Limited Liability Insurance: Separating Fact From Fiction

Dec 22, 2019 | Business Insurance

When you first start a business, your mind is probably focused on setting your company afoot by earning industry credentials, generating revenue, hiring staff, normalizing cash flow, and acquiring a competitive space in the market of the industry your business is in and how the company will grow.

While achieving those feats will definitely set your company ablaze, one crucial factor you may not have considered is insurance. You should not forget to consider procuring insurance for your business. It’s essential to invest in business insurance so that you are personally protected.

Having Limited Liability Insurance has been proven to be an essential investment in any type of business. This insurance serves as your shield for unexpected lawsuits from stakeholders and other work-related scenarios that can be blown out of proportion. Limited Liability Insurance protects not only your business assets as a collective but also identifies you as a single entity. Therefore leaving your personal & business assets unscratched should some of the aforementioned occasions arise.

You may say, “but I’m part of an LLC, so I don’t need limited liability insurance.” While there is truth in that statement, this is not so. An LLC (limited liability company) is basically where a business combines the features of a corporation and partnership, to reap the tax benefits and liability protection. Thus, avoiding double taxation and separation of personal & business-related expenses, among other obligations.

That being said, as a business owner (Be it a partnership or corporation), you are still exposed and vulnerable to legal settlements set against you, customer claims leveled against your products & services, and others inflicting damages coursed upon you.

However, being part of an LLC won’t cover you individually from liabilities. If the business goes under, your personal assets should be safe, but if someone tries to sue the company, or you, being in an LLC won’t protect you or help with the financial implications.

Limited Liability insurance protects the individual, not the business. It separates and safeguards your private and personal investments from possible scenarios you’d least expect to happen.

It also protects your private and personal assets and is the responsibility of each person in the business to invest in their own individual insurance.

Want to know more? Keep reading.

Why’s Limited Liability Insurance Recommended?

As stated above, limited liability offers personal protection from litigation.

While it’s true that being part of an LLC offers some protection by separating business assets from personal ones, it still has a lot of loopholes and limitations (as compared to having specific limited liability insurance) that can further harm you and your business from high leveled risks that can entail costly & unnecessary expenses. Having limited liability insurance further divides these areas of your life, and boosts personal security.

Outliers and nonparticipants that pose threat and selfish interest in you and your business can inflict consequential damages that could bring about legal actions against you as well as industry malpractices that put you in the opposition. All these circumstances only mean one thing: expenses. Additional liabilities & compensatory damages could have easily been avoided if adequate limited liability insurance has been procured.

Furthermore, having this coverage will avert exorbitant legal costs being thrust upon you in business-related litigation. Let’s use an example to illustrate:

If you’re a dentist who practices alongside other dentists, having your own limited liability insurance is vital in case a patient tries to sue the company. By having this insurance, your business assets are protected in the company.

Therefore, you and your personal assets are protected from a lawsuit involving your company. Hence, saving you from the worst scenarios possible.

What Types of Limited Liability Insurance is Available?

Now that you are aware that having limited liability insurance is a necessity and a lifesaver, it’s only fitting that you familiarize yourself with several different limited liability insurances.

There are several different limited liability insurance options to consider, and not everyone needs every type of coverage. Choosing one that suits your requirements is essential. Below are some options to consider.

Commercial Property Insurance

If your business requires a lot of physical resources, commercial property insurance could be essential to consider.

This type of insurance is necessary for almost every type of business since most companies occupy physically owned/rented properties for office spaces, storage areas, and a location for production.

Companies involved in real estate, industrial, and production/operations-heavy businesses should consider having this type of insurance for their companies.

Commercial property insurance insures your company’s physical assets (Building, furniture & fixtures) in the event of unexpected perils such as but not limited to: earthquakes, floods, storms, tsunamis, fire, explosions, war, civil commotion, theft, vandalism, and the act of terrorism. It is evident that most, if not all, of these predicaments, are unavoidable and can incapacitate your business in ways unimaginable. That is why commercial property insurance is mainly recommended to business owners by financial advisers & insurance sellers.

The coverage of commercial property insurance depends on how limited or broad you want your insurance is. This means that the accurate valuation of the property plays a pivotal role in how much your insurance premium is going to cost. And also adding some costs apart from the initial valuation for necessary precaution. Moreover, keeping documents such as POs, ARs & other proofs of purchase, and the value of each physical asset is also important in the event of a claim.

Lastly, virtual businesses may stray away from this type of insurance since this won’t be relevant or helpful in their business.

Before taking out insurance, take an inventory of your business, as commercial property insurance varies enormously depending on the business assets.

Contractors Professional Liability Insurance

While commercial property insurance is more of a general type of coverage insurance, contractors’ professional liability insurance is tailored specifically for contractors, architects, building engineers & designers, construction companies, etc.

If you’re about to start or thinking about starting a business that involves building or construction (including things such as architecture and engineering), it’s vital you get some type of professional liability insurance like this one.

This type of cover typically protects you from work-related errors, such as claims of environmental impact, as well as lawsuits.

