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Are Businesses Required to Have Liability Insurance

A staggering 37 lawsuits — that’s the average number of lawsuits faced by US companies. Worse, almost nine in ten US corporations are battling out litigation at any given time. Now, you may think that these legal headaches are only for the big and the well-established. That’s not the case, as they are also a huge problem within the small business territory. In fact, the yearly cost of litigation wrings out at least $105 billion from SMBs.

The good news is, liability insurance can protect your business from such lawsuits. The big question is, are businesses required to have liability insurance? What exactly is liability insurance anyway, and how can it protect your business? Ready to learn more about this type of small business insurance policy? Then let’s dive right into it!

What Is Liability Insurance?

Liability insurance protects the policyholder against claims that result from injury and damage. It covers legal costs as well as payouts to the “claimant”. The policyholder, however, must be legally at fault before the insurance kicks in.

This type of insurance for business owners is a must for those at risk of becoming liable. In short, anyone who is at risk of facing a lawsuit for damages and injuries needs this policy. That includes business owners as well as professionals.

For example, if your business manufactures products, you should get product liability insurance. Regardless of how amazing your product is, it still carries a risk of becoming “faulty”. If it does, it can injure or damage the end-user or any other third party.

If you don’t have liability insurance, those affected by your faulty product can sue you. Keep in mind that the average award to victims of defective products reached over $1.8 million in 2017. That’s more than $500 thousand higher compared to the average award in 2016.

Are Businesses Required to Have Liability Insurance? It Depends

Liability insurance comes in different forms, and not all are a legal requirement. Also, the requirements themselves vary from state to state. One may require it, the other may not.

That’s why it’s very important to know your state’s business insurance requirements.

To help clear things up, here are some situations wherein liability insurance is a legal must.

A Requirement for Licensure in Some Cities or States

In the US, about one in four professions now require some form of licensure. Professional licensure, after all, helps protect not only consumers but the professionals too. It also allows for easier monitoring of regulated occupations.

To get such a license, however, you usually need to show proof of liability insurance. General liability insurance, in particular, is a pre-licensing requirement in some states.

Under the Texas law, for example, some contractors must have this insurance at all times. These include contractors who hold a Class A license — without it, they won’t be able to begin a project.

Many other professional licenses also often demand general liability insurance. These include professionals like real estate agents, accountants, and medical personnel. The specific laws vary from state to state, so be sure to check with your local insurance board.

Real Estate Lease Contracts

Commercial landlords also often require liability insurance for lease contracts. Meaning, if your business will open a brick and mortar store, you’d likely need this insurance. This will protect you (and the landlord) in case the rental space gets damaged.

Commercial Auto Insurance

Did you know that only New Hampshire and Virginia don’t require auto insurance? Still, both states need you to prove that you have the funds to cover damages to others.

The same rules and laws apply to commercial auto insurance, including liability coverage.

In NH, you must meet the state’s Motor Vehicle Financial Responsibility Requirements. Otherwise, the Granite State may suspend your driving privileges.

Worse, if you cause a vehicle accident, you’ll shoulder all costs that arise from it. That includes injuries and damages sustained by anyone involved in the crash.

In VA, you can forego the minimum auto insurance requirements by paying $500. That money goes toward paying for the state’s Uninsured Motor Vehicle Fee. It doesn’t provide any form of coverage — it just allows you to drive without insurance.

Meaning, if you cause a car crash, you’ll still be liable for all the resulting injuries and damages.

Types of Liability Insurance for Businesses

Product liability and commercial auto insurance are just two forms of liability insurance. For example, depending on your state, you may need to get both workers’ compensation and employers’ liability coverage. You may also need premises liability coverage if you have a brick and mortar office or store.

That said, let’s take a closer look at each of these policies.

Workers’ Compensation and Employers’ Liability Coverage

Workers’ compensation is a legal requirement in all states except Texas. Under the Texas employment law, workers’ comp is an optional type of insurance policy.

Workers’ compensation coverage, however, is separate from employers’ liability policies. Still, most insurers bundle them together, so you can get both under the same policy.

In states with monopolistic state funds, these two are usually individual policies though. Meaning, you’d likely need to purchase both, as both are likely to be a legal requirement. Such states include North Dakota, Ohio, Washington, and Wyoming.

What if your state or local government only requires workers’ comp? Well, you should still get employers’ liability coverage. That’s because workers’ comp, as great as it is, still won’t protect your business against all claims.

For example, workers may still sue a company for damages like “pain and suffering”. Employers’ liability bridges much of the gap left by workers’ comp.

Commercial Liability Insurance

This is also known as comprehensive general liability insurance. The term “general” is there since it covers the insured against different types of claims. It can protect you against claims of personal or bodily injury, as well as property damage.

This type of liability insurance protects against the consequences of erring employees. For instance, it kicks in if a negligent employee harms another or if they cause property damage. It also provides coverage for lawsuits that may arise due to injury to employees and the public.

Commercial liability insurance can also cover intellectual property infringement cases. It can also protect you against employment practices or contractual liability. In many cases, it also provides coverage for slander or libel.

Premises Liability Coverage

Premises liability protects your business from accidents that happen on your business premises. It provides coverage for lawsuits and the medical costs of the injured.

Although not always required, you should still get this policy if you have a physical office. That’s because everyone is at risk of accidents like slips, trips, and falls.

In fact, among the workforce, slips, trips, and falls are leading causes of days away from work. In 2017 alone, such accidents led to 290,660 cases of workers having to take days off from work. Their workers’ comp may cover them, but if such incidents happen to clients, you’ll be liable.

As such, it’s best to also add premises liability coverage to your insurance toolkit. This way, you can protect your business from massive hospital bills or lawsuits. Your policy will protect you in case an accident occurs within your premises.

Indemnity Insurance

You may know this as “professional liability insurance” (PLI) or “errors & omissions” (E&O). Its main purpose is to protect businesses against negligence claims. Such businesses (or professions) are those that involve providing advice and services.

Let’s say you have a plumbing business and you’ve completed a service call in a client’s home. The next day, the client rings you up, saying that you made things worse (or a similar claim). If they sue you, your PLI or E&O coverage will protect you from their lawsuit.

Comprehensive General Liability (CGL)

You can think of CGL as a liability insurance policy tailor-made for your business. It covers many areas from bodily injury to property damage and medical costs. It can also protect you from operations and premises liability.

In some cases, a CGL policy may even protect you from advertising injury claims.

Although called “comprehensive”, it’s not a one-size-fits-all policy. It usually doesn’t include workers’ compensation and auto liability coverages.

The insurer, however, may sell all these policies. Some of them may even offer discounts if you buy everything you need from them.

Before you take advantage of discounts, make sure that you compare and shop around first! This is the best way to figure out if you’re getting enough coverage at a good price.

Don’t Risk Your Business by Skipping and Skimping on Coverage

There you have it, all the answers to your question, “are businesses required to have liability insurance?” Now that you know, it’s time to map out a plan on which ones you really need and how much coverage to get. This way, you can get your business covered and protect it from the massive costs of lawsuits.

Want to stay up to date on the latest in business, entertainment, or tech? Then be sure to keep checking back on our blog for more useful guides like this!

Abubakar is a writer and digital marketing expert. Who has founded multiple blogs and successful businesses in the fields of digital marketing, software development. A full-service digital media agency that partners with clients to boost their business outcomes.
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