Business Liability Insurance: The Ultimate Guide for Small Business Owners

There are various types of small business insurance and not all of them will apply to your business—liability insurance, on the other hand, is a necessary investment for every company. Although it may seem like an unnecessary cost at first, liability insurance could save your business from losing thousands of dollars in the long run.

As a small business owner, you’re familiar with all of the challenges that you face on a day-to-day basis and unfortunately, no matter how hard you work, things happen. That’s why it’s so important to protect yourself with small business liability insurance.

This being said, however, you might be wondering: What type of liability insurance do you need? How much does business liability insurance cost?

We’re here to help. In this guide, we’ll break down everything you need to know about business liability insurance. We’ll explain how small business liability insurance works, the different types that exist, what kind of coverage you may need, and what it costs.

What Is Business Liability Insurance?

So, let’s start with the basics: What exactly is business liability insurance and how does it work?

Essentially, liability insurance protects your business in the case of damages or fees that come as a result of legal claims made by clients, customers, or employees. In this way, business liability insurance works similar to any other type of insurance policy: For example, if a customer brings a “slip and fall” lawsuit against your company, but you have liability insurance, the legal costs—to defend your business, any settlements or investigations—as well as any medical expenses or damages, should be covered under your small business liability insurance.

Most commonly, the term business liability insurance refers to general liability insurance. General liability insurance specifically protects your business in the case of claims regarding bodily injuries, medical payments, property damage to other property (not including your business’s), advertising injuries, and reputational injuries.

This being said, however, in addition to general liability insurance, there are a variety of other types of business liability insurance (as we’ll discuss shortly)—each of which covers a particular set of circumstances.

Do I Need Business Liability Insurance?

So, with this in mind, you may be wondering if your company actually needs small business liability insurance—after all, you may be just starting out and don’t feel like you have the funds to spare. If this is the case for your business, consider asking yourself these two questions:

  1. Does my business work with clients where something could potentially go wrong?  
  2. Is there any possible scenario that could occur for which my business might be sued?

It’s very likely that you answer yes to at least one of these questions, and therefore you should look into getting small business liability insurance. While business liability insurance isn’t usually required by law, at the end of the day, not insuring your business puts you at great risk. Unfortunately, there are a number of different situations that could lead to a lawsuit and in this case, so it really is better to be safe rather than sorry.

In fact, according to Hiscox insurance expert Kevin Kerridge, “You actually don’t have to make a mistake to have your company sued,” and as we mentioned, legal defense is just one of the things business liability insurance can cover. Therefore, Hiscox recommends getting liability insurance if your business or employees of your business do any of the following:

  • Interact with clients face to face. If you visit a client’s place of work, or clients visit yours, an interaction could go very wrong and you could be served.
  • Have access to a client’s equipment. For example, if you spill coffee on a client’s server, you could be responsible for property and data damages.
  • Represent your client’s business in any way. Anything you or your employees say or do could be subject to liability claims.
  • Use third-party locations for any business-related activities. For example, if you rent space for an event and the building gets damaged as a result, you would be responsible.
  • Are required to have general liability insurance before entering into a contract. This is pretty big. If you don’t have liability insurance, you may be prevented from doing business with clients who require having it in their contract.

Types of Business Liability Insurance

Now that we have a sense of what business liability insurance is and how it works, let’s explore the different types of policies that are available.

Here are the most common types of liability insurance and what they each cover:

General Liability Insurance 

As we mentioned, this is what people typically mean when they talk about business liability insurance. This being said, if you’re going to get any type of liability insurance, you’ll at least want general liability insurance.

Once again, this insurance covers physical damage (or digital damage, such as data loss) to the property of others or injuries to others, as well as protection from claims of libel and slander. In other words, if you run a restaurant and a customer gets food poisoning, you’re covered under this type of insurance. In the same way, if one of your employees goes on an online rant about a client and the client sues you for libel, you are also covered by general liability insurance.

Professional Liability Insurance 

Also known as errors and omissions insurance, professional liability insurance covers anyone who presents themselves as an expert and provides advice or consulting services. If a project goes poorly and the client sues, you are covered for your legal fees and defense costs.

Product and Completed Operations Liability Insurance

This type of insurance provides protection for bodily injury and property damage that occurs away from your premises that are caused by your products or your work. The amount of coverage and the level of risk associated with product and completed operations liability insurance will depend on your business type.

Employment Practices Liability Insurance

On top of general liability insurance, employment practices liability insurance covers specific employment incidents in case you are sued for sexual harassment, discrimination, hostile workplace claims, or unfair employment practices.

Commercial Excess Liability Insurance

Finally, commercial excess liability insurance insures your other insurance. This is additional insurance in case you exceed the limits on your other policies. You’ll usually pay a few hundred dollars for this insurance to ensure you don’t pay thousands in overages if a claim exceeds your policy.

Business Liability Insurance Coverage

With these different types of liability insurance in mind, you might be wondering more specifically about coverage. How do you know how much business liability insurance coverage you need?

Ultimately, the small business liability insurance coverage you require will depend on a variety of factors that are unique to your business, including:

  • The type of liability insurance you need: Do you only need general liability insurance—or do you need multiple different types?
  • The industry your business is in: Are you in a high-risk industry like construction or manufacturing?
  • What your business does: Do you sell products? Are you an accountant or another service-based professional?

To explain, if you’re looking into general liability insurance, you might need more coverage than, say, if you’re looking into employment practices liability insurance. Similarly, if you’re in a higher risk industry, like manufacturing or construction, you also might need more coverage. Finally, if your business sells products, for example, you might decide you need product liability insurance on top general liability insurance, which would overall, mean you require more coverage.

