Every new small business wants to thrive. But merely staying alive is a major challenge in the highly competitive world of commerce.
A thin line separates success from failure, and any unexpected event can tip the scales against a small company.
For that reason, it's important to make sure you're properly insured. Failure to insure against key liability risks is especially dangerous for small businesses, says Loretta Worters, vice president for the nonprofit Insurance Information Institute.
"You don't have the financial resources of a big company to back you up in the event of a client lawsuit," she says.
What factors influence how much business liability insurance costs?
Business liability coverage generally is available as either individual stand-alone policies, or as part of a broader business insurance package.
Factors that influence how much you will pay for such coverage include:
- The type of services or products you sell.
- Where your business is located.
- How many people you employ.
- The amount of coverage you pursue.
Following are five types of liability small-business owners face and how you can protect yourself against them.
1. Product liability
If you make or sell a product to the public, product liability insurance can protect you when a customer is hurt as a result of using the product.
For example, a patron may eat a meal and get sick at your restaurant, or a child could choke on a part from a toy you created and sold.
Businesses that might need this type of insurance include manufacturers, packagers, distributors, wholesalers, retailers, contractors and restaurants, says Elizabeth Stelzer, spokeswoman for Nationwide Mutual Insurance.
Such coverage helps you pay out damages related to bodily injury or property damage claims related to a product you sell or work you complete.
The cost of product liability insurance is directly related to the potential risk associated with the product or service the business delivers.
"Costs for a clothing retailer will be less than the cost for a pharmaceutical manufacturer," Stelzer says.
2. Employment practices liability
Sometimes the employee-employer relationship goes sour. An employee may sue a company alleging he or she has been mistreated illegally. Examples of such claims include:
- Breach of employment contract.
- Discrimination based on age, disability, race or sex.
- Sexual harassment or other forms of harassment.
- Wrongful termination.
Employment practices liability insurance can help pay legal costs if you're sued. If you lose the case, the coverage reimburses the cost of judgments and settlements.
Insurers sell this coverage as a stand-alone policy, or as part of a package of business coverage.
3. Errors and omissions liability
Many small businesses provide services -- such as advice or expertise -- as opposed to selling a product.
Occasionally, customers who are unhappy with the service you provide may sue for damages, contending you injured them financially through an act of negligence, error or omission.
Malpractice suits filed against physicians are a well-known example of this type of legal action. But many other fields, such as accountancy or tax preparation, can leave you vulnerable, Worters says. For example, a tax preparer could be sued for giving improper or incorrect tax advice, she adds.
Errors and omissions liability coverage pays for legal costs and damages connected to such lawsuits, which can protect your business and financial security if you’re sued.
Even if you’re never sued, having errors and omissions liability coverage can give you a leg up on the competition.
"More and more clients require the professionals they hire to carry E&O insurance," Worters says. "You may risk losing the opportunity for a new project without it."
4. Cyber liability
Cyber liability is a relatively new risk for businesses, but computer-based theft or hacking is an increasingly common event. News stories regularly report about businesses that have been hacked and attacked, whether via website or private customer data.
Cyber crime can be costly. The average cost of a corporate cyber breach has climbed to $3.5 million, according to The Ponemon Institute, a privacy and data protection research center.
Millions of customers now worry their sensitive data may be at risk, and such fears pave the way for future lawsuits after a cyber attack.
Tim Francis, enterprise cyber lead at Travelers Insurance, says these crooks can access everything from customer information to company financials or other highly confidential information. They also can engage in cyber extortion, where the criminal threatens to attack and demands money to stop the breach.
Cyber liability insurance helps pay for such costs as forensic investigations that help determine the scope of the breach. It also covers legal expenses associated with the breach.
Other covered expenses may include:
- Fines and penalties.
- Business interruption expenses related to cyber events.
- Cyber extortion expenses.
- Data restoration costs.
5. Liquor liability
If you sell alcoholic beverages -- or even if you don't charge for drinks, but are required to take out a license to serve liquor -- you probably need liquor liability insurance. This type of coverage is generally excluded from a general liability policy.
Liquor liability insurance covers you if someone who’s intoxicated causes an accident, and you’re held liable for any of the following reasons:
- You contributed to the intoxication of the person.
- You served alcohol to a person under the legal drinking age.
- You violated any law associated with selling, distributing or using alcohol.
Many business owners assume they don't need this coverage unless they own a bar, restaurant or liquor store.
But that's not always true, Worters says.
For example, you may need this coverage if your business is hosting an event where you don’t furnish alcohol, but other people bring their own alcohol - such as a wedding reception. In such cases, you can purchase what is known as a host liquor liability policy.
The coverage is often included as part of a general business insurance policy – but consult with your insurance agent or broker to be sure.