A Guide to Business Liability Insurance for Small-Business Owners

Business liability insurance protects your business from financial losses due to incidents like injuries or property damage caused by your employees, products, or services.^[1] This coverage can protect against expensive lawsuits and costly claims that the standard limited liability company (LLC) structure doesn’t cover.

Several types of business liability insurance are available, and here, you’ll learn more about each type, where to buy coverage, and what to look for in a policy.

Business liability insurance explained

Business liability insurance can refer to a policy or a set of policies, including various types of business insurance. It covers costs like legal fees, court settlements, medical bills, and other expenses if your business is found liable for an injury, property damage, libel, slander, or negligence.

One example of business liability insurance in action could be when a customer in a grocery store slips and falls and gets injured. The store’s liability insurance would cover the injured customer’s medical bills or court expenses, should the customer decide to sue. Professional liability insurance, also known as errors and omissions insurance, would cover this.

Business liability insurance is crucial for business owners with storefronts, contractors, and consultants. Without it, you and your business could face significant financial consequences from incidents or lawsuits.

Do small businesses need liability insurance?

Yes, small businesses need liability insurance, as an LLC will only protect your personal assets, not your business assets. LLCs are important, as they protect a company’s members from personal financial liability. But if you want to protect your business, you’ll need liability insurance.

Each state has its own regulations and requirements regarding which businesses are legally required to have business liability insurance. Some industries are also more likely to mandate coverage, including construction, medical practices, real estate, retail, consulting, child care, and manufacturing.

Types of business liability insurance

Business liability insurance isn’t just one policy but rather a combination of relevant types of liability coverages designed to match the risk your business faces. Here are the different types of business liability insurance to consider.

General liability insurance

General liability insurance is the most basic type of business liability insurance. It covers claims of bodily injury, property damage, medical expenses, slander, libel, lawsuit costs, and settlement expenses.

For example, if a customer slips and falls in your retail store, injuring themselves, general liability insurance would protect your business.

Professional liability (errors and omissions) insurance

Professional liability insurance, also known as errors and omissions insurance, protects businesses that offer services or advice against mistakes or negligence.

For example, if someone sues you for malpractice, errors and omissions insurance would cover the cost of client lawsuits or settlements.

Product liability insurance

Product liability insurance covers injury or damage claims caused by defective products. This coverage is essential for retail stores and product manufacturers.

For example, if a small toy poses a choking hazard, product liability insurance will help cover costs and any damages awarded to the suing party.

Employment practices liability insurance (EPLI)

Employment practices liability insurance (EPLI) covers claims from employees that allege harassment, discrimination, breach of contract, emotional distress, or wrongful termination.^[2]

Cyber liability insurance

Cyber liability insurance covers business costs resulting from data breaches, cyberattacks, and other digital threats. It’ll also pay for things like legal expenses, data recovery, and notifying affected customers.^[3]

For example, if you’re a small e-commerce store owner, and your customers’ information is hacked, cyber liability insurance will cover costs associated with the breach, including fines or credit monitoring.

Commercial auto liability insurance

Commercial auto liability insurance covers vehicles used for business purposes. It pays for damages from accidents that cause injury or property damage and is typically required for business vehicles.^[4]

For example, if your company provides delivery services and your delivery vehicle rear-ends another car, commercial auto liability insurance will cover the resulting costs.

Liquor liability insurance (for bars and caterers)

Liquor liability insurance protects restaurants, bars, and other businesses, like caterers, from claims due to an intoxicated customer’s actions. This type of liability coverage is typically required for any business that serves liquor.

For example, liquor liability insurance will pay for your business’s legal expenses or damages caused by a drunk driver who was at your bar.

Umbrella liability insurance

Umbrella liability insurance provides additional coverage for your business beyond your other policies’ limits. Its purpose is to be a backup for these other insurance types in the case of a very large claim that exceeds the standard limits.^[5]

For example, if your employee causes a substantial car accident totaling damages over your commercial auto liability insurance limit, your umbrella liability insurance will kick in to cover the rest.

Where to buy business liability insurance

You can buy business liability insurance in a few different ways, including from:

• Online marketplace: An online marketplace is a great way to get multiple quotes at the same time and compare your options. But it can be more challenging to get specific costs and personalized service. This method sacrifices a bit of specificity for speed.

• Direct insurers: You can buy a policy directly from an insurer. This limits your comparison options, but you’ll likely get a more accurate and straightforward quote on your policy.

• Independent brokers: You can also hire a broker to help you find a policy. They can help you both compare and get accurate quotes from multiple companies. This method isn’t free but may provide value worth the money.

What business liability insurance covers

Business liability insurance covers various costs associated with your business being held liable for a wide array of incidents. It pays for things like your legal defense, court judgments, and out-of-court settlements, as long as the claim is covered.