According to Progressive, the coverage for general liability insurance is typically a policy with a $1 million/$2 million aggregate.[1] This means that your insurance provider will cover you up to $1 million for a single incident and no more than $2 million per policy term (usually one year). This being said, however, the higher the aggregate on your policy, the more your premium will be.

Because your business liability coverage needs will be so particular to your company, it’s important to discuss the details of your business—what you do, how you do it, your industry, etc.—with any insurance provider or professional that you work with. This way, they’ll be able to advise you on exactly what type and how much business liability coverage you require.

Business Liability Insurance Cost

As you may have deduced based on our discussion regarding coverage, your business liability insurance cost will also vary depending on a handful of factors. Of course, the type of liability insurance you need will influence cost, as will the extent of your coverage and the number of policies you require.

Moreover, some of the factors that influence your coverage needs will also play a role in cost, as well as additional factors, including:

  • What your business does
  • How risky your industry is
  • The number of employees you have
  • Where your business is located
  • What kind of property or equipment you have
  • How long you’ve been in business

This being said, in terms of general liability insurance specifically, TechInsurance reports that the average annual cost ranges from $483 to $2,758—which calculates out to approximately $40 to $229 per month.[2]

With this in mind, if you find that your business will require multiple types of liability insurance, you’ll want to look for providers that offer a BOP, or business owner’s policy. With a BOP, you can bundle multiple types of business liability insurance together—most typically, general liability insurance and commercial property insurance. A BOP or other package deal can be much more cost-effective than buying individual policies for each type.

How to Get Small Business Liability Insurance

As we’ve mentioned, every business owner should at least consider getting liability insurance to protect their company. Luckily, if you’re looking to buy business liability insurance, you have a variety of options.

Your first option is to go through an insurance broker or agent. Although this option can be more expensive, it can also be useful if you’re unfamiliar with the process of buying insurance. To ensure that you’re working with a trustworthy insurance professional, LegalZoom recommends going through your local chamber of commerce or consulting other business owners to find a broker or agent.[3]

Second, you can go directly to an insurance provider and discuss your business needs. Some insurance providers, like Next Insurance, allow you to request a quote and set up a policy completely online, whereas others require that you talk to a representative to actually buy a policy.

Finally, you might choose to use an insurance marketplace, like CoverWallet, to get small business liability insurance quotes from a variety of providers. With this method, you can compare policies from different providers—without having to take the time to talk to multiple representatives or apply for a quote on multiple websites—and then choose the one that works best for your needs.

All of this being said, whichever route you decide to use to get business insurance, you’ll want to explore all of your options and ensure that the insurance agency or broker understands exactly what your business does and does not do, because as we’ve mentioned, this can influence the type of liability insurance you need, your coverage, and your cost.

Other Types of Business Insurance You May Need

As we’ve discussed, you might need multiple kinds of small business liability insurance based on what your business does and does not do. This being said, however, liability insurance won’t protect you from everything, and therefore, should not be considered the only kind of insurance your business might need.

Many small business owners mistakenly believe that if they have general liability insurance, their own losses are covered as well as the losses of their customers,” according to Hiscox, “but a general liability policy does not protect you when it comes to your own property.”

Although we’ve already discussed the major types of business liability insurance, there are a few other types of insurance you might want to keep in mind:

  • Property or equipment insurance: Also known as commercial property insurance, this insurance covers property you own, which general liability insurance does not cover. If you own the building your business is run out of and there’s a fire, you’ll want to insure against the property damage.
  • Business interruption insuranceProperty damage isn’t the only risk associated with, say, your business catching on fire. You also want to protect against any business interruption, and therefore, potential revenue, caused as a result.
  • Commercial auto insurance: If your business owns vehicles, or you drive a personal vehicle for business purposes, commercial auto insurance protects you in the case of bodily injury or property damage.
  • Medical malpractice insurance: If what you do is FDA regulated, you could be required to have medical malpractice insurance.
  • Inland marine insurance: This insurance covers your business property if it moves over land or is stored away from your main business location. You can also use inland marine insurance to cover certain items that traditional property insurance won’t cover.
  • Technology insurance: If you work in software, you may want to consider protecting yourself in case you use—accidentally or otherwise—code that has been copyrighted by another company.
  • Cyber liability insurance or data breach protection: More common than ever, this type of insurance covers your commercial business account against cyber theft or fraudulent wire transfers. Or, if your business handles sensitive digital information about employees or clients, you’ll want to cover that with cyber liability insurance.
  • Workers compensation: If you have employees, you’re required by law to have workers compensation insurance. This insurance covers medical expenses and lost wages for employees who have work-related injuries or illnesses.

The Bottom Line

At the end of the day, although there is a cost involved with business liability insurance, it’s important to manage your risk, as opposed to letting your risk manage you. As we’ve discussed, there are a variety of different types of small business liability insurance—and the type that you need, as well as how much coverage you require—will depend on the specifics of your company.

This being said, however, it’s best for businesses, at the very least, to get general liability insurance to cover themselves in the case of legal claims or lawsuits from customers, clients, or employees. Ultimately, if you’re not sure what kind of liability insurance you need, or want assistance in choosing a provider and a policy, you’ll want to work with an insurance professional you can trust to help you through the process and decide what’s right for your business.

Article Sources:

  1. “How Much Does Business Insurance Cost?
  2. “How Much Does Commercial General Liability Insurance Cost?
  3. “Insuring Your Business: 5 Questions and Answers About Business Insurance
Senior Contributing Writer at Fundera

Priyanka Prakash, JD

Priyanka Prakash is a senior contributing writer at Fundera.

Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.

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