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Business Liability Insurance Basics

If you're in business for yourself, you know that your personal liability insurance won't cover losses related to your business activities. But what if you're sued? An expensive lawsuit could wipe you out before you get started or critically damage the valuable business you've built. Now is the time to talk to your insurance agent about business liability insurance.

Whatever can go wrong, might

There are so many ways you need to protect your business. You'll need protection against claims for bodily injury and property damage that occur on your premises, or that are the result of conducting your business at or away from your premises. Your business can be sued for injury or damages suffered because of faulty products used or because the work was done improperly. If you hired independent contractors who acted negligently or performed substandard work, your business is the one that'll get sued for it.

If your business employs other people, it'll need protection against liability losses that could result from claims filed by those employees. An employer may be held liable if an employee is hurt or becomes sick as a result of his or her job, or if he or she is fired, experiences discrimination, or suffers a loss through mismanagement of an employee benefit plan.

Your business can be sued because it emitted pollutants that damaged the environment. It may also need protection against other risks, such as product recall, liquor liability, or steam boiler liability. The list goes on.

Commercial general liability insurance--the first blanket on the bed

Business liability insurance is third-party insurance: The damages are paid to outside individuals who file claims, not to the insured business or business owner. The insurance pays the cost of a legal defense if the insured business is sued, and it pays damages up to the limit of the policy if the insured business is found legally responsible for bodily injury or property damage.

These policies can be written on either a claims-made basis or an occurrence basis. If the policy's written on a claims-made basis, the insurance company will pay claims filed during the time the policy is in effect, regardless of when the event leading to the claim actually occurred. If the policy's written on an occurrence basis, the reverse is true: The insurance company will pay claims only for damage or injury suffered because of events occurring while your policy's in force, regardless of when the claim is filed.

Commercial general liability (CGL) insurance protects your business against claims for bodily injury and property damage, personal injury, and advertising injury. It also provides medical payments coverage to individuals injured on company premises. This coverage can be purchased separately or as part of a commercial package policy (CPP). A CPP combines several types of coverage that the insured business chooses based on its needs. A typical policy includes general liability coverage along with property, crime, and boiler and machinery coverage.

Check what might be excluded in the CGL coverage; coverage for these excluded areas may be purchased as endorsements to the CPP or as specialized policies. These needs can include pollution and environmental liability insurance, manufacturers and contractors insurance, and product liability coverage, among others.

Commercial umbrella policies--a bigger blanket

If you think that your business might need broader coverage or higher liability limits than what's available through your CGL coverage, you may want to buy a commercial umbrella liability policy to supplement your coverage. You'll need to own basic liability coverage with certain limits before you'll be issued a commercial umbrella policy. If a claim is filed against your business, the underlying CGL policy pays first, up to its policy limits. Beyond those limits, the commercial umbrella policy will pay the claim up to its own limits. If the umbrella policy covers a loss excluded under the basic CGL policy, then the umbrella policy pays first.

Protecting the business from the help--employers' liability insurance

Your shop foreman injures himself on or away from the job while performing work-related activity. Or perhaps one of your employees sues for job discrimination based on gender or race bias. Maybe another sues because she feels that the employee benefits administrator mismanaged the pension plan. As an employer, you may need to protect the business against these risks by purchasing one or more types of employer liability coverage.

Workers' compensation insurance is mandatory in most states. It covers the insured employer who must pay benefits to a disabled employee under state workers' compensation laws. It also pays doctors and hospitals for covered treatments, and protects employers sued by employees suffering an occupational disease or a work-related injury. As an employer, how you purchase the insurance depends on your state. In some states, you'll have to purchase the state's workers' compensation insurance policy; in others, you can purchase private insurance policies.

As an employer, you can protect your business from employee suits alleging discrimination, sexual harassment, or wrongful discharge by purchasing employment practices liability insurance. You can also purchase employee benefits liability insurance, which protects the business against suits brought by employees who participate in the business's employee benefits program.

Finally, you can protect the business against losses from employee dishonesty by bonding them with a fidelity bond. The insurance company that issues the bond will pay damages according to the terms of the fidelity bond if the business suffers a loss due to the dishonesty of a bonded employee. As an employer, you can protect your business further with surety bonds, which guarantee certain contractual obligations made to or by an employee will be fulfilled.