Honesty is the best policy in business and in life. Commercial general liability insurance is the policy a small business needs to protect the business and its owners, their achievements, and wealth in an increasingly litigious society, advises Toronto-based insurtech co-founder, advisor, and early/emerging stage investor Neil Mitchell.
For many small business owners, the purchase of commercial liability insurance is considered a “grudge” purchase. It is often seen as a necessary evil, a cost of doing business, with little associated value other than to meet insurance requirements imposed on them by financial lenders, landlords, licensing boards, regulators, governments, clients, and other third parties.
Despite it being a “nuisance” expense, commercial general liability insurance provides valuable financial protection to the balance sheet and income statement of a small business. By paying an insurance premium, a known and fixed cost today, small business owners protect themselves against unknown costs that may arise from future and potentially catastrophic events.
“With small businesses, the personal wealth of the business owner is on the line when the business is sued for alleged bodily injuries and property damage,” says Mitchell. “The insurance purchase affords the small business access to an insurer’s financial resources to pay claims that would otherwise cause significant financial strain to a small business and its owner.”
Legal claims arising out of bodily injuries to a third party caused by the operations of a small business are covered by a commercial general liability insurance policy. A familiar illustration would be the payment of a customer’s medical expenses if the customer is injured on the property of a small business. If that customer also sues the small business, the commercial general liability insurance would also pay defense costs and any associated legal settlement.
In addition to bodily injury claims, commercial general liability insurance covers a small business owner against third-party claims for property damage. A property damage liability claim could be caused by an employee damaging a customer’s laptop, or an outdoor sign falling on a customer’s SUV. If a customer’s property is damaged because of the operations of a small business, the customer can make a claim and the commercial general liability insurance will cover it. For a small business that leases business space, their commercial general liability insurance generally also covers damage to the leased space caused by fire, water damage or severe weather.
Commercial general liability policies often apply to certain claim situations you might not expect, says Mitchell, such as advertising claims. Many commercial general liability insurance policies offer advertising injury coverage, which can help pay for your legal expenses when you’re accused of advertising wrongs.
Most advertising injury claims are brought against a business by a competitor. For example, a small business that owns a small chain of beauty salons creates a print ad that contains a photo of one of their customers. They did not obtain permission from the customer to use their photo and the customer sues the small business operator for violating their privacy.
Conversely, commercial general liability insurance policies exclude many other types of claims. For example, in the case of an employee who sues a small business for an on-the-job injury, a commercial general liability policy would not pay claims for damages. Commercial general liability insurance does not cover workplace injuries that happen to employees or other people on the small business payroll. Instead, workplace injuries are covered by workers’ compensation insurance.
Commercial general liability insurance for small businesses does NOT provide coverage for circumstances such as:
- Employment disputes
- Professional errors and omissions in performing business services
- Cyberattacks that disable key business operating systems, destroy electronic data records, or result in potential identity theft
- Business interruption caused by natural disasters or government-declared disasters
- Business interruption caused by employee sickness or injury
- And many other circumstances
“Nor would a small business and its owner(s) be shielded from any intentional acts that led to damage or injury,” says Mitchell. “Accusations of sexual harassment will also usually not be covered.”
Sometimes commercial general liability coverage is part of a package of policies, often referred to as a Business Owner’s Policy (BOP), which may include property, crime, and mechanical equipment breakdown insurance.
“Depending on the nature of the small business, it may be prudent to add on coverage beyond BOP insurance,” he suggests. Popular choices include umbrella and excess insurance; product liability insurance; employment practices liability insurance; professional liability insurance, sometimes known as errors and omissions coverage; cyber insurance; and directors’ and officers’ insurance.
Each policy will indicate a maximum amount limit for the term of the policy and a per-occurrence and total aggregate limit. The coverage is usually purchased as a “claims made policy” which will provide protection against claims made during a specific period. Broader coverage known as an “occurrence policy” can protect against claims that are made many years after the occurrence of a particular incident.
As with all insurance, a myriad of variables affect the cost of insurance, such as the scope of coverage sought or required, and the risk profile (i.e., businesses in high-risk industries will pay more). In addition, insurance rates and premiums are higher for businesses located in areas prone to severe weather, including wildfires, floods, tornadoes and earthquakes.
Engaging the services of a professional insurance broker is the first step for small businesses to ensure they have the most cost-effective and comprehensive form of insurance protection.
The insurance broker will assess the small business’s risks, check which types of coverage others in your industry are carrying, and assess the legal climate in your industry and jurisdiction. The insurance broker will actively solicit numerous insurers to structure the best coverage terms for the small business, and in the event of a claim serve as a critical advocate for the small business owner.
“A good insurance broker secures the best coverage for their client and provides critical advocacy, advice, and support through the claim process,” says Mitchell.
It is also important for a small business to check to see whether lower-cost coverages tailored to their specific industry and business may be available through a business association or professional or trade groups to which they belong.
Written by Lara Harper
