The Basics of Business Liability Insurance

Businesses need liability insurance to protect themselves from lawsuits filed by business associates, customers, clients and other third parties. A lawsuit can be very expensive. If a company is sued, liability insurance can mean the difference between survival and dissolution of the business.  

Indemnity and Defense

Liability insurance covers two types of costs associated with lawsuits: indemnity and defense.

Indemnity coverage applies to damages or settlements paid to the plaintiff. This coverage is subject to a limit, such as $1 million. Your insurer will stop making payments for damages or settlements once your policy limit has been used up.

Defense coverage applies to the cost of investigating a claim and defending you against a lawsuit. It includes expenses your insurer incurs to subpoena witnesses, conduct depositions, and hire experts to testify in your defense. It also includes fees charged by an attorney to defend you. The attorney may be employed by the insurer or hired from an outside firm. Most (but not all) liability policies provide unlimited defense coverage. This means that your insurer will continue to pay the cost of defending you until the claim or suit is resolved.

There are three basic types of liability insurance a business may need: general liability, umbrella liability, and professional liability insurance.

General Liability Insurance

Virtually all businesses need general liability insurance.

This coverage protects businesses against some common types of claims or suits. It includes three types of coverage:

• Bodily Injury and Property Damage Liability
• Personal and Advertising Injury Liability
• Medical Payments

These coverages are often designated Coverage A, Coverage B and Coverage C, respectively.

Bodily Injury and Property Damage Liability

Bodily Injury and Property Damage Liability (Coverage A) applies to claims or suits against your firm for bodily injury or property damage. It covers claims alleging your company's negligence triggered an occurrence (accident) that caused the claimant to suffer bodily injury or property damage.

Coverage A is quite broad. It covers most bodily injury or property damage claims except those that are subject to an exclusion.

Bodily Injury and Property Damage Liability covers all of the following:

• Premises Liability: Covers bodily injury or property damage that occurs on your premises and arises out of your negligence. For instance, a customer slips and falls on a wet floor in your store, injuring his leg.
• Operations Liability: Covers bodily injury or property damage that arises out of operations you perform away from your premises. For example, you are installing computer equipment at a customer's office when you accidentally knock over a shelf, breaking a piece of artwork.
• Contractual Liability: Covers liability you assume under a contract for potential lawsuits against someone else. For instance, your building lease requires you to assume liability for any lawsuits against your landlord that arise out of your negligent use of the building.
• Liability for Acts of Contractors: Covers your vicarious liability for negligence committed by independent contractors you've hired.

• Product Liability: Covers claims by third parties alleging that a product you made or sold is defective, and caused them to sustain bodily injury or property damage.
• Completed Work Liability: Covers claims by third parties alleging that work you have completed is defective, and caused them to sustain bodily injury or property damage.

Personal and Advertising Injury Liability

Personal and Advertising Injury Liability covers injury to others that arises out of a covered offense. In contrast to Coverage A, Coverage B applies to financial injury rather than physical injury. An injury is covered only if it is caused by one of seven types of offenses listed in the definition of personal and advertising injury. Covered offenses include acts such as libel, slander, and false arrest. These acts are intentional torts, meaning intentional acts that result in unintentional injury. 

Coverage B includes certain offenses you commit in the course of advertising your business. For instance, it covers claims by other firms alleging you disparaged their products in your advertisement.

Medical Payments Coverage

Unlike Coverages A and B, Medical Payments Coverage (Coverage C) does not cover third-party lawsuits. Rather, it covers medical expenses incurred by individuals who have been injured on your premises or at an off-premises job site. These expenses are covered regardless of fault. That is, injured parties need not prove you are liable for their injuries to receive payment under your policy.

Medical Payments coverage is intended to deter lawsuits by injured customers and other third parties. The limit provided is usually low, such as $10,000.

Commercial Umbrella Policies

A commercial umbrella is a type of liability policy that serves two functions. First, it serves as excess coverage, providing extra limits of liability. The limits on your umbrella apply after the limits on your primary liability policy have been used up. Secondly, an umbrella affords broader coverage than your basic liability policies. That is, it includes coverages that aren't provided by your primary policies.

An umbrella protects your company against large losses that could otherwise devastate your firm. For example, a child sustains a serious head injury after falling in your store. He spends several weeks in a hospital in intensive care. His parents sue your company for bodily injury, and the claim is settled for $1.5 million. The settlement amount exceeds the $1 million Each Occurrence limit on your general liability policy. In the absence of an umbrella, your firm will face a $500,000 out-of-pocket loss.

Virtually all umbrella policies apply over and above your primary general liability policy. If your company is insured for commercial auto liability or employers liability, your umbrella should include those coverages as well. Some umbrellas include a self-insured retention (SIR). A SIR typically applies to claims that are covered by your umbrella but aren't covered by primary insurance.

When shopping for an umbrella, keep in mind that policies vary widely. Some provide broader coverage than others. Some may exclude coverages, such as liquor liability, which are included in your primary policy. If you need help deciphering policy language, ask your agent or broker for assistance.

Errors and Omissions Liability

As its name suggests, errors and omissions liability insurance covers claims that arise out of negligent acts, errors or omissions committed by a business in the course of providing services to others. Errors and omissions (E&O) liability is also called professional liability.

E&O insurance covers claims that seek compensation for financial losses rather than bodily injury or property damage. Any company that gives advice or performs a service should consider this coverage. Examples are accounting firms, consulting companies, engineering firms, architectural firms, and website design companies. E&O policies often apply on a claims-made basis.

Many E&O insurers offer policies designed for specific types of businesses. For instance, an accounting firm can purchase accountants E&O insurance. An engineering or architectural firm can buy architects and engineers E&O insurance. A physician can purchase physicians professional (or medical malpractice) insurance. Some insurers also offer a "catchall coverage" called miscellaneous professional liability insurance. This coverage can be used to insure many types of businesses that have professional liability exposures.

Management Liability Insurance

Many companies purchase a group of E&O coverages that are often referred to as management liability insurance. This category includes the following:

• Directors and Officers (D&O) Liability: Covers claims against corporate officers or directors (if they have not been indemnified by the company) for errors or omissions they commit while performing their duties on behalf of the corporation. Also, covers claims against the corporation that arise out of its vicarious liability for acts of directors and officers. Specialized policies are available for certain types of businesses. For instance, private companies can purchase private company D&O coverage.
• Employment Practices Liability: Covers employment-related claims filed by employees alleging acts such as discrimination, wrongful termination, and harassment.
• Fiduciary Liability: Covers claims against fiduciaries of employee benefit plans for errors or omissions they make while administering such plans.