When you have your own business, you need to protect your business assets against the risk of loss or damage caused by theft, fire, smoke, explosions, storms, flood, earthquake, riots, vandalism and various other unforeseen events. Property insurance serves to protect your business from these types of risks.
There are other risks that could affect your business that are not directly related to your business assets and that are not caused by any of the aforementioned events. These risks are related to damages that your customers or clients, or third parties could suffer as a result of an accident in your place of business, due to your product, or because of some act or omission on the part of your business’s personnel, for which your business could be held liable in the event the affected person presents a complaint or files a lawsuit, or simply when your business is obligated to answer for the damages caused.
Why Do I Need Third Party Liability Insurance?
Even though you are aware of the risks you could encounter in your business, and despite having good control and good risk management, third party liability insurance coverage can protect your business from the adverse effects you could suffer in the event that you are held liable for damages to third parties.
The types of risks to which your business is subject will depend on your line of business, for example, a construction company faces different risks than a graphic designer who spends most of the time working in an office or shop. But some of the types of risks to which any business could be subject include the following:
Someone falls and suffers an injury while visiting your place of business and files a lawsuit for reimbursement of medical expenses.
A customer is injured while using a product you sold and files a claim for indemnity.
A customer suffers an allergic reaction after eating or drinking a food or beverage product at your business and files a lawsuit.
Someone in your company makes a negative comment about one of your competitors to the press and your competitor files a lawsuit against your company for slander.
Due to an overload on an electrical socket, a fire results that causes damage in the building where you are renting space, and the owner of the building demands payment from your business for the cost of the repairs.
Someone in your company goes to pick up a client at the airport to take the client to a business meeting. On the way back, the person has an accident and the client is injured.
You have a contract to deliver an order on a specified date. Due to a hurricane, you lose electrical power for an extended period and cannot manufacture and deliver the products on time. The customer files a lawsuit for breach of contract.
These risks could be covered by different types of insurance policies, some more general and others more specific. A third party liability insurance contract provides coverage for various types of risks your business faces in its activities and dealings with customers and clients, and the public in general.
What Does Third Party Liability Insurance Cover?
A third party liability insurance policy against all risks, or a general commercial liability policy covers four categories of events for which your business could be held liable: bodily injury, third party property damage, personal damages including libel and slander, and false or misleading advertising.
According to these categories of events, the damages for which third parties could hold your business liable, and which are normally covered by a general commercial liability insurance policy include: compensatory damages, which are economic losses suffered by the affected party and the future losses that could result from the damages claimed in a lawsuit; general damages, which are non-monetary losses suffered by the affected party, such as “pain and suffering”, or “psychological anguish”; and punitive damages, which are the penalties and additional charges that your business could be ordered to pay.
What is Not Covered by a Third Party Liability Insurance Policy
Normally, a general third party liability insurance policy does not cover labor claims, such as wrongful dismissal, or lawsuits for sexual harassment or discrimination. These are covered under employment practices liability insurance.
Claims related to vehicles are covered under a motor vehicle policy. You should have motor vehicle coverage for the vehicles that are registered in the name of your company. If you use a personal vehicle in the business, you need separate commercial coverage to protect you and your workers when you are using that vehicle for business purposes.
Professional liability insurance is coverage for the risk of a potential professional malpractice suit. Doctors and other health care providers, attorneys, accountants, architects, engineers, consultants, and other professionals contract this type of insurance separately.
Third party liability insurance does not cover the risk of business debt. In order to protect yourself from being personally liable for the debts of your business, you could set up your company as a limited liability company (LLC), or a corporation.
What Types of Insurance Are There?
A general third party liability policy covers damages that your business could be ordered to pay to an individual, such as a customer, client, supplier, business partner, or visitor, who is injured in your place of business, or who suffers some damage from the acts or omissions of anyone who works in your business.
A related type of insurance is product liability, which protects you from lawsuits filed by customers who claim to have suffered harm or damage as a result of a product that your business sold them.
Vehicle liability insurance covers damages that you or someone else in your business causes in a business-related accident. Vehicle liability coverage is not included in third party liability coverage against all risks, and is legally mandatory in practically every state in the U.S.
