For web developer LessEverything, the lawsuit came out of nowhere—a client they’d built a web site for years earlier claimed their work was unsatisfactory and sued them for tens of thousands of dollars.
“We were paid for the project back when it launched, and we even played a round of golf together to celebrate,” LessEverything co-founder Allan Branch recalled in an e-book, “Don’t Let Your Business Run You.”
Thanks to a good attorney and a quick settlement, the company emerged from the lawsuit only $8,000 poorer, but it could have been much worse. According to the Court Statistics Project, the median legal cost of a contract dispute is $91,000. But the experience left the founders with this advice: “Bite the bullet. Buy errors and omissions insurance.”
Soon after the lawsuit, LessEverything purchased several million dollars worth of errors and omissions coverage—also known as professional liability insurance—something that Branch points out would have saved them a lot of stress if they’d bought it earlier.
So What’s Professional Liability Insurance?
Professional liability insurance protects small businesses against lawsuits from clients, but it’s not the only kind of liability insurance your small business may need. There’s also commercial general liability (CGL) insurance, which will cover you if an employee or customer gets hurt on your company’s premises, and also protects you from lawsuits over false advertising and certain other claims, according to the U.S. Small Business Administration (SBA).
The SBA also advises you to buy product liability coverage if you’re in manufacturing or distribution, and employment practices liability insurance to protect against suits from current, past, or prospective employees. Smaller businesses may be able to purchase all the liability insurance they need packaged into a single business owner’s policy (BOP), according to the National Association of Insurance Commissioners’ Small Business Insurance 101 guide.
How Much Liability Insurance Do I Need?
First, check to see if your state requires businesses to carry a minimum amount of liability insurance, advises Business News Daily. You should also be sure if you’re required to carry a certain amount of insurance by your clients, as well as any investors you may have.
But that minimum threshold may not be all you need, since liability insurance needs vary from business to business and state to state. If you’re like most small businesses, you’ll probably need between $500,000 and $1 million. But other businesses with higher risks or a higher volume of public interaction may need more coverage.
What Insurance Professionals Can Help Me?
It’s wise to consult multiple insurance professionals—preferably those that specialize in businesses of your type—before deciding your appropriate level of liability insurance. Consider consulting an independent insurance agent, who works with a number of different insurance companies, or a captive agent, who represents just one kind. Or you could try a licensed broker, who may not necessarily put your best interests ahead of the company they represents. You should also be sure exactly who is representing whom—traditionally, the policyholder is represented by a broker, but the distinction between the two is blurring.
To find these professionals, tap your professional network. Ask around, and see what similar businesses in your area are using. Have conversations with insurance agents and supplement them with independent resources like the National Federation of Independent Businesses, which offers an insurance and healthcare resource center on its web site, the U.S. Small Business Administration, and the National Association of Insurance Commissioner’s Insure U site.
But whatever you do, don’t let fear of the expense keep you from looking into liability insurance for your small business. General liability insurance premiums run from $750 to $2,000 a year, according to the SBA, which is less than you may think—and certainly less than the cost of defending a lawsuit on your own.