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Understanding the Basics of Small Business Liability Insurance

To protect a small business from potential lawsuits, liability insurance is necessary. Policies vary greatly, and they cover different classifications of risks for varying costs. Before shopping for a policy, it is important to educate yourself about liability insurance.

Liability Insurance is Available in Many Different Forms

Commercial general liability, which is also called CGL, is a very broad insurance product. It covers claims from accidents, injuries or negligence when the business is at fault. Small businesses may face a wide array of damage charges. Personal injuries, property damage, libel and slander are just a few examples.

Product liability insurance covers legal fees for litigation involving a faulty product. It also covers any personal or property damage charges caused by the defective product.

Professional liability coverage pays for damages caused by services. It is also called errors and omissions coverage. This is for companies that market a service instead of a product. For example, professionals in medical clinics must have medical malpractice coverage.

There are other types of insurance designed for specialty businesses. For example, there are special policies for companies involved only in Internet sales. The nature of the business determines what type of coverage is necessary.

Type of Business May Influence Premium Amounts

Insurers classify businesses in several different categories. These classifications play a key role in determining annual premiums. Every business has a certain degree of risk, and some types face many more risks than others.

For example, a company that washes windows on skyscrapers would be considered a riskier business than a tax preparation company. To get a better idea of what to charge, most insurers research the number of claims made by similar businesses. The North American Industry Classification System is commonly used.

The size of a business' payroll and the amount of sales made also contribute to premium amounts.

To find out what kind of risk classification a particular business falls under, discuss the matter with us.

Liability Insurance Doesn't Cover Everything

General liability coverage does not offer benefits for employees' work-related injuries and illnesses. Workers' compensation coverage usually provides benefits for such expenses.

Liability coverage does not cover intentional acts or damages sustained from those acts. Employee fights, criminal activity and fraudulent behavior are some examples of intentional acts.

Liability Insurance May be a Requirement

Several states require some professions to carry liability coverage. If a business uses a vehicle or lets employees drive it, auto liability coverage is also important.

Although most states have a specific standard for minimum auto liability coverage, the amounts vary from state to state. It's important to discuss these requirements with us to be sure your business is adequately covered for the state(s) you operate in.

In the event of a claim, liability insurance provides coverage for defense costs, litigation claims and other legal fees.

It's Possible to Decrease Risks

If business owners document certain safety measures taken to reduce or eliminate risks, insurance companies may classify the company as low(er) risk. Smoke alarms, fire alarms, sprinkler systems and multiple fire extinguishers help lower risks.

It is also beneficial to train employees in various safety practices. Be sure to make equipment readily available.

When vehicles are used for business purposes, make sure they are maintained properly.


Kenneth Gladman

Friday, February 23, 2018 at 5:17pm CST

I didn’t realize that insurance for commercial buildings could be required by law. It is good to know if it is mandatory in your state. You can avoid a lot of trouble by researching.

Derek Dewitt

Thursday, April 19, 2018 at 9:15am CDT

I know I always check to see that contractors on my property are insured, so I can see why a small business would need to do the same. I like your point about how fire alarms and other systems can help you lower risks. I think businesses with these safety features can probably qualify for discounts, so it pays to have safety measures in place.

Malia Davis

Wednesday, September 12, 2018 at 2:23pm CDT

Thanks for giving a quick definition of what product liability insurance is. It’s nice that with this type of insurance, you wouldn’t be liable as a company for a faulty product. I could see how that would be very useful for online companies since they have to send their products out and need to make sure they stay in top condition until they reach the customer.

Sharon W.

Wednesday, September 12, 2018 at 9:13pm CDT

I like that you talked about how you may need an auto liability coverage for your business insurance if you will have vehicles that your employees will drive. My husband and I are dreaming of owning a food delivery business. We want to protect both our business and employees, so it’s important for us to be aware of what type of business insurance coverage our business should have. Thanks for sharing this.

Taylor Bishop

Tuesday, March 12, 2019 at 12:45pm CDT

Thanks for going over types of liability insurance. You mentioned that medical clinics could have medical malpractice coverage. I’m kind of interested to learn if the type of coverage medical clinics could have could also depend on what conditions are treated there.

Lloyd Bronson

Tuesday, September 3, 2019 at 10:04am CDT

I am glad to see that your article mentions that liability insurance does not offer workplace injury-related benefits, as workers’ compensation will usually take care of those. My uncle is looking into hiring the services of an insurance company to assist him in the future when he starts his restaurant, but he is unsure of how to go about ensuring that his workers are safe. I will do additional research to assist him in the matter in order to find him the insurance company that will work best with what he needs.

Taylor Hansen

Friday, May 22, 2020 at 10:41am CDT

I never knew that liability insurance is required for each state. My brother is trying to start up a cookie delivery business and is wondering what kind of liability insurance to get. I’ll be sure to share this with him so he can check our state’s requirements for insurance.

Shammy Peterson

Friday, June 11, 2021 at 2:02am CDT

You got my attention when you said that a product liability insurance policy covers personal or property damage charges caused by the defective product. My supervisor at work mentioned that he was tasked to find the best insurance company. I will share your tips with him because he mentioned that he needed to find a policy that could protect the business from any financial crisis should the equipment and tools in the office got damaged due to different circumstances.

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