Businesses are always exposed to certain degrees of risks and this is why it is important for companies to get their liabilities insured.
Liabilities such as malpractice, bodily injuries, and property damage (to others) are insured against to help protect businesses from legal claims.
This implies that payments are not made to businesses (the insured) but rather to an individual who has suffered loss through the company.
What is Liability Insurance?
Liability insurance is also known as third-party insurance is a component of the general insurance system of risk financing. It offers protection to businesses against third-party lawsuits within the range of the insurance policy.
Liability insurance does not cover damages caused intentionally by the business. Also, when a claim is made against a business, the insurance provider offering coverage to that business have every right to defend the business (the insured) against such claims
The degree of insurance needed by a business is totally dependent on the type of business being run. Each business has its own unique risks. For example, businesses in construction will need insurance with higher liability limits than a salon.
Furthermore, one liability insurance does not cover all your risks as there are different types of liability insurance covering specific types of risks in businesses.
Types of Liability Insurance
As a business owner, protecting your business comes first. And with lots of risks businesses are exposed to, getting the right liability insurance is important.
It is recommended that business owners have an asset protection plan in place that gives access to different types of liability insurance coverage. Here are the types of liability insurance;
1. Commercial General Liability (CGL)
This is a type of liability insurance that offers coverage to businesses in the event of property damage, bodily, and personal injury caused by the business’s operations and products. It also covers injuries that take place in the business environment premises.
Even with the wide range of liabilities covered by commercial general liability it still does not cover all the risks faced by a business. However, it is still regarded as comprehensive business insurance.
Workings of Commercial General Liability (CGL)
When it comes to commercial general liability, different levels of coverage are offered at various proposals to businesses. For instance, premises coverage may be included in a proposal to insure businesses from claims that take place on the business premises during any normal business operations.
In the same proposal, coverage for bodily injury and property damage may also be included to protect the business from claims of damage caused by a finished product or service carried out at different premises.
It is important to note that not all risks are covered by commercial general liability policies. For instance, costs incurred during a product recall, may not be covered by some CGL.
For businesses to cover claims that surpass the threshold of commercial general liability policies, excess liability coverage is sometimes acquired.
Also, before you get commercial general liability insurance for your business, it is crucial for you to know the two types of CGL.
2. Claims-Made Policy
This is an insurance policy that offers coverage when a claim is rendered against it, irrespective of the time the claim event happened.
The claims-made policy is mostly the favourable option in cases where there is a delay between the time of occurrence of the event and when claims are filed.
The claims-made policy is mostly used to cover the risks attributed to business operations. For instance, the possibility of mistakes attributed to errors and omissions (E&O) in financial statements are covered by the claims-made policy.
It is important to note that this policy only offers coverage to claims made during the active period of this policy.
3. Occurrence Policy
An occurrence policy provides coverage to claims made for injuries suffered during the active period of an insurance policy
The claim will hold even if the claim was filed after the policy has been cancelled or the insured switched to another insurance company.
An example of such a claim is an employee endangered to dangerous chemicals who may only suffer the impacts years later.
4. Special Considerations
In some events, it is favourable for a company to include other companies or individuals in the commercial liability insurance policy as “additional insured”. The inclusion of other companies in the CGL policy is dependent on the company’s business activities and needs.
This is quite popular among businesses that are in contract with another business. For instance, if a bakery enters into an agreement with IJK Co. to offer cleaning services for their facility, IJK Co. may need the bakery owners to include IJK Co as “additional insured” on their CGL coverage.
Example of Commercial General Liability (CGL)
Some of the circumstances that would need CGL to include:
A client arriving at your place of business where the floors have just been recently mopped and cleaned, making the floors result very slippery. The client slips and falls on the floor breaking their arm.
One of the barbers of your saloon company does a home service for a client and accidentally cut deep the customer.
A placed advertisement resulting in a person making a claim for defamation or slander
Personal Liability Insurance
Personal liability insurance also called comprehensive personal liability (CPL) insurance is a segment of both the umbrella and homeowners’ insurance policy.
It offers protection to the insured and members of the insured’s household against claims that emerged from injuries to other people and the destruction of their property.
With CPL, the insured is protected from paying a large sum of money out-of-pocket to the third party if found guilty and legally held responsible for bodily injury or property destruction that happened to the third party
Workings of Personal Liability Insurance
Just like every other type of liability insurance, personal liability insurance offers protection to businesses against third-party lawsuits.
These insurances do not offer coverage of accidents to the policyholder, but rather offer coverage of accidents caused by the policyholder to the third party.
Personal liability coverage can be obtained in three ways;
It is included with homeowners, renters, or dwelling insurance policy. The inclusion of personal insurance with a homeowner’s insurance policy is called comprehensive personal liability.
It can also be acquired as a stand-alone policy. This is mostly purchased by individuals without any physical property (whether rented or owned). No physical property implies no homeowner’s insurance needed.
