How small businesses can reduce liabilities
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Lawsuits are like itchy sweaters. Nobody actually enjoys them, but sometimes they’re unavoidable. And for small businesses, they can be more than uncomfortable; they can be financially and reputationally devastating.
Whether it’s a homeowner tripping and falling over construction equipment, a plumber’s faulty workmanship causing a café to flood, or a delivery driver crashing into another car, small businesses face a lot of liability risk.
If someone believes your small business is responsible for bodily injury, property damage, or breach of contract, you could be sued for damages. And the cost of these lawsuits can pile up quickly, including:
- Legal expenses, such as attorney fees, settlements, or judgments
- Loss of revenue, if you start losing business from bad press
- Missed wages, if you need to temporarily close during legal proceedings
While you can’t always avoid court, there are things you can do to lower your chances of getting sued and properly protect your assets. In the insurance world, this is called reducing liability, which can also land you lower insurance rates.
If you’re ready to protect your business, here’s how to get started.
- What are some ways that liability can be reduced for small businesses?
- Build a solid legal and business foundation
- Manage everyday risks in operations
- Protect against liability through policies and procedures
- Reduce employee- and contractor-related liability
- Use insurance to transfer risk
- Ongoing monitoring and risk reduction
- Get the right protection for your small business with Insureon
What are some ways that liability can be reduced for small businesses?
Protecting your business is a two-pronged approach. You need to both reduce your legal liability and have a financial safety net in case you ever get hit with a lawsuit.
This step-by-step guide will provide you with proactive measures you can take to try and avoid costly lawsuits, legal fines, and penalties. Plus, we’ll walk you through some of the most important liability insurance policies every business owner should purchase.
Let’s start with some preventive steps...
Build a solid legal and business foundation
If you’re a small business owner looking to protect your assets, building the right business foundation is a good place to start. This includes:
-
Select the right business structure:
Many small business owners will choose to start as
sole proprietors,
because that’s the easiest and least expensive business structure. But, in sole proprietorships, there’s no legal separation between business and personal assets.
With a limited liability company (LLC) or a corporation, you’re making your business a separate legal entity. This means if your company is sued, your home, retirement savings, and other personal assets are off the table. - Establish strong financial controls: Beginning a business relationship with a detailed contract or service agreement that identifies expectations, responsibilities, timelines, and other key terms will help protect you navigate client disputes or legal claims.
- Create solid contracts: Beginning a business relationship with a detailed contract or service agreement that identifies expectations, responsibilities, timelines, and other key terms will help protect you and navigate client disputes or legal claims.
- Maintain compliance: Adhering to regulations and obtaining the right permits and licenses can help you avoid hefty fines, legal fees, and operational shutdowns.
Manage everyday risks in operations
From hackers to workplace hazards, there are plenty of opportunities for incidents to unfold during the day. Here are some ways to cut down on those risks:
- Comply with Occupational Safety and Health Administration (OSHA) standards
- Provide employee safety training to keep them safe while on site and in transit
- Keep risk awareness and accountability top of mind by demonstrating proper safety precautions and compliance
- Uphold the value and safety of your business property with regular inspections, timely repairs, and proper signage to warn people of potential hazards
- Establish cybersecurity protocols to help prevent data breaches, including strong passwords, multi-factor authentication (MFA), and data encryption
- Maintain accurate financial records, client communications, and contracts
Protect against liability through policies and procedures
Establishing company policies, strictly adhering to procedures, and maintaining clear and well-documented communications can help you avoid misunderstandings, reduce mistakes, and handle customer complaints that could lead to lawsuits.
Recommended actions to take include:
- Enforce written company policies for employee conduct, safety protocols, and other compliance standards to uphold workplace laws.
- Document everything, from employee emails to client agreements, to provide clarity and accurate information.
- Establish (and demonstrate) best communication practices to ensure clear communication with both clients and employees.
- Protect company intellectual property (IP) with trademarks, copyrights, and patents to avoid branding, advertising, or other IP disputes.
- Implement quality assurance (QA) standards and processes to minimize errors, oversights, and negligence.
- Create opportunities for employees and clients to provide honest feedback to help identify issues, improve protocols, and reduce your risk of liability.
