The Dangers of Going Without Liability Insurance
When running a business, operating margins are one of the most critical factors that determine your financial performance. Although insurance is usually inexpensive, many business owners make the mistake of assuming that they can go without coverage in an effort to reduce costs.
After all, insurance can seem like just another bill that reduces your margins. You may have run your business for years without experiencing a lawsuit. Why would you need insurance when these problems have never happened to you?
The reality is that liability lawsuits are common and can be filed against you at any time. To protect yourself, you need an insurance policy that covers liabilities that you are subject to when doing business, practicing your profession, and even when doing activities in your personal life. Read on to learn more about how liability insurance can protect your family and your business from crippling lawsuits.
Why Liability Insurance Matters
Not having liability insurance can financially wipe out you or your business at any time. Million-dollar verdicts are more common than ever before, and formerly prosperous individuals who do not have insurance are ruined almost every time one of these verdicts is handed down.
Imagine if your business, cars, home, and life savings were all taken from you in a single day by a court order. 757,497 bankruptcies are filed every year, and almost none of these cases are filed by people who ever dreamed that their decisions would end up ruining their lives. The reason most people think these problems will never happen to them is because they know in their hearts that they are doing nothing wrong. Nevertheless, for the purpose of establishing incentives for society as a whole, courts will still liquidate all of your assets without even considering whether you actually did anything wrong.
Insurance is, therefore, necessary to protect yourself against liability risks that you should not be responsible for. Instead, insurance helps to ensure that you only pay for actions that are your own fault. Most insurers even modify your monthly rate based on activities that you actually control. Just like how automobile insurers reduce your coverage rates when you avoid getting traffic tickets and avoid being at fault in accidents, liability insurers can give you better rates when you take steps to reduce your exposure to liability, such as by making your premises safer or by training your employees.
Types of Liability Insurance
Liability insurance comes in many forms. The most common types of liability insurance policies are used by companies to avoid liabilities associated with activities that occur in the course of doing business. However, nonprofits and even government enterprises need to maintain coverage for similar purposes. In less common cases, individuals who have household staff may also need to get many of the same liability insurance plans that businesses often use.
Obtaining insurance will, in many cases, comprehensively cover an area of liability for your business. Moreover, since insurance companies have a vested interest in ensuring that you obtain a good outcome in the event of a lawsuit, insurers will usually pay your legal defense costs upfront if you get sued. Insurance companies are specialists in dealing with liability lawsuits, so having an insurer at your side while preparing for legal proceedings can give you a significant advantage.
To enjoy the protections that insurance provides in the event of a lawsuit, you will need an insurance plan that covers the specific type of legal claim that is made against you. There are a very wide range of liability insurance plans that you can choose from, so you will need to study the different plans that are available to decide what is appropriate in your situation. Many businesses and high-net-worth individuals have dozens of insurance policies that provide protection against almost any type of lawsuit, so you should not be afraid to cover more areas than you might initially feel that you need.
General liability insurance is the most common form of commercial insurance that businesses use. General liability insurance will cover you against many of the most common types of injury claims. However, protections afforded under general liability plans go beyond medical injuries to include property damage and basic product liability.
Unfortunately, not all general liability plans are the same. In the insurance industry, margins are generally less than 2 percent, so discounts are usually not possible unless you take actions that reduce your risk. Therefore, if you find a general liability plan that is very cheap, there are likely to be certain terms in the contract that give you less coverage than you might expect.
Although getting general liability insurance is a great first step toward protecting your business, you will usually need additional forms of insurance to stay fully protected. After all, many general liability plans do not cover punitive damages or cases where you are deemed to be at fault. Accidents happen, and you will usually be at fault in about 50 percent of instances.
Furthermore, many general liability plans only provide a low amount of coverage. Coverage limits of $100,000 or below are common. In reality, your business could be sued for millions of dollars. Therefore, you need to find a plan with a high coverage limit. It is also important to read your contract carefully and to conduct thorough research to make sure that the most serious liability risks are covered by your plan.
Professionals often have to obtain licenses because they are authorized to sign off on important decisions that could lead to serious injuries or enormous financial losses. For instance, engineers have to sign off on building plans to ensure that buildings do not collapse, and doctors give their permission for nurses to complete certain life-saving procedures. Unfortunately, mistakes can happen, and professionals can become liable for certain injuries that are deemed to be caused by negligence, incompetence, or malpractice. Professional liability insurance provides professionals with blanket coverage that protects against nearly all liabilities associated with their activities.
If you have a business, there is no way to control what all of your employees at doing at any given time. You can institute rules and procedures that aim to reduce your liability, but there is no way to guarantee that you will not experience a problem. Some employees may even intentionally engage in nefarious actions for the purpose of suing your business later down the road. Consequently, employment practices insurance is a crucial protection for every business.
Employment practices insurance can also help to protect your company in an event where a court interprets part of your internal policies to be insufficient or illegal. Additionally, employment practices insurance can help to cover costs that are not covered under your workers’ compensation policy. The best part about employment practices insurance is that your insurance company will usually work with you as a partner to take steps that reduce your liability. Your rates are then based on how well you comply with your insurer’s recommendations and how frequently you experience employment lawsuits.
Cyber liability insurance protects you from the crippling legal implications of a hack or data breach. As the digital world becomes more important in modern society, the value of assets held in cyberspace is growing. Consequently, there are more hackers who are working to steal valuable information while victims now have even more to lose. Worst of all, many jurisdictions are now passing a broad range of laws that can make both businesses and individuals liable for the cost of data breaches that were not the direct result of any action that they took.