Here’s what business liability insurance typically covers, depending on your selected policies:

• Bodily injury covers medical expenses and legal costs if someone is injured on your company’s property or if one of your products or services causes harm or damage.

• Property damage covers damage that your business causes to someone else’s property, regardless of whether it occurs on your business’s premises.

• Advertising injury (defamation) covers your business if any marketing materials result in claims of libel, slander, or infringement of someone else’s intellectual property.

• Completed operations covers your business against claims of defectivity that come after your company has completed its work.

• Medical payments covers hospital and medical expenses if someone is injured on your business’s premises, regardless of whether there’s a lawsuit.

• Contractual liability covers legal responsibility for claims that arise due to breach of contract or failure to deliver services as per the terms of the agreement.

What liability insurance doesn’t cover

Liability insurance doesn’t cover everything your business might face, unfortunately. For example, any intentional wrongdoing or certain very high-risk events are often excluded from coverage.

Below, you’ll find a list of common policy exclusions:

• Employee injuries: Workers’ compensation, which state governments mandate, covers this instead.

• Professional mistakes: General liability insurance won’t cover these mistakes. You’ll need errors and omissions insurance, also referred to as professional liability insurance, to provide the desired coverage.

• Property you own: Business liability insurance doesn’t cover your property, but rather incidents that happen on your property. To protect the property itself, you’ll need separate property insurance.

• Punitive damages: These costs are often excluded from coverage, as they’re meant to be punitive and discourage a repeat offense. Coverage can vary by policy.

• Cyber breaches: General liability won’t cover cyber breaches. You’ll need to buy a separate cyber liability insurance policy to cover these costs.

• Auto accidents in personal vehicles: If you get into a car accident in your personal vehicle, your regular car insurance will cover the damage.

• Criminal acts: Liability insurance doesn’t cover intentional criminality or things like fraud due to their illegal nature.

How much does business liability insurance cost?

In general, you’ll pay between $40 and $150 per month for business liability insurance, depending on the policy type. 

For example, a general liability insurance policy costs an average of around $42 per month, while a cyber insurance liability policy costs an average of $145 per month.

Factors that affect liability insurance cost

The cost you’ll pay for coverage will depend on a variety of factors, including:

• The size of your business

• Your payroll and revenue

• Your industry and risk level

• Your location claims history, deductibles, and coverage limits

• The types of coverage that you choose

Each of these factors affects the likelihood of you filing a claim on behalf of your business, and insurance companies consider them carefully before setting a price. When buying a business policy, consider what your business risks are, and only buy coverage you actually need.

How to buy business liability insurance

Buying business liability insurance can be pretty straightforward. You can often even get a policy in a day if you’re prepared. Here’s what you’ll need to do:

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  1. Gather business details

  Get all the key information for your business ready for prospective insurers. You’ll need things like your industry code, your company’s revenue and payroll, and where you operate.

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  2. List contract or landlord minimums

  Check your lease agreements and contracts to see if you have any specified insurance coverage limits that you’ll need to meet.

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  3. Use an online comparison site for baseline quotes

  Utilizing an online marketplace to get some baseline quotes for coverage can be a good starting point in your search.

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  4. Request broker guidance for specialty coverages

  Once you’ve found some companies that you’re interested in, consider hiring a broker to consult with on whether your coverage is adequate or if you’ll need any specialty coverages like cyber liability.

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  5. Compare policy details

  Compare your top policies side by side. Look at things like coverage limits, what you’re getting for that coverage, deductibles, and whether defense costs are inside or outside the policy limits.

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  6. Purchase your policy

  Once you feel good about your choice, buy the policy. Make sure to download your certificate of insurance (COI) for proof of coverage.

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  7. Schedule renewal

  Put your renewal date in your calendar and set a reminder to review your company’s risk levels each year to see if you need to adjust your coverage.

How to choose the right liability coverage

Choosing the right liability coverage is important to ensure your business is sufficiently protected. Pick policies that match your company’s main exposures and adequately cover them. Don’t just go for the lowest price. 

Here are some considerations before you buy a policy:

• Industry-specific needs: Certain industries need specific types of coverage, such as consultants needing errors and omissions coverage and retail stores needing product liability coverage.

• Exposure level: Consider how exposed your company is to risk. Construction and hospitality businesses will likely need higher coverage limits for injury or property damage.

• Claims history: Consider your past claims history to determine what kinds of coverage or how high your limits can be. The past can often be an indicator of future incidents.

• Size and revenue: The larger your business and the higher your revenue, the higher your coverage limits will likely need to be.

• Contractual requirements: Make sure that your policy meets any landlord or contractual requirements when it comes to coverage or coverage limits.

Business liability insurance FAQs