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What Is Liability Insurance?

18. February 2013 16:08
what is liability insurance

If you're a small-business owner, chances are you've heard that insuring your company is a great way to protect your assets in the event of a natural disaster or unexpected lawsuit. But business insurance is not as familiar to most people as health insurance or auto insurance. So what exactly is liability insurance? Read on to find out how this type of coverage works for small-business owners.

What Is Business Liability Insurance?

Legally, liability insurance is a product that that offers financial and legal protection in the event that a person or entity (such as your business) is charged with responsibility for some kind of financial loss or damage. To illustrate how liability insurance works, let's use the example of a bakery owner.

Say a customer orders some bread, eats it, and has an allergic reaction because it was made with peanut oil – to which the customer has a horrible allergy! He sues the bakery for damages related to his ambulance and medical costs.

What is the role of liability insurance in this situation? It protects the bakery owner in three ways:

  1. Provision of legal defense. The initiation of a lawsuit against the bakery owner (or other insured party) triggers the insurance company's obligation to provide a legal defense against the claim. This might include providing an attorney to build the defense and argue the bakery owner's case in court.
  2. Payment of damages. The second protection liability insurance offers is the payment of benefits to cover any damages for which the insured party is found liable. For example, if the bakery owner is found to be responsible for all costs related to the emergency room treatment of the allergic customer, the liability insurance covers those costs, up to the policy's limit.
  3. Settlement of reasonable claims. Finally, liability insurance providers are required to settle certain claims on the behalf of the insured party. If the bakery owner could potentially owe far more than her policy limit if the claim were taken to court and she were found liable, the insurer might recommend that she settle for an amount within her policy's coverage.

What Is the Benefit of Liability Insurance?

What is liability insurance's real boost for small-business owners? Like other kinds of insurance, it essentially provides peace of mind for a modest price: by paying a small amount of money upfront (in the form of a premium), you can purchase the assurance that, should you face a major expense down the road, your liability insurance will cover it, allowing you to leave your business and personal assets intact.

In other words, by purchasing liability insurance for your business, you purchase financial security for the future.

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Risk Management | Small Business Risk Management

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