Understanding Business Liability Insurance

Business liability insurance, like almost all insurance, is something you hope to never have to call upon, but this important coverage is essential when the unexpected happens.

“Business liability insurance … helps protect your business from claims of bodily injury or property damage,” says The Hartford. “These business liability claims can come up during your normal operations and be very costly.”

While business liability insurance – also called general liability insurance and commercial general liability insurance – is something that is not required of business owners, the danger of forgoing it is that without coverage, you will pay the costs out of pocket of any lawsuits or incidents that occur in the scope of your business.

“As a business owner, the law doesn’t require you to have business insurance. However, it is an essential coverage that helps set your business up for success in the future. It also helps protect you when something unfortunate happens to you, your company, or your employees,” says The Hartford.

Inflation, Lawsuits and Cyber Crime Put Pressure on Commercial Insurance Rates

The odds are that your business will call upon its business liability insurance since the American Property Casualty Insurance Association (APCIA) reported in May that preliminary estimates for 2021 suggest that property and casualty (P&C) insurance industry’s commercial lines combined ratio is at almost 100 percent – meaning insurers paid more in claims and expenses than they collected in premiums.

“U.S. P&C insurers faced an $11.3 billion net underwriting loss in the third quarter. These trends are not sustainable,” said Robert Gordon, senior vice president of policy, research, and international for APCIA.

Inflation, legal system abuse and cyber crime were all cited as reasons for the rising number and cost of commercial insurance claims:

• Inflation: Rapid increases in inflation and other developments over the last year have significantly increased the cost of claims that insurers have paid out to policyholders. Inflation in insurance claims has been rising even faster than the Consumer Price Index and outpacing premium increases.
• Legal System Abuse: Changes in laws are encouraging more lawsuits and jury awards, which the APCIA says do not increasingly reflect logical conclusions or precedents. In recent years, practices like third-party litigation funding – investment by hedge funds and other third parties in lawsuits in return for a share in the awards – have played a significant role in litigation abuse. Business liability insurance is affected by these lawsuit trends, including the number of large “nuclear” verdicts. The P&C industry incurred losses for general liability have skyrocketed more than 57 percent since 2017.
• Cyber Crime: Cyber-related losses are growing exponentially. Ransomware payments have frequently exceeded $1 million and the resulting costs for business interruption or data exfiltration increased claim payouts. The massive growth in ransomware attacks increased the 2020 loss ratios (prior to expenses) for stand-alone cyber policies by more than 50 percent, and the corresponding combined ratio was estimated at more than 100 percent. This trend is expected to have continued in 2021.

Business liability insurance will also continue to be more important as businesses face growing climate-related risks.

“To address growing climate risks, businesses will have to set aside an increasing share of their cash flows. Hurricanes, wildfires, and the rise in sea levels impose costs on firms, both in preparation and response to these disasters. As the risks grow, those costs are only going to increase over time,” says the Harvard Business Review. “Risk management can help minimize the cost of climate change. Robust risk management strategies layer financing tools — insurance, reserving, and borrowing — to address different aspects of the risk.”

What Does Business Liability Insurance Cover?

In general, business liability insurance covers:

• Property damage
• Bodily injury
• Medical costs
• Reputational harm
• Advertising injuries or errors

Many business owners will have business liability insurance coverage bundled under their business owner’s policy (BOP).

According to The Hartford, business liability policies typically can help cover claims such as:

• Property Damage Lawsuit: A fire breaks out in the kitchen of your restaurant where you are a renter in the building and your landlord sues you for damages to the building. Business liability will help cover costs associated with the property damage.
• Slip and Fall Incident: There is a reason you see those “caution: wet floor” signs everywhere … because slip and fall incidents can be costly to your business. If a customer slips on your wet floor, and must have surgery on their leg, they may sue you for medical costs. Business liability coverage can help cover bodily injury costs.
• Product Liability Lawsuit: Your coffee shop also sells espresso machines and one of your customers purchases one of them and is scolded by hot water by a malfunctioning machine. If the customer then sues you for medical costs, your product liability insurance, which can be stand alone coverage or part of a business liability policy, can help you pay the costs.
• Customer Injury Lawsuit: A customer in your secondhand store drops an anvil on their foot and sue you for medical costs of their broken big toe. Your business liability policy can help provide you protection.
• An Advertising Lawsuit: You launch a new advertising campaign, only to have another business sue you for copyright infringement. Business liability insurance can help you cover costs of the lawsuit.

Losses Can Occur at Any Moment of the Day

Every business is unique, as are their potential losses.

“It’s also important to be aware that your business liability insurance policy doesn’t cover all claims. You may need other types of insurance to help get full protection for your business,” says The Hartford.

Other types of coverage for your business could include:

• Commercial auto insurance, including fleet insurance
• Workers’ compensation insurance, some form of which is required in 49 states (all except for Texas)
• Management liability insurance
• Professional liability insurance
• Employment practices liability insurance

“Losses can occur at any moment during the day,” says The Hartford. “Having the right business insurance can help protect you … In some cases, business insurance may even help you avoid closing your operation entirely from lawsuits filed against you.”

Contact Dean and Draper today to help your business identify your insurance needs and analyze the best solutions available.

Dean & Draper is a Trusted Choice insurance agency representing numerous insurance companies. For over 40 years we have offered a trusted freedom of choice to our clients.  Contact Dean & Draper today.

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