The terms general and professional liability insurance are often confused. General liability helps cover the costs of damages and lawsuits if your business is held responsible for things like property damage, bodily injury, libel, and slander against another. Professional liability helps cover the costs related to claims your business committed errors or omissions in the advice or services it provided.
It’s more important than ever to know how to protect your business from a lawsuit. According to the U.S. Chamber Institute for Legal Reform, in 2008 (the most recent data available), small businesses paid out more than $105 billion in tort liability costs. Unfortunately, small businesses are often underinsured. Of that $105 billion, over $35 billion was paid out-of-pocket to settle claims.
If you want your business to be a success, you’ll also want to understand which types of small business insurance you need. Most liability claims costs can be covered with general or professional liability insurance. A better understanding of the differences between general and professional liability insurance is critical in an environment in which the threat of lawsuits continues to grow.
Are More Businesses Being Sued?
When you hear about an unjust lawsuit, you’re probably hearing about the U.S. tort system. This is the legal system for settling personal injury and property damage claims. Not all tort claims are unjust, but if you hear about an unjust claim, it’s probably in the tort system.
An example of a tort claim is a 2016 case from DeKalb County, Georgia. In this case, a woman was awarded $161,000 after she walked into a construction ladder. The woman was texting while walking and didn’t see the multiple orange cones and orange ladder. The ladder wasn’t moving either. The woman suffered a mild concussion, headaches and has a slight dent in her forward. The company using the truck originally offered $5,000 for her injuries. The woman took the company to court. There, she asked for $155,000. The jury decided that the amount wasn’t enough and awarded her $161,000.
Unfortunately, for the U.S. economy and small businesses, tort claims are rising. In fact, tort claims’ growth has exceeded GDP growth annually since 1950. On average, tort claims have increased by 8.7% every year. That’s 2% more growth than the average GDP, which is 6.7%.
As reported by the U.S. Chamber Institute for Legal Reform, small businesses pay 81% of all U.S. tort costs. But they aren’t the only ones paying. Consumers do, too. Eventually, to cover higher costs, businesses must pass some of the burden to consumers in the form of higher prices.
For example, tool manufacturers add about 10% to the cost of their goods to help cover liability costs. A product with a higher risk for a claim will see an even greater increase. The cost of a stepladder factors in about 15-20% for liability costs. In the price of a $200 football helmet, 55% is attributable to the built in cost of the liability risk. And the $110 for a power drill includes approximately 10% for liability risk.
How to Protect Your Business from Lawsuits
There are three great ways to help protect your business from a lawsuit: form an LLC, buy liability insurance, and run your business safely. When you form an LLC, you are creating a limited liability company. This means that any lawsuit against your business will stay against your business and not against you personally. So, if a lawsuit costs your business $10 million, only your business will be responsible for paying that cost. Your personal assets could not be seized for payment of claims against your businesses.
Another important way to protect your business from a lawsuit is to buy sufficient general and professional liability insurance. If you or your business is sued, these types of insurance will help cover the legal costs associated. Otherwise, you might pay out-of-pocket.
Of course being risk averse and running your business operations as safely and thoughtfully as possible is also critical to avoiding mistakes that could possibly end up in a lawsuit against your company. Loss control and Risk Engineering services can help larger companies mitigate risks and improve the safety of your operations.
Key Differences Between General and Professional Liability
The major difference between general and professional liability is in the types of claims they cover. General liability helps cover the costs of claims made because of accidents on your business’s property, damage done to someone else’s property, or from advertising mistakes. Professional liability helps covers against claims of mistakes made in the advice or services you provide. For example, general liability insurance covers the costs of claims:
- Made against your business because someone injured herself on your premises. For example, a customer slips on a wet floor in your store. She then sues, claiming she was injured because your store is not safe.
- Made against your business because you damaged someone else’s property. For example, if you’re working on a job site and damage the neighbor’s lawn, the neighbor could make a claim against your business.
- Made against your business because your advertising infringed on someone else’s copyrighted material. For example, a photograph you use in your advertising is copyrighted by the photographer. You thought the photo was public domain, but now the photographer is making a claim.
Professional liability insurance, also known as errors and omissions, or E&O coverage, covers the cost of claims made against your business because of errors in your provision of advice or services. For example, a photographer takes photos of a couples’ wedding ceremony. While developing the photos, the photographer accidentally destroys the film. The married couple makes a claim against the photographer for errors in his service. The photographer’s Professional Liability Insurance can help cover the cost of this claim.
Businesses that manage finances will almost always need professional liability insurance. For example, an accounting firm miscalculates its numbers when preparing a return for a client. This miscalculation costs the client nearly a million dollars and the client makes a claim. Professional liability insurance can help cover the costs the accounting business would need to spend in order to handle the claim.
Which Businesses Need General Liability?
The average “premises liability” lawsuit costs around $54,000. Without general liability insurance, your business would be required to pay damage claims out-of-pocket. Consider adding general liability to your small business insurance solution if your company has:
- A warehouse, office, storefront, or showroom that customers, employees, or vendors visit
- Advertising or marketing content
- The possibility of damaging someone else’s property while working
Which Businesses Need Professional Liability?
Consider adding professional liability to your business insurance policy if you offer advice, services or products. Clients or customers could make a claim against your business even if you’ve done nothing wrong. And the costs can range from thousands to millions of dollars. Without professional liability insurance, your business could be on the hook for paying legal fees, settlement and damages costs out-of-pocket.
To protect your business from the potentially devastating costs of liability claims, you must first understand what liability risks it faces and then choose the right types of business insurance, like General Liability Insurance, Professional Liability Insurance or other types of insurance, to address those risks.