It can also be included in an existing policy, mostly the personal auto or watercraft policy
When it is included in the homeowner’s policy, personal liability coverage is usually worldwide and not limited to just the insured premises.
Generally, the policy offers coverage up to the court costs, lawyer fees, and any other form of payments as long as it is limited to the amount stipulated in the insurance contract.
Coverage offered by personal liability Insurance
When it comes to personal liability Insurance, cases barely get to the lawsuit phase. A lot of liability-related claims are quite familiar and some of the circumstances include;
Visitors get bitten by your dog in your home
The mailman slips and falls, breaking his leg in your driveway
You’re found guilty of causing a multi-car crash on the highway
You left the boiling ring on and unattended while cooking, causing a fire to start and damaging about half of the house
A maximum of $100,000 to $300,000 is usually provided by homeowners’ policies in terms of personal liability insurance.
Umbrella insurance policy offers more in terms of personal liability insurance. Umbrella insurance offers more than $1 million in terms of comprehensive personal liability coverage.
Umbrella insurance policy also covers specific liability claims not available in homeowners’ insurance. This includes defamation, slander, and invasion of privacy.
The umbrella insurance policy is mostly useful when the third party claim is greater than the homeowner’s policy limit.
Professional Liability Insurance
Professional liability insurance (PLI) is the type of insurance that offers protection to professionals such as accountants, attorneys, and doctors against imprudence and any other claims incited by their client or patient.
Professional Liability insurance is specific to claims of professional practices such as negligence, malpractice, or misrepresentation. This is because the general liability insurance policy does not offer protection against these professional claims
Workings of Professional Liability Insurance
Based on the industry or type of profession, professional liability insurance is called different names. In the medical industry, it is referred to as medical malpractice insurance and for real estate agents, it is called errors & omissions insurance.
Professional liability insurance is a unique kind of coverage that is not included under the homeowners’ policy, in-home business policies, or the business-owners’ policies.
Furthermore, this insurance is classified as a claims-made policy. This implies that professional liability insurance offers coverage during the active period of the policy.
Events that occurred before the policy was triggered may also not be covered. However, exceptions are made on some policies to include a backdate.
Conventionally, professional liability policies will offer protection to the insured against loss from any claim(s) made during the active period of the policy.
Errors, oversights, and negligent acts perpetrated in the course of the insured’s professional activities during the active period of the policy are covered.
Non-inclusions in Professional Liability Insurance
Professional liability policies do not offer coverage for criminal prosecution and all kinds of legal liability under civil law, except those enumerated in the policy.
The policy may not also entail cyber liability, data breach, and other technical issues. However, there is a separate policy that offers protection against claims of data security and other technology security-related issues.
Professional Liability Policy Wording
Policies are worded more firmly from one professional liability insurance to the other.
Some wordings are composed to fulfill a required minimum standard of wording, to make them easier to compare with others that differ in the type of coverage they provide.
For instance, in the case where an incident that occurred was reported by the insured to the insured during the active period of the policy, a breach of duty may be included.
Example of Professional Liability Insurance
A common example of professional liability insurance is medical malpractice insurance.
This insurance gives medical professionals the freedom to do their work without worrying about the threat of lawsuits for alleged medical malpractices.
This medical malpractice is usually interpreted as an act or omission by the medical professional in which treatment provided is considered below the standard of care which may result in injury or even death of a patient.
The medical insurance counterbalances the cost of such lawsuits to the insured. It is important to note that most cases of medical malpractice are treated as civil torts in the United States
Employers’ Liability Insurance
Employers’ liability insurance is also known as employment practices liability insurance (EPLI). This is the type of insurance that offers protection to employers against the claim of work-related injuries sustained by an emp that is not covered by workers’ compensation.
Some businesses infuse employers’ liability insurance together with workers’ compensation insurance to offer more coverage and protection to the business against the expenses attributed to workplace injuries, illnesses, and deaths.
Sometimes, employers’ liability insurance is referred to as the “part 2” of a workers’ compensation policy.
Workings of Employers’ Liability Insurance
It’s required by states for employers and business owners to own workers’ compensation insurance.
The Workers’ compensation laws were established at the state level to offer coverage to employees (federal employees, who are covered by the federal workers’ compensation laws).
A certain degree of coverage for medical bills and missed wages for employees or they’re next of kin is offered by the workers’ compensation insurance when a worker is injured, sick, or dies because of their job
When it comes to workers’ compensation it is not required of the employee to sue the employer to make a request for qualified compensation.
However, in a case where an employee believes losses are not quite covered by the workers’ compensation or just because the negligence of the employer resulted in the injury, the employee is within his/her rights to sue their employer for damages
Employers’ liability insurance comes into play when expenses are over the limit of workers’ compensation or general liability insurance.
When circumstances require employers’ liability insurance to make a payout, losses can be limited by employ by including a condition on the payout. A clause that acquits the employer and their insurance company from future responsibility related to the particular incident can be included.
