Get the Right Liability Coverage for Your Business
Buying insurance to protect your business against liability is a step in the right direction. Once you make the decision, however, the big question becomes: How much coverage do I need? Understanding the goal of having general liability insurance can help.
Liability insurance protects you and your financial assets if you are found responsible for injuries or damage to other people’s property. It also pays to defend you in a lawsuit. For example, if a customer falls and suffers injuries in a restaurant, this person could sue the restaurant owner for negligence. If a judge finds the owner liable for the injury, that is when your liability coverage will kick in.
The cost of general liability insurance can range from a few hundred dollars to several thousand dollars depending on the size of the business and its associated risks. To understand how much business liability insurance you need, ask yourself these six questions.
1. What Assets Do I Need to Protect?
The short answer is you need to protect the assets of your business that could be exposed if the business were found liable for causing personal or physical damage. Those assets can include the building you work in as well as your financial assets or holdings.
The business is an asset as well. For many people, it’s how they feed their family, and general liability coverage protects that livelihood.
2. How Much Liability Coverage Do I Need?
One way to calculate how much liability coverage you need is to go through a maximum probable loss exercise, which essentially helps you determine the worst-possible scenarios for your business. For example, if a bakery space is leased in Bellevue, Washington, and a fire caused by the tenant burns down the space, how much would it cost the bakery to rebuild the space? If a customer gets sick from a cupcake and ends up in the hospital, how much would this customer’s medical bills cost?
Another way to think about this question is: How much of a loss would it take to put your business out of business?
There is no answer to the exact amount of liability coverage you should have, but a general rule is to carry enough insurance to prevent your business from closing for good.
3. What Does Washington State Require?
Washington does not require you to have business insurance in most cases, but it’s still a good idea to protect your business from unexpected losses.
4. Can Clients Require Liability Insurance?
Yes. Depending on the type of business you do, you could encounter a client who requires a specific amount of liability coverage. This interaction would be rare in retail, but if you provide services to another business or you are the subcontractor to another business, the contract for that relationship may include guidelines of what types of insurance they require in order to have you as a vendor or provider of goods or services.
5. How About Umbrella Insurance?
An umbrella policy can be a great way to get additional layer of protection for your business above and beyond. It can be used on top of your liability coverage as well as your existing auto policy. An umbrella policy may cover costs related to slander, false arrest and additional legal fees — among other things.
An umbrella policy is also a less expensive way to get additional liability coverage. It is important to remember that it only can be used once the underlying limit of the general liability coverage is exhausted.
For example, in the Bellevue bakery scenario, instead of purchasing $5 million in general liability insurance, the owner could select $2 million in general liability insurance and an additional $3 million umbrella policy. Then, if the bakery is found liable for $3 million, the general liability insurance would cover $2 million of that cost and the final $1 million would come from the umbrella policy.
An umbrella policy should be considered if you feel your liability needs exceed what you have as an underlying limit.
– Written by Marc Zarefsky, last updated in January 2023.