Today, there are more than 23 million businesses operating as sole proprietorships or partnerships. This accounts for more than 80 percent of all U.S. businesses, according to BizStats.com. Do these structures protect small business owners from certain liabilities, or if a suit was brought against them, could their assets be at risk?
There is a common misconception that limited liability companies (LLCs) or incorporated structures are absolute safeguards against personal liability. As a result, many business owners forgo arming themselves with a small business insurance plan.
While attention to quality control and seamless risk management procedures can reduce the risk of lawsuits, no organization can completely eliminate the threat of a claim. The expense associated with defending litigations, even on frivolous claims, can add up quickly and possibly put a company in financial peril. With just one claim, savings that took years to build can be wiped out and the owner's personal assets can become vulnerable.
Instances where You Could be Liable
- The owner acted in an irresponsible or illegal manner
- They personally injured someone
- The owner signed a personal guarantee for a loan
- The business is not operated as a separate entity
Businesses can prevent the financial pitfalls of defending a claim by arming themselves with a business liability insurance plan. Typically, with business liability insurance policies, four types of claims are covered: bodily injury; property damage or loss; personal injury, such as libel or slander; and advertising injury. A General Liability policy covers all damages, legal fees and settlement charges up to the policy limits for covered claims. This is usually packaged with Property coverage in a Business Owner's Policy (BOP).
Typically, liability insurance coverage includes:
- Legal costs: General liability insurance will cover litigation costs such as attorney and witness fees, as well as settlement payments.
- Medical costs: Insurance will cover medical costs for individuals who may have been injured on company property.
- Property damage: Insurance will cover fire, theft or other incidents that damage the assets of the business. It insures the company from physical damage to the property as well as the customer's property.
- Business interruption: Insurance will cover the business in cases of major disasters, such as a fire, that render the business inoperable. If the business is unable to operate, the insurance would reimburse the company for its losses and the profits that would have been made during that time.
Business owners should also consider Professional Liability insurance, also known as Errors and Omissions insurance, which protects organizations against claims of professional negligence and errors or omissions in professional work.
While the cost of safeguarding a business and its owner with liability insurance can be costly, there are several ways business owners can cut down on the expense, including:
- Shop around: Business liability insurance coverages range by company; read up on what is covered and what is not. Review small business insurance quotes from several insurers and compare rates.
- Consider a Business Owner's Policy (BOP): Rather than purchasing separate types of insurance from various companies, consider purchasing a package of policies. When receiving a small business liability insurance quote on a BOP, be sure to understand what is included in the coverage. BOPs don't typically include all types of insurance.
- Enlist a specialist broker: If the small business operates in a niche, it will often require specialized insurance to safeguard against unique risks. Insurance brokers will know what coverages are necessary for the business and know where to go for the best rates.
Company liability insurance safeguards businesses from various allegations of negligence, but it also protects them from having to absorb the fees associated with defending a frivolous lawsuit. Protecting the business from these risks provides a foundation for success. Business owners should invest the time to research small business insurance plans and understand what their needs are. It could mean the difference between survival and financial disaster.