Liability Insurance 101 for Small Business

Date: November 16, 2009

A restaurant gets called into court for serving hot coffee; a bakery is sued by someone alleging that their products made him fat. Every small business owner has heard nightmare stories of unmerited lawsuits. Unfortunately, if your business is hit with a lawsuit, no matter how outrageous the claim, you will still spend valuable time and money taking care of it.

One means of defending yourself against both warranted and unwarranted claims is by purchasing liability insurance, which protects your business against accusations of injury to people or other properties.

Kinds of liability insurance lists three types of liability insurance:

  • General, which protects your business from accidents, injuries and negligence claims.
  • Product, which protects you if one of your products is defective and causes injury.
  • Professional, which protects against claims of malpractice and negligence for companies providing services.

What kind of liability insurance do you need?

Most insurance providers have umbrella liability packages for companies needing more than one type of liability insurance, but comprehensive packages aren't necessary for all small businesses. Let common sense be your primary guide. Let's say you only have two employees who work at desks and never do any heavy lifting, and you visit your customers at their workplaces, so they never come to you. If this is the case, then purchasing general liability insurance would not be a top priority.

Keep in mind, however, that some businesses are required by state law to carry certain types of liability insurance. Doctors, for example, are usually obliged to have a professional liability policy. If you're not sure about your state's requirements, lists state insurance offices.

What does liability insurance take care of?

According to, liability insurance will protect you from a number of expenses that result from liability claims, such as "payments as the result of bodily injury or property damage, medical expenses, the cost of defending lawsuits and settlement bonds or judgments required during an appeal procedure." However, many policies exclude damage for intentional acts; for example, if one of your employees gets into an altercation with a customer and the customer sues your business, you may not get any help from your coverage.

However, in most cases, liability insurance pays off for small businesses sooner or later. Talk to your insurance company about your specific needs. The cost of purchasing liability insurance will depend on several factors, such as whether your business is considered high or low risk for liability claims and whether or not your business has been responsible for causing injuries or damages in the past.


Related resources: Legal Center webinar on avoiding lawsuits.

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