To further explain, this insurance protects the above-mentioned industry professionals from financial liabilities as a result of misguided, undelivered, and erroneous work during the construction of commercial, industrial, mixed-structure, agricultural, and residential structures.

Common human errors are due to unclear building design patterns, complicated wiring systems, third-party hires’ negligence, and omissions of details originally indicated in the blueprint or design plan.

Violation of fair dealing and inaccuracies in judgment or advice should also be taken into account when dealing with contractors’ professional liability insurance. Litigation and lawsuits as a result of infringement and lack of compliance to the original plan are also covered by this insurance. This gives professionals and companies with CPL a lot of leeways to push through their projects without any worries and can be rest assured that they’ll be facing minimal to no risk at all if ever such a case occurs during the construction of the project.

Although CPL is a great choice for the construction/build industry, it still has its limitations. For one, it does not cover some areas like personal injury, property damage, some basic liabilities included in the general liability policy. So that might be a good point to consider when you are also thinking of including your blue-collar workers and other employees to be insured. You should pair it with other limited liability insurance that focuses on employees’ welfare (Please see “employment practices liability insurance” further below).

Similar to commercial property insurance, the premium cost may vary according to location, type of industry, coverage limits, and other factors that can be affected during the computation. So before you procure this type of insurance, it’s best you identify all the relevant factors that you need to cover for optimal insurance coverage.

Product Liability Insurance

This type of insurance covers you against lawsuits resulting from malfunction, misuse, or injury from a product produced by your business.

For exporters, entrepreneurs, wholesalers, vendors, and manufacturers, company commodities are their business’ lifeline. Revenue heavily relies on how well their products perform in the market. So if you’re out looking for your company’s insurance, this one is best suited for you. Product liability insurance makes sure that all costs get compensated for.

While you put out your best effort in manufacturing and introducing the most sought out commodities, it is an inescapable fact that your products and commodities are likely to experience some unexpected errors and specific malfunctions during mass production. As a result, consumers may encounter personal accidents due to those faulty products and cause further injuries to themselves, their properties, and other liability they can claim against you and your company. With that, product liability insurance will make sure that your business and personal assets are protected from such accountabilities, or at least mitigate the costs that can befall should a stakeholder or clientele decide to file a case against you, demand a claim, ask for compensatory costs for the damages.

Although product liability insurance isn’t required by law, it is best to be reminded that suppliers and distributors, or any of the like, will be held liable for any damage that their products can inflict on their consumers (Form further details, see “Consumer Protection Act”). While the provisions may vary per state and/or country, the law is clear on what it wants to convey: manufacturers will pay the price. So mandated or not, it is wise to get your business this type of insurance.

The amount and type of insurance you will need will depend on the kind of products your business makes. For instance, if your company produces guns, it will probably need more protection than someone who produces cotton wool.

The premium cost of this insurance will greatly depend on how much is needed for the type of business you have. An estimation of compensation claim and public liability coverage stated in your contracts are both ideal factors to consider when computing how much liability will be needed for your company. Just make sure you include other risk factors and don’t be frugal on your insurance. Because it’s better to spend money on an investment like this if it means saving your business from unforeseen liabilities and extraneous costs.

Errors and Omissions Insurance

This is sometimes referred to as Professional Liability Insurance and is usually used by professionals such as consultants or those who offer financial services. This specialized liability insurance is specifically structured and aimed towards companies and professionals whose work involves providing services and giving professional advice to their prospects and consumers.

In a nutshell, E&O insurance covers businesses that provide professional services (usually to other companies) and protects them against claims that their service caused distress to them or their clients.

It is not like traditional liability insurances that focus on bodily injuries, natural disasters, and property damages. In fact, this type of liability protection meets the specific needs of your company’s services that aren’t normally covered in generally limited liability insurances. This insurance makes sure that it protects your professional services, business assets, and company reputation from losses as a result of due negligence and/or unintentional errors in your services.

The errors and omissions insurance (E&O) has been proven to be a beneficial investment to companies like law firms, accounting/financial institutions, consultancy firms, advertising agencies, real estate agencies, and industry professionals specifically insurance brokers, financial advisers, dealers, accountants, and other similar advice/service providing professions. If you own a businessman or a professional whose business/profession falls under the same umbrella as those mentioned above, then the E&O is the right insurance for you.

Procuring errors and omissions insurance means that your business/profession is protected from a variety of factors. Aside from negligence and errors/omissions, some of the elements that may play a role are a violation of good faith & fair dealing, misrepresentation, claims of inadequate work/service, libel and slander, lawsuits, and many more.

The cost of the errors and omissions insurance will depend on the type of profession/business, its location, outstanding liabilities, settlements & claims, etc.

For those of you who are considering getting the E&O insurance, it is important to note that this liability insurance doesn’t cover deliberate jeopardy on the part of the insuree. Falsification of advertisements acts of fraudulence or wrongdoing and other related acts won’t be covered by this insurance no matter how much you paid for your premium.

Errors and omissions insurance will save you from a lot of unwanted expenses so it is wise to consider applying for one immediately.

Business Liability Insurance

