How much business liability insurance do I need?
Liability insurance can protect you from risks and help your business meet contract requirements. Here’s how to decide which coverage limits you need for your liability policies.
What types of business insurance do I need?
First off, you'll need to figure out which types of business insurance you need. There are two broad categories of commercial insurance:
- Commercial property insurance provides reimbursement for damaged, lost, or stolen property.
- Business liability insurance helps pay your legal costs if someone sues your business.
Some liability insurance policies provide benefits to every type of business. Other policies cover liabilities specific to businesses that have employees, offers professional services or advice, or have other risk factors. After you've decided which policies are right for your business, you must determine the amount of coverage you'll need.
Aggregate limit vs. per-occurrence limit
An insurance policy will provide coverage up to a specific dollar amount, or limit. Most policies have two limits:
- The aggregate limit is the maximum your insurance company will pay on all claims during the policy period (usually one year).
- The per-occurrence limit is the most your insurance company will pay for a single claim.
How much business liability insurance do I need?
If you're purchasing liability insurance because a lease or contract requires it, your landlord or client will likely specify how much coverage you need. Liability insurance is often required to protect others from financial risk. It ensures you'll be able to cover the costs of any lawsuits filed against your business.
For example, clients will often ask for proof that your business has errors and omissions insurance (also called E&O or professional liability insurance) before they agree to hire you. This policy shows you’re able to compensate clients who suffer a financial loss due to a professional error by someone at your business. Client contracts most often require a minimum coverage limit of $1 million.
If you rent your office space or storefront, your landlord may require you to carry general liability insurance. This policy covers legal costs related to clients and other third parties injured at your office, or third-party property damage. Rental contracts usually require a minimum per-occurrence limit of $1 million and an aggregate limit of $2 million.
You may encounter other requirements, too. For example, Amazon sellers with gross proceeds of $10,000 in any given month must carry general liability insurance and product liability insurance with a $1 million per-occurrence limit and a $1 million aggregate limit.
What are typical liability coverage limits?
Many businesses in the technology industry face the same professional risks and purchase the same policies. Here are the average coverage limits for common tech liability policies.
Errors and omissions insurance
E&O insurance, also known as professional liability insurance, covers legal expenses if a client sues your business over a professional mistake, including contract disputes and missed deadlines. It pays for attorney’s fees, judgments, settlements, and other legal costs.
About two-thirds of tech businesses purchase an E&O policy with a $1 million per occurrence limit and a $1 million aggregate limit.
Cyber insurance
Cyber liability insurance covers the cost of recovering from a cyberattack, as well as legal expenses for data breach lawsuits. Tech businesses are especially vulnerable to cyberattacks, so a high coverage limit is important.
Most tech businesses purchase a cyber liability policy with a $1 million limit.
General liability insurance
General liability insurance covers the cost of lawsuits related to third-party injuries or property damage. For example, this policy would cover your business if a client trips walking up the stairs to your office and drops their laptop. It also covers advertising injuries like libel and slander.
The vast majority of small businesses purchase a general liability policy with a $1 million per occurrence limit and a $2 million aggregate limit.
Employment practices liability insurance
Employment practices liability insurance (EPLI) covers legal expenses if a current or former employee sues your company over wrongful termination, harassment, discrimination, or another violation of employee rights.
The most common EPLI policy for tech businesses has a $1 million occurrence limit.
When do I need additional liability coverage?
When something goes wrong with a project, any business that was even remotely involved can be named in the lawsuit. As you evaluate your business risk, keep this “chain of liability” in mind.
To illustrate the chain of liability, attorney Adam Kaufman of Adam B. Kaufman & Associates, PLLC points to the example of one of his clients. This online advertising publisher was named in a class-action liability lawsuit related to unwanted marketing texts and emails, despite not having sent the messages in question.
Even so, the lawsuit named every business that was connected to the messages. The typical penalty at the time for advertisers contacting people without permission averaged about $1,000 per incident, so the potential liability ran into the millions.
Frivolous lawsuits can still be expensive to defend against. Even if the plaintiff is grasping at straws by naming your business in their chain liability lawsuit, you’ll still need to hire an attorney to represent you. If the plaintiff eventually drops you from the suit or a judge throws out the case, it could still cost you thousands in legal fees.
While some businesses can get by with lower coverage limits, others will need higher limits based on their revenue and their likelihood of being named in a chain liability lawsuit. You may already know your liabilities. If not, an insurance agent can help you develop a risk profile for your business.
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