Liability insurance will protect business assets in the event the business is sued. These days, with lawsuits clogging the courts, a business owner should maintain a proper amount of liability insurance to protect the business he or she has worked so hard to build. Any company can be sued for something it did — or even didn’t do — that resulted in injury or property damage to someone else.
The expenses of defending yourself or your business against a lawsuit without insurance can be a substantial cost to you, regardless of whether or not the lawsuit has merit. Liability insurance will cover the cost of damages along with the legal fees and other costs associated with your defense in a lawsuit. In addition, many customers will demand that their vendors hold liability insurance.
“We require our vendors to carry general product liability insurance,” noted Taras Szmagala, attorney for Eaton Corporation. “Like most large companies, Eaton expects that its vendors will stand behind their products, and insurance is an important way to do that.”
Liability insurance will not protect you against claims arising from nonperformance of a contract, wrongful termination of employees, sexual harassment, or race and gender lawsuits. Usually a surety bond is taken out as performance insurance. Employment practices liability insurance (EPLI) protects your business against employment-related claims, such as sexual harassment.
Many small businesses have difficulty figuring out how much liability insurance they need. There are some guidelines to consider, but no standard formula. Determining the amount of liability insurance to buy is an important task, since the sky’s the limit on lawsuits. A business owner can use a recent liability settlement in a related business as a guide, or the amount could be based on the total assets of the business.
Some occupational licenses might require a set amount of liability insurance. If a business owner rents a business property, a set amount of liability is often required and is stated within the lease. The business owner should purchase an amount which they can reasonably afford, because the cost of insurance will be far less than the cost of a lawsuit.