On the off chance that you end up having to make an insurance claim, finding out that you don’t have enough liability insurance coverage could become the last nail in the coffin for your business.
Your insurance policy has a coverage limit (the maximum amount it will pay out to you when you make a claim). The limit must be high enough to cover all your legal expenses and losses.
Every small business owner is faced with this question when buying insurance: how much is enough?
Whether you work from home as an independent consultant or employ several people in an office, running a business has risks. It is necessary to get not only the right liability insurance policy but also enough coverage limits for your business.
There are a few different types of liability insurance and also a few different options for coverage limits. So unless you are an insurance expert, it’s natural to feel hesitant when choosing your policy.
This guide will simplify the important parts to help you make the right decision.
What is liability insurance?
Liability insurance protects you from claims and lawsuits alleging damage to a third party — a customer, supplier or member of the public for example.
There are multiple ways to cause damage to a third party and not all types of risk apply to all businesses, so insurance companies group liability risks into a few different categories.
These are the most common ones:
General liability insurance
This protects businesses from claims of property damage by its product or employees as well as injuries at an office, storefront or place of business. This is the most popular coverage for small businesses.
Professional liability insurance
Covers lawsuits and settlements resulting from claims of damage or monetary loss to a client due to a service or advice that you provided.
Cyber liability insurance
Protects businesses if their cybersecurity is breached and personal and commercial data is damaged or stolen.
Directors and officers (D&O) liability insurance
Directors and officers are bound by duties, and this coverage protects them in the event that they fail to meet their duties or the company they serve is involved in a lawsuit.
Which insurance coverage do I need?
As we mentioned earlier, not all coverages apply to all businesses. Let’s get the easy ones out of the way first.
Cyber liability insurance
If you store or make use of electronic data, you should insure yourself against the possibility of a cyber breach. Contrary to popular public opinion, hackers don’t only target big corporations. They love to target small businesses too.
In 2018, small businesses were the target of 43% of all cyberattacks.
Sixty percent of small businesses that suffer a data breach go out of business in six months. The risk is not worth it.
Directors & officers liability insurance
If you are not a corporation and you don’t have directors, you don’t need D&O liability insurance.
Professional liability insurance
This type of insurance applies to anyone who provides a service or advice. For example:
- Doctors
- Lawyers
- Independent consultants
- Media companies
- Beauticians
- Personal trainers
It’s also known as errors and omissions insurance and it covers professionals against any errors or omissions in the service they provide.
For example, this type of insurance kicks in when a doctor misdiagnoses his patient due to negligence, or an accountant’s error lands his clients in financial trouble.
General liability insurance
General liability insurance covers your business in the event of bodily injury to your employees or clients on your property and your clients’ property. It also covers damages caused by your product to any third party.
General liability insurance has been a lifesaver in endless cases, including:
- Restaurants slapped with slip ‘n fall lawsuits
- Contractors who damaged their clients’ property while working on-site
- eCommerce stores that sold a product that injured a customer
If you manufacture or sell products, operate out of a premises that host employees and customers, or work at sites owned by a third party, pay special attention to the coverage offered by a general liability policy.
Coverage limit options
Insurance policies have two limits: an occurrence limit or the maximum amount your insurance company will pay out for a single claim. The second limit is an aggregate limit. This is the maximum amount your insurance company will pay out during the lifetime of your policy (usually a year).
At the time of this writing, these are the regular limits options (Note: the first number shown is the occurrence limit and the second is the aggregate limit):
- $300K / $600K
- $500K / $1M
- $1M / $1M
- $1M / $2M
- $2M / $4M
Higher limits mean more safety and greater peace of mind, but they increase your insurance premium. That’s the trade-off you face.
How much coverage is safe?
Unfortunately, there is no formula that can give out a safe number for your business. The risks you are exposed to and your risk tolerance can help you make a decision, but it’s important to be proactive rather than passively take a guess. Here are some tips that should help:
Take an inventory of your risks
List all the risks you can think of — anything that could damage your store, office, home (if you work out of your home), equipment or supplies. Also consider risks like theft — both of tangible assets like inventory and electronic data too.
Consult a broker with experience in your industry
A broker who has worked with other businesses in your industry understands the range of risks that you face. Discuss your risks, ways to reduce them and appropriate policies to cover them.
Explore opportunities to reduce your premium
If you can reduce the cost of your premium, you can afford a higher coverage limit. Some common strategies to reduce your premium are:
- Paying your premium as a lump sum up-front
- Bundling policies together for a discount
- Minimizing risks by taking security precautions
Be sure to ask your broker about all three of these possibilities.
Key takeaways
In this guide, we have gone over what liability insurance is, the four most popular types of liability insurance, options for coverage limits and how to determine the right amount of coverage limit for your business. If you have further questions, reach out to an insurance professional for answers.
