It’s sad, but true: we live in a lawsuit-happy world.
That’s why liability for business-related lawsuits is one of the biggest concerns for small business owners.
And freelancers aren’t left out; they need to obtain adequate coverage, too. Otherwise, they risk financial ruin if they get sued.
What Is Liability?
Liability means being legally responsible for doing something that injures someone, such as breaching a contract, committing malpractice, or hurting someone in an accident.
If you’re personally liable for a wrong, and a person sues you and obtains a judgment against you, you’ll have to pay the judgment. And, if you don’t pay, the person who obtained the judgment can take your personal property (subject to certain limits). In other words, you could end up losing your personal bank accounts, property and home.
Here’s how you could be sued while in business:
- Malpractice liability: negligence by professionals, such as doctors and lawyers
- Contract liability: breach of business contracts
- Premises liability: injuries or damages that occur at your place of business
- Infringement liability: you’ve infringed on a patent, copyright, trademark or trade secret
- Employer liability: injuries or damages caused by an employee while they were working for you
- Payroll tax liability: your payroll expert failed to properly withhold and pay income and Social Security taxes for your employees
- Product liability: injuries or damages caused by a product that you manufacture or sell to the public
- Negligence liability: you failed to use “reasonable care” in your actions, resulting in injuries or damages
Note: Many freelancers are sole proprietors, so they personally own their business and its assets. They’re personally liable for all of these types of lawsuits.
The Role of Insurance
What can you do to protect yourself from business-related lawsuits? Get liability insurance!
This insurance protects you if a person got hurt or property was damaged, and you’re sued because you did something, or failed to do something, that caused those injuries or damages. The insurance covers legal fees, the injured party’s medical bills and any settlement or judgment against you, up to the policy limit.
The greater the policy limit, the more expensive the policy. For example, a policy with a $1 million limit will pay a maximum of $1 million, but you’ll be responsible for amounts owed over $1 million.
For additional protection, you can purchase separate “umbrella coverage,” in case you suffer a major liability loss that exceeds the limits of your regular liability policy. For example, if you have a liability policy with a $1 million limit and you’re sued for $2 million and lose the case, the umbrella policy can pay the $1 million that isn’t covered by your regular policy. And the great news is that umbrella coverage is relatively inexpensive because it supplements your regular insurance.
Types of Liability Insurance
There are two types of liability insurance: general liability and professional liability. You might need both. Fortunately, liability insurance premiums are deductible as a business expense.
This will provide coverage for the types of lawsuits any business owner might face. For example, it would protect you if a client who visits your home office slips on the wet floor and breaks an arm, or if you knock over and shatter an heirloom vase while visiting a client’s home.
You need this coverage if clients or customers visit your office. If you already have homeowners’ or renters’ insurance, don’t assume that you’ll be covered. Such policies don’t typically cover injuries to business visitors unless you pay for a special endorsement.
If you do any part of your work away from your office, including in clients’ homes or offices, you’ll need this coverage because you could end up injuring someone or damaging property while working there.
General liability insurance isn’t too expensive. You can get it for just a few hundred dollars annually. Plus, you can get general liability coverage as part of a package policy, such as:
In-home policies: If you work at home, you can get liability insurance ranging from $300,000 to $1 million with an in-home business policy that will also insure your business property at a single location for up to $10,000. The cost is usually around $200 annually. There’s also coverage to protect against lost valuable papers, records, accounts receivable, off-site business property and equipment.
Business owners’ policies (BOP): This is for businesses that aren’t based at home or larger home-based businesses. These policies combine both liability and property coverage in one policy. Although they’re more expensive than in-home policies, they provide the most comprehensive coverage for small businesses.
Note: As an alternative, you can obtain a separate general liability insurance policy: a “commercial general liability (CGL)” policy. It might cost more than a package policy, but it’ll give you more coverage.
Professional Liability Insurance
Why do you need a separate professional liability insurance policy, also known as “errors and omissions,” or E&O, coverage? Because general liability insurance doesn’t cover professional negligence: claims for damages caused by a mistake you made or something you failed to do when performing professional services.
These policies commonly cover the following workers:
- Insurance Agents and Brokers
- Pension Plan Fiduciaries
Note: Some types of workers are required by state law to obtain this insurance.
You can get E&O coverage for other occupations, too, if you’re willing to pay for it. Because of the growing number of professional negligence suits and the costs of litigation, this insurance tends to be pricey, ranging from several hundred to several thousand dollars annually.
If you need this insurance, head to a professional association. Many will arrange for deals with insurers offering lower rates, and those that don’t, could direct you to a good insurer.
Protect Yourself Today for Peace of Mind
Liability insurance might seem like another daunting expense at first, but it’s more than worthwhile. Purchasing the right coverage will give you the peace of mind of knowing that, if you’re ever sued, you’ll be protected.