General Liability Insurance for Your Small Business

As a practical matter, most businesses will find it a must to carry general liability insurance even though it's usually not required by law.

Just like the liability coverage on your auto policy protects you from having to pay out of pocket for damages or injuries if you cause a car accident, general liability insurance covers the cost of damages or injuries caused by your business.

What Is General Liability Insurance?

General liability insurance protects your personal and business assets if someone outside your company is injured or suffers property damage because of your business, its operations, or its products. The insurance pays the costs associated with the damage or injury.

These policies, also called business liability insurance and commercial general liability insurance, kick in when a customer reports an incident—called filing a claim—against a business, and a company is found to be responsible for what happened. General liability insurance typically pays for medical and legal expenses, monetary losses and property damage or losses, though the exact coverage will depend upon the policy you buy.

What Businesses Need General Liability Insurance?

People often think of general liability insurance as something retailers need because slip-and-fall claims in stores like groceries are among the most common. But mistakes and accidents can occur at many different types of businesses.

Some highly publicized examples include infections caused by dirty equipment at nail salons and the e-coli outbreaks that caused food poisoning at restaurants. Other examples would include a customer who trips on an office stairway and breaks a leg or is injured during a fire on your premises. Or your software prototype damages a client's operating system, or an employee of your construction company drills through a pipe and causes a flood.

Certain business structures like sole proprietorships and partnerships are especially vulnerable because a liability claim would put the owner's personal assets at risk. But a limited liability company (LLC) also needs to protect business assets like equipment, inventory, and even monies due from customers. And if the owners of an LLC slip up in the rules for separating their personal assets from their business, a liability claim could put their personal assets at risk as well.

What Does General Liability Insurance Cover?

General liability insurance pays the costs that result from injuries or damages including:

• medical expenses, lost wages, and other expenses that result from an injury
• costs to repair or replace property or monetary losses from property damage
• legal costs to defend your company as well as the attorney fees and other court costs of the person making the claim, and
• financial and personal losses that arise from advertising mistakes your company makes.

The injury or damage doesn't have to occur on your business premises for general liability insurance to come into play. Suppose that you own a construction company, for example, and a stockpile of two-by-fours falls injuring a client on a walk-through of the job site. Or you visit a client's offices to demonstrate a new piece of software, and your coffee spills onto the client's computer and breaks it. These incidents would be covered, though some policies also place geographic restrictions on coverage.

Just like your auto policy, your general liability coverage will have dollar limits on what the insurance company will pay, and some situations might not be covered depending on the policy you purchase.

What Doesn't General Liability Insurance Cover?

It's important to read your policy carefully because many different situations may not be covered, or you may need to add another type of policy to be fully protected. General liability insurance policies typically don't cover:

Employees and independent contractors. General liability insurance covers damage done by your employees to others like a worker who breaks a pipe while installing a washing machine for your customer. But it doesn't cover employees who are injured on the job, and it usually doesn't cover independent contractors injured while working for you. Independent contractors who cause damage or injury to others while working for you won't be covered by most general liability insurance policies either.

Situations that might be anticipated. General liability insurance doesn't cover situations that might be expected based upon the business you own. If you own an ice skating rink, for example, your policy probably won't cover you if a skater falls and breaks a leg because it's reasonable to expect that kind of injury would occur at a skating rink.

Situations where you didn't follow government regulations. If your client is injured by falling debris on a job site and you haven't provided a hard hat, for example, your insurance company is likely to deny the claim.

Auto accidents. Even if your employee is driving for work-related reasons, general liability insurance won't cover injuries or damages from auto accidents.

Certain professions like CPAs. Protection against damages caused by the services and advice given by professionals like accountants and consultants is covered with professional liability insurance rather than general liability policies.

Some of these situations are covered by other types of insurance, and in some cases are required by states--like workers' compensation insurance to protect employees injured on the job.

Types of General Liability Insurance Policies

General liability insurance policies can differ based upon the timing of the injury or claim.

Occurrence policies cover injuries and damages that occur during the time the policy is in effect, no matter when the claim is filed. Say your customer fell in your store but didn't report the incident for months, and your policy has since lapsed. You would still be covered for the claim if the injury happened while your policy was in effect.

Claims-made policies base coverage on when a claim is made. It doesn't matter when the injury or damage occurred as long as the claim was filed during the time your policy was in effect.

Suppose you own a hair salon and your customer claims that you provided a color treatment that made her hair fall out. Now let's say she was one of your first customers when you opened your salon in January, and you didn't get around to buying your insurance policy until March. Your customer's hair loss was gradual, and she didn't fully realize the problem until March, and it took her another month to find an attorney and file a claim. If your hair salon was found responsible, a claims-made policy would cover you even though you didn't have the policy when the injury occurred because your policy was in effect when the claim was filed.

How Much Does General Liability Insurance Cost?

The cost of a general liability insurance policy can range from about $300 to $1,000 per year, depending on many factors including:

• your business location
• the risk factors of your business
• the payment limits you choose
• the deductible you choose, and
• the number of people you employ.

Just like customers in one city pay different auto insurance rates from customers in another city, general liability insurance costs differ based upon where you do business. And just like an auto insurer might charge more to insure a luxury car than an economy car, general liability insurance might cost more for certain businesses because insurers believe their risk or the potential cost of claims is higher.

Construction companies and other businesses that perform work at other locations are generally thought to carry the highest risk. Information technology companies, real estate brokerages, and similar services are likely to be at the lower end of the scale.

The amount of coverage you choose will depend upon the assets of your business and the potential costs of a claim. A dry cleaning business that loses a customer's suit, for example, doesn't have nearly as much at stake as a construction company that makes a mistake building a home.

Many insurance companies offer a package of policies called a business owner's policy that discount rates when you bundle two or more types of coverage like general liability insurance with workers' compensation insurance.