit, employees injured on the job receive compensation for costs associated with their injuries through your business’s workers’ compensation insurance.
In order to make a workers’ comp claim, the basic rule is that an employee needs to be injured in the course of employment. This rule can be interpreted quite broadly; for example, it may include employees injured at social functions associated with your business.
If you are a sole proprietor, you likely won’t be eligible for workers’ compensation insurance for yourself. By contrast, if you’re a partner in business structured as a partnership, or an officer of a corporation, you generally can get workers’ compensation insurance for yourself, if you choose.
The specific requirements for obtaining workers’ compensation insurance vary on a state-by-state basis. Most small businesses pay money into a state-run fund or get a policy through a private insurance company. “Self-insuring” requires you to keep large amounts of cash in reserve and, at least for small businesses, generally isn’t a realistic option.
Your rates for worker’s compensation insurance will vary depending on what kind of business you’re in. More dangerous businesses, such as working with hazardous chemicals, will have higher rates than lower-risk businesses such as offices that provide business services. Your business’s safety record may also be taken into account when computing rates.
Be aware that standard workers’ compensation insurance might not cover every type of harm an employee may experience while on the job. More specifically, an employee may be able to sue in court for injuries resulting from gross negligence or intentional conduct. You should obtain separate workers’ compensation insurance to cover these types of claims.
Finally, be aware that workers’ compensation insurance is not required for independent contractors. However, you should make sure that you accurately distinguish between independent contractors and employees. If you do not provide workers’ comp coverage to a person doing work for you because you wrongly think he or she is an independent contractor rather than an employee, and then that person is injured on the job, you may be on the hook for a large settlement.
You can find more detailed information on liability insurance and other issues relating to your small business in Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo) and The Small Business Start-Up Kit: A Legal Guide, by Peri H. Pakroo (Nolo).