As a result of the reality that there is no perfectly secure computer system in existence, cyber liability insurance has become crucial for both businesses and individuals with significant assets. In addition to protecting you from lawsuits submitted by third parties, cyber liability insurance can also help you to recover from actual losses that you incur as a result of a hack or data breach.
It is also important to protect yourself and your family with personal liability insurance. Personal liability insurance can shield your assets in a broad range of cases, such as when someone gets injured at your home or even when one of your family members becomes liable for an injury to a third party. Most personal liability insurance plans can even protect you if you get sued for slander or if one of your pets attacks a neighbor.
There are also forms of personal liability insurance that are designed to protect you against novel forms of liability. For example, director’s insurance can protect you in cases where you become liable for actions that your company takes. Overall, personal liability insurance will significantly reduce your odds of having your assets liquidated by an unforeseeable lawsuit. Personal liability insurance is especially important if you have a high net worth since people with more assets are often targets for frivolous liability lawsuits submitted by desperate or unscrupulous individuals.
Is Liability Insurance a Legal Requirement?
In most cases, the law does not require you to maintain liability coverage. There are no laws that force all individuals to have liability coverage. However, certain licensed professionals do have to maintain basic coverage to protect their clients from injuries that they may cause. Additionally, some businesses in heavily regulated industries also have to maintain coverage.
Mandated Coverage for Professionals
When obtaining a license is a legal requirement for practitioners of your profession, you are usually made to get insurance because lawsuits are likely to be common in your profession. Legal coverage minimums will usually be set based on the average cost of litigation and the assumption that you will be able to pay a portion of any damages out of pocket. Moreover, many coverage minimums were set decades ago without any adjustments for inflation.
The bottom line is that when you are required to obtain coverage, you will usually want to get more coverage than the law mandates. Minimum coverage may help to save you a small amount of money each month, but doing so forces you to live in fear of lawsuits that could ruin your financial future. If a lawsuit actually happens, you could end up losing everything. Since your income may be relatively high, courts may even refuse to allow you to discharge any balances that your assets are unable to cover. Going through life with millions of dollars in debt and no assets is an indignity that no respected professional should have to endure, and insurance will make sure that you never experience this type of problem.
You usually only have to obtain coverage when a license is required in your jurisdiction. Liability laws vary dramatically by state, so you should be sure to confirm whether coverage is mandated for professionals in your area of practice. Nevertheless, the following are some of the most common types of professionals who have to obtain insurance coverage:
- Construction managers
- Financial advisors
- Real estate agents
You should keep in mind that insurance is not always required for practitioners of the professions listed above and that the above list is not exhaustive. Most importantly, even if you are not required to do so, you will still want to obtain coverage in most cases. Doctors, for instance, usually experience several lawsuits in their careers because of the uncertainty inherent with their work and the impact that medical mistakes can have. Lawsuits against engineers can be very expensive, and these lawsuits are often ultimately the fault of contractors who made a mistake that is outside of the engineer’s control. The bottom line is that professionals can make mistakes in the course of their work, so you need insurance that protects you when something goes wrong.
Mandated Coverage for Businesses
Businesses also have to get insurance coverage in many cases. Business coverage mandates are similar to the requirements that professionals have to deal with. However, coverage requirements for businesses are usually more broad and more strict. Many businesses have to obtain coverage for activities that ordinary people would never expect insurance would be needed for.
Most laws are in place for very good reasons, but the intended beneficiary of some laws is often a third party that is not involved in any work that your business conducts. Therefore, you can never assume that your business is not required to obtain insurance until you actually research the law yourself.
For instance, most people do not realize that liquor stores often have to get liquor liability insurance. Of course, you would almost certainly learn about the need for liquor liability insurance if you actually invested the enormous amount of time and capital needed to start one of these establishments. In the same way, however, you could easily not realize the need for insurance coverage if you are running a small business on a part-time basis or do work for a client that causes you to meet the legal definition of a business that is required to obtain a certain type of coverage. Consequently, if you own a business, it is crucial to do your own research to determine whether any of the activities that your business conducts make your business subject to requirements to obtain insurance.
Protecting Your Business
The key to protecting your business from unforeseeable liabilities is to get a comprehensive insurance policy. Even if your business is required to maintain an insurance policy, the minimum policy is not likely to cover most of the types of lawsuits that your business could face. Therefore, you will need to get a broad range of insurance policies to keep your business safe from most of the potential lawsuits that your business could experience.
There are a few steps that your business should take to make sure that you get the right mix of insurance policies. These steps include:
1. Conduct a risk assessment: You will need to start by analyzing your business to determine what risks your business is subject to. Public court records are a great source for discovering what types of lawsuits your competitors have faced. You should also conduct online research and talk to experienced professionals in your field.
2. Choose an agent: When you buy a business insurance plan, you always want to work directly with an insurance agent who acts as your advocate. Your insurance agent will help you to pick the right policies, and your agent will also help you to obtain compensation when something goes wrong. Therefore, you should interview several agents to find a professional who is a good match for your business.
3. Compare policies: Insurance companies often vary dramatically in terms of the range of insurance products that they offer and the cost of their services. As mentioned earlier, costs generally differ because of differences in contractual terms, so you will need to put in a lot of work to compare policies that are available.
4. Obtain and maintain coverage: Your business will need to actually select which policies you will hold, and this can sometimes be a tough decision that involves a broad range of stakeholders. You will also need to take actions that keep you in compliance with your insurance contract, such as paying your bill on time and avoiding certain business activities that are forbidden under your policy.
5. Routinely reconsider your needs: Insurance needs will constantly change as your business activities shift to new areas and as technology advances. As a result, your business should make time every couple of months to reconsider your insurance needs. In this way, your business will continue to have the coverage necessary to stay protected from a broad range of legal liabilities.