Hiring employees, contractors, and subcontractors can open the door to a variety of vulnerabilities. It’s essential to create a workplace that protects both your employees and your business. This can be done in several ways, including:
Employee training
Providing—and documenting—regular training for staff members ensures each employee understands expectations, the code of conduct, cybersecurity policies, and safety protocols.
Educating your staff is a solid way to prevent injuries, harassment claims, and other workplace incidents, and it reinforces the importance of these policies to your staff.
Contractor agreements
Providing independent contractors with clear, detailed contracts and waivers that clarify the scope of work, agreed-upon wages, project timelines, and other expectations and responsibilities will help you avoid any misunderstandings, contractual disputes, or liability issues.
Employment law compliance
Following employment laws can reduce your chances of getting sued or hit with legal fines. These laws offer worker protection regarding wages, discrimination and harassment, workplace safety, job-protected leave, and worker classification.
Employment laws exist at federal, state, and local levels.
- Federal laws apply to employers nationwide, including the Fair Labor Standards Act (FLSA), the Americans with Disabilities Act (ADA), and the Family Medical Leave Act (FMLA).
- State laws must comply with federal regulations but typically offer more protections for workers, such as minimum wage requirements.
Use insurance to transfer risk
Even with all the best preventive measures in place, liability can’t be completely erased. That’s why business insurance is so important for small companies. When you have liability protection, you can pass the financial risk to your insurer. This means, if you get hit with a lawsuit, your policy will pick up the tab.
Here are five important liability insurance policies small business owners should consider:
General liability insurance
Typically, the first policy business owners purchase is general liability insurance, which provides financial protection to your company from third-party claims of:
- Bodily injury
- Property damage
- Advertising injury, including copyright infringement
For example, if a customer slips and falls at one of your restaurant’s parking lots and breaks their wrist, general liability will cover their medical bills and any legal expenses.
If you’re signing a lease for a commercial property, many landlords will require that you have a general liability policy as part of the contract.
Professional liability insurance
Also known as errors and omissions (E&O) insurance, a professional liability policy can protect businesses that provide their expertise or advice, such as management consultants and accountants, against claims such as:
- Work mistakes and oversights
- Incomplete services
- Negligence accusations
- Missed deadlines
- Breach of contract
Cyber insurance
As social engineering attacks become more sophisticated, it’s important to protect your business from the high costs of data breaches or malicious ransomware attacks.
Cyber insurance will help pay for:
- Data breach response costs, including notifying affected customers and providing them with credit monitoring services
- Cleanup response expenses, such as hiring IT consultants and a public relations manager
- Ransomware payments, if you’re a victim of cyber extortion
- Defense costs, such as legal fees, legal advice, settlements, or court-ordered judgments
Workers’ compensation insurance
When you hire your first employee, most states legally require you to purchase workers’ compensation coverage. This policy covers medical bills and lost wages, if an employee suffers a work-related injury or illness.
Workers’ comp usually includes employer’s liability insurance, which protects your business if an employee sues over a work injury or illness.
Commercial umbrella insurance
For businesses working in high-risk industries, such as construction and manufacturing, or that have a lot of public exposure, like retail and hospitality, a commercial umbrella policy is highly recommended.
If you’re hit with a very expensive lawsuit, and the damages surpass your standard insurance policy limits, an umbrella policy will take the baton and finish the race.
Ongoing monitoring and risk reduction
Once you’ve got the right insurance policies in place, it’s important to stay on top of your risk management plan to manage your company’s liability.
- Conduct annual reviews to update and renew policies and contracts
- Perform premium audits on your workers’ comp policy, general liability coverage, and cyber liability insurance to ensure you have sufficient coverage and protection protocols established
- Stay informed on liabilities, lawsuits, and risk management innovations in your industry
Get the right protection for your small business with Insureon
Okay, quick recap: While you can’t eliminate all of your company’s liability, it’s possible to reduce and manage these risks.
By combining the strategies discussed above with the right insurance policies, you’re well on your way to reducing your chances of liability lawsuits—and the financial consequences, should you ever face one.
Your first step? Get policy quotes from top-rated U.S. insurance companies by filling out our easy online application. You can compare rates, get expert advice from one of our licensed insurance agents, and secure affordable liability insurance and your certificate of insurance (COI) typically in less than 24 hours.