Business Owner’s Policy
An option for small business owners could be a commercial policy in the form of a general package called a business owner’s policy, which includes different types of coverage, such as insurance on the business’s material assets, business interruption insurance, and third party liability coverage. This could be less expensive than contracting different individual policies, and many insurance companies can adapt the policy to the specific needs of different types of businesses. Provided the policy meets all your needs, this type of insurance package could be advantageous.
Another option would be to contract separate policies, such as the following:
Insurance on material property, to cover tangible assets such as a building, installations, machinery, equipment, and furniture against the risks of fire, smoke damage, theft, storms, and others.
Business interruption insurance, to cover lost income and the expenses incurred in order to keep your business operating during the period of reconstruction or repairs after destruction caused by a hurricane, flood, tornado, earthquake, or some other natural disaster.
Third party liability insurance, to cover the risks of third party damages resulting from accidents in your place of business, or damages caused by some act or omission on the part of the people who work in your business.
Product liability insurance, to cover the damages that could be caused by the product your business manufactures, sells or distributes.
Vehicle liability insurance, to cover the risks of damages caused by you or the people who work in your business when driving vehicles owned by the company, or private vehicles used for business purposes.
Other types of liability insurance include:
Supplemental liability insurance, which provides additional protection above the maximum limit granted by another insurer, that is typically in the range of from $500,000 to $1,000,000 and can reach $5,000,000. These policies are appropriate for businesses that have high-value assets or that are especially vulnerable to lawsuits.
Umbrella insurance provides coverage for the majority of the risks you face in your business.
Crime insurance protects businesses from theft, such as embezzlement on the part of employees.
Internet business insurance protects against damages caused by hackers and viruses.
How Is the Cost of Insurance Determined?
The cost of a third party liability insurance policy depends on the type of business and the risks generally associated with that line of business. Some lines of business are more risky than others. Insurance companies evaluate business risk based on various factors, including the number of claims presented within the respective industry, the likelihood of a claim for the same type of company or a similar company, the financial stability of a company and its longevity, state laws, the company’s products and the type of operation, and the company’s risk management.
When you have sound and well-documented security practices and procedures in place, the insurance company may consider that your company represents a lower risk level than other companies in the same line of business, and therefore could charge you lower premiums.
Taking into account the above-mentioned factors, the premiums for third party liability insurance policies are typically calculated based on estimates of the company’s sales and payroll. These estimates are made before contracting the policy. Then, when actual figures are available, the insurance company may make an adjustment to increase or reduce the premiums.
Suggestions for Reducing Risks
As the owner of a small company or business, you can take steps to minimize risks in the workplace and thereby reduce the premiums for your insurance policies. The following are some suggestions that could benefit your business, your employees, your customers, suppliers and others.
Install fire and safety alarms. Plan for emergencies such as fires and storms, establish an evacuation plan, and train the people who work in the company.
If you work with tools and machinery, or in environments where there is noise or fumes, provide the workers with personal protection equipment appropriate for the work, such as safety glasses, gloves, hearing protectors, masks, and others, as applicable.
Have a secure place where workers can keep their wallets, purses, and other personal belongings. Keep cash and other company valuables in a safe.
Keep the workplace clean and orderly. Make any necessary repairs promptly. Keep hallways, stairs, and transit ways free from any obstacles.
Make sure that wiring and cables are in good condition, that they do not present any hazards, and that electrical sockets are not overloaded.
If anyone in the business operates a company vehicle, make sure that the person has a valid driver’s license, a good driving record, and that the person is trained.
Keeping Policies Up-To-Date
It is important to review all insurance policies at least once a year, noting any changes that could affect the costs of coverage. For example, premiums could be affected by an increase or reduction in the number of company employees, the products sold to customers and the level of inventories the company manages, changes in installations, and changes in state regulations that affect your business.
Considerations When Buying Insurance
You can compare different insurance plans in order to ensure that you are contracting the best policy for your company in particular, at a competitive price. You should also study the policies you carry, to ensure that the same risks are not being covered in more than one policy. This study can also serve to detect risks that possibly are not covered.
It is important to have an accredited insurance broker who understands the specific activities of your business and the risks involved, preferably a broker who specializes in policies for your line of business. There may be many policies adapted to your type of business, and a broker who understands your business can guide you to these specialized policies.
Reference:
- All Business – Liability Insurance for Your Small Business: www.allbusiness.com