Limits of Employers’ Liability Insurance Policies
Businesses acquiring adequate employers’ liability insurance can sometimes not be enough to cover claims. In the case where an employee files for a lawsuit, it becomes more expensive and tricky for employers.
The expenses incurred for defending against such a lawsuit can sometimes be a major monetary loss to the employer.
Because of this, most businesses tend to acquire employers’ liability insurance to provide coverage for the costs of defending the business against a lawsuit.
Businesses are not always willing to take that level of risk so they make sure to guard against it as claims may or may not be valid.
With employers’ liability insurance, employers are covered against claims of alleged discrimination (whether sex, race, age, or disability), wrongful dismissal, harassment, lack or delay in promotion, and other employment-related circumstances.
Employers’ liability insurance will not cover any employer who deliberately heightens an employee’s work-related injury or illness. In a case where this happens, the employer will be required to pay the employee out of pocket if he/she loses the lawsuit.
There are limits to payouts per injury, per sickness, and per employee under employers’ liability insurance. A minimum of $100,000 per employee, $100,000 per occurrence, and $500,000 per policy are being paid out. Please note this insurance does not offer coverage to independent contractors.
Not all situations are covered by the employers’ liability insurance coverage. Exclusions to this policy are criminal acts, willful infraction of the law, fraud, illegal profit or interest, and claims emanating out of downsizing, dismissals, manpower restructurings, factory closure, or strike actions, coalitions, or acquisitions.
Most states will always rule out insurers to compensate against claims of punitive damages.
However, punitive damages are offered by most employers’ liability insurance policies via the “most-favoured jurisdiction” clause.
This clause stipulates that state law that supports coverage against punitive damages will also regulate those punitive damages
For instance, an organization with many business operations in different states gets a claim in a state where punitive damages coverage is excluded. If the organization was founded in a state that offers coverage against punitive damage, then the company can get protected against such claims under its employers’ liability insurance policy.
Directors and Officers Liability Insurance (D&O)
Directors and officers (D&O) liability insurance provide protection to individuals against personal losses in the case where they are sued because of their position either as a director or an officer of a particular organization.
This coverage may also extend to the legal fees and any additional costs the organization may owe as a result of the lawsuit.
Directors and officers liability insurance is related to corporate governance, corporate law, and the fiduciary duty owed to stakeholders and beneficiaries.
Directors and officers are permitted to have vast discretion when it comes to their business activities by US federal law.
Companies that are traded publicly are however governed by more federal restrictions than privately-owned companies. This is due to the Securities Act of 1933 and the Securities Exchange Act of 1934. All corporate laws are generally regulated at the state leave.
Workings of Directors and Officers Liability Insurance (D&O)
This is the type of insurance that offers coverage to anyone serving as a director or an officer in a profit or non-profit organization.
A Director’s and Officers liability policy offers coverage against personal losses, and also helps to compensate a business or nonprofit organization for costs incurred from defending individuals against a lawsuit.
D&O liability insurance claims are paid directly to directors and officers of a business or organization who have incurred losses from a lawsuit.
Directors and Officers liability policy can also cover criminal and regulatory inquiries or trial defence costs because claims of civil and criminal actions are often made against directors and officers at the same time.
Depending on the nature of the risks faced or the structure of a business, various forms of D&O policies are available to tackle these differences in businesses.
It is recommended that businesses lookout for insurance providers who have enough experience in this technical field.
The D&O liability insurance is acquired by the company itself to cover a group of directors and officers rather than by the persons themselves.
In the case where a company declines to divulge material information or intentionally gives false information, the insurer (director or officer) is within his/her right to resist payment as a result of the misrepresentation.
D&O policies offer coverage for a wide range of claims and hazards. However, exclusions are made for corruption, fraud, criminal actions, and illegal profits and interest.
Liability Insurance Clauses
The Severability clause
The D&O policy puts this clause in place to protect the insurance of other insured from getting affected by the misconduct of another insured. However, it might be ineffective in some particular jurisdictions.
The Insured vs. Insured
This clause ensures that no claims are paid when a lawsuit is made against the company either by a present or former director or officer. This is to ensure that companies don’t benefit from fraud and conspiracy.
Companies are legally accountable for any accidents or liabilities associated with the business. This is why most companies acquire insurance even before starting up. Each of the liability insurances discussed above helps to protect businesses against financial obligations from lawsuits out of pocket.
Apart from protecting businesses from liabilities, business agreements often require insurance. Sometimes companies are required by clients to have a specific type of insurance before deals are signed. It is also required for businesses to meet the state regulations for workers’ compensation insurance.
Let me know your thoughts and comments below. Thanks for reading!
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Sagar Sridhar is a personal finance blogger from Canada. His genuine passion for personal finance coupled with his unique style of writing is what stands out. Professionally, he is a computer engineer, agile certified and has a master’s degree in Project Management. His writing has been featured or quoted in the leading Canadian publications such as Credit Canada and many other personal finance publications. While he is juggling between his day job and blogging, he is the main author on this blog and has miles to go before making the final pit stop.