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What is Liability Insurance?

5-minute read

Mariah Bliss

Mariah Bliss

10 June 2022

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Maybe a customer said that you need it to work on their project.

Or maybe your state requires proof of it in order to get a professional license or certificate.

Either way, at some point, you’ve been told you need business insurance for LLC - and that search led you here, to this article.

So if you’ve ever found yourself wondering, “What is liability insurance?” rest assured you’ve come to the right place. Let’s dive into the answers to the biggest questions you have, including:

  • What is liability insurance?
  • What does limited liability insurance typically cover?
  • How much is liability insurance for a business?
  • Do you need liability insurance with an LLC?
  • And more!

What is Liability Insurance?

Liability insurance, as the name suggests, is a term used to describe a type of coverage that helps financially protect your LLC from your biggest liabilities. These liabilities could include things like:

  • Property damage
  • Accidents
  • Unintentional mistakes or negligence
  • Employee lawsuits
  • And more

Your liability insurance policy can cover costs associated with the above claims, up to your policy limits. And if you happen to get sued by a customer, your policy could help cover the costs of your attorney’s fees, as well as damages you’re ordered to pay out.

The only thing that may come out of your pocket is the deductible - which, in many cases, can be as low as $0.

How Does Liability Insurance Work?

Much like auto or home insurance, liability insurance works by helping cover financial costs that may arise when you have to make a claim.

One important caveat: Liability insurance is an umbrella term for any type of policy that provides financial protection from your LLC’s biggest risks. Liability insurance could be used to describe either:

  • General Liability Insurance
  • Professional Liability Insurance

Each type of policy helps protect against certain industry risks. On the one hand, general liability insurance covers financial costs from claims involving third-party property damage (making it a favorite for general contractors, landscapers, and more).

On the other hand, professional liability insurance covers the cost of claims resulting from mistakes and unintentional negligence, making it a must-have for business types like accountants, lawyers, tax preparers, and more.

Workers compensation insurance also includes a type of coverage known as employers’ liability insurance, which helps cover legal costs if an employee decides to sue your LLC for getting hurt or sick while working for you.

No matter which policy you pick, your coverage works by paying out on your approved claim (up to your policy limits). That means you don’t have to pay for it out of your own pocket, meaning your business and personal finances likely remain untouched.

What Does Limited Liability Insurance Cover?

In order to explore what limited liability insurance covers, let’s get into some of the most common types of business liability insurance policies:

  • General Liability Insurance
  • Professional Liability Insurance
  • Workers Compensation Insurance

General Liability Insurance

General liability insurance provides financial protection from claims involving third-party accidents and property damage, medical bills, and more. For example, if a customer makes a claim that your work caused damage to their property, your GL policy could pay out on that claim.

This type of coverage can also offer product liability protection, making it a smart type of policy to have if you have an ecommerce business.

Most LLCs may find themselves needing a general liability insurance policy, especially if they’re looking to rent office space or want to meet their state’s insurance requirements.

Professional Liability Insurance

Three key areas that may lead you to consider professional liability insurance are mistakes, errors, and negligence. All of which makes it well-suited for human beings.

While general liability insurance can cover claims where someone gets hurt or something is damaged, professional liability insurance helps cover incidents where there’s a financial loss due to a mistake, oversight, or negligence caused by your business.

If your business performs professional services, such as accounting, architecture, interior design, or consulting, it makes sense to get professional liability insurance at the get-go.

Your PL policy usually covers:

  • Negligence or alleged negligence
  • Legal defense costs
  • Omissions or alleged omissions
  • Copyright infringement
  • Claims and damages

For example, let’s say you run an LLC that offers life coaching services. You have a client with a high-pressure job who is experiencing a great deal of stress and anxiety.

After several coaching sessions, you suggest that a major lifestyle change may be necessary to reduce the client’s stress level, but you recommend that they start with small steps.

In response, the client takes some big steps. They sell their house and move across the country in an effort to change their life situation. A few months pass, and the client still isn’t happy, so they sue you for giving them bad advice.

Even as a life coach, you may need some coaching yourself on what to do. Fortunately, if you have professional liability insurance, most associated costs, including a settlement, may be covered (up to your policy’s limit).

Workers Compensation Insurance

Many business owners choose an LLC because their business has grown or is growing quickly. That usually means they also have employees working for them.

Even with just one employee, it’s a good idea to have workers compensation insurance. This type of policy is usually required by law and can help protect you if an employee gets injured or sick while working for you.

If you have workers compensation, your policy can help cover costs associated with:

  • Medical bills
  • Employee’s lost wages
  • Rehabilitation expenses
  • Death benefits

Aside from the legal requirement, getting workers compensation insurance is a good idea anyway. Work injuries are fairly common in the United States — and costly too!

Without coverage, an employee could sue you, and you could be responsible for paying for their medical bills and more.

Other Types of Business Liability Insurance Policies:

The good news is, we offer all of these policies - and more - at Simply Business. Best of all? You can get liability policies for as low as $21.25/month* from the nation’s most trusted insurers.

Start here to check out your free quotes!

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Do You Need Liability Insurance with an LLC?

While every LLC is different, in most cases, it’s generally recommended that you get a type of liability insurance policy.

That’s because depending on your industry, your state may require you to carry a specific type of liability insurance (learn more about state-based insurance requirements).

And even if your state doesn’t require your LLC to have liability insurance, you may run into other obstacles without coverage. For example, many licensed professionals find that they need proof of insurance coverage to get and maintain their certification.

Additionally, if you’re looking to rent office space or a building, your landlord may require your LLC to have liability insurance.

Bottom line, it’s a good idea to have coverage, as it can offer you financial protection and open doors to more opportunities!

Now that you know more about the different types of business liability coverage, there’s just one question remaining:

Are you ready to protect your business? If so, get your free quote from Simply Business today!

*Monthly payment calculations (i) do not include initial premium down payment and (ii) may vary by state, insurance provider, and nature of your business. Averages based on July-September 2023 data of 10% of our total policies sold.

Mariah Bliss

Written by

Mariah Bliss

I love writing about the small business experience because I happen to be a small business owner - I've had a freelance copywriting business for over 10 years. In addition to that, I also head up the content strategy here at Simply Business. Reach out if you have a great idea for an article or just want to say hi!

Mariah writes on a number of topics such as small business planning, contractor insurance, and business licenses.

This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer

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