Determining Your Liabilities & Insurance Needs

When we say “potential liabilities,” we are talking about potential risks.

A liability is a risk that you can be held legally responsible for.

For example, if you have a storefront or an office and your customers or clients visit you in that space, there is the potential that they could slip and fall. If a customer hurts themselves in your store, they could potentially sue your business. If they are successful, you could be held legally responsible and forced to cover the cost of the damages of that fall.

“If a customer hurts themselves in your store, they could potentially sue your business.” 

DETERMINING POTENTIAL LIABILITIES

When determining your potential liabilities, you need to think about all of the things that could go wrong. It might not be a fun brainstorming exercise, but it is a necessary brainstorming exercise.

During this brainstorm, a few key groups to think about are customers, employees, and competitors. If you have a disgruntled employee, what actions could they take that could negatively impact your business?

You also need to consider the risks that are particular to your type of business. If you work in a potentially dangerous industry, like construction or mining, there are way more risks to consider. Other industries, like anything to do with children, can also be considered very risky.

If you are unsure about how to identify your potential liabilities, you should consult a flat-fee risk management consultant or an attorney.

Consulting with an experienced professional will help you pinpoint potential liabilities that you would never have thought to consider.

In many instances, consulting with a professional can provide you with greater peace of mind. You might sleep better knowing that you’ve thought about everything that could go wrong with your business and that you’ve set up the proper protections.

USING INSURANCE TO PROTECT AGAINST LIABILITIES

One key facet of being an entrepreneur is managing risk. We’ve already talked about Selecting an Entity Type to manage your risk and limit your liability, but one of the other key ways to limit your liability and manage your risk is to be adequately insured.

If your business has adequate insurance, you will be less impacted financially if you’re found to be legally responsible in a lawsuit. Much like health insurance or car insurance, instead of having to pay “out of pocket,” you can use your insurance to cover the damages.

There are many different types of insurance for business owners. Three common types of insurance policies for business owners are commercial general liability, umbrella, and professional liability.

Commercial General Liability

Commercial general liability policies are the most general type of policy. This type of policy typically covers common business liabilities like if your employee causes damage to property while on the job.

Many business owners make the mistake of assuming that commercial general liability insurance covers just about everything. That is why it is important to make sure you actually read your insurance policy. Do your due diligence and make sure you understand what your policy covers and what your policy does not cover. You might be surprised by what it doesn’t cover.

Umbrella

What if you identify liabilities that your commercial general liability policy doesn’t cover? Or what if your other policy doesn’t cover the full amount? If that happens, you can still get protection through an umbrella policy, which is a type of secondary insurance policy.

A secondary insurance policy only kicks in once you’ve exhausted the limits of your other insurance policies. Umbrella policies are usually cheaper because they are needed less often, but that doesn’t mean you shouldn’t consider purchasing one.

Professional Liability

Professional liability policies protect people in specific professions. The name varies depending on the profession, so you may have also heard professional liability insurance called errors and omissions insurance or malpractice insurance.

If you make a mistake while practicing your profession, professional liability insurance protects you from any lawsuits that seek damages to cover what went wrong.

Professional liability insurance is common among doctors, lawyers, accountants, and real estate agents.

While it is not required to carry professional liability insurance in all states, it can provide peace of mind for both you and for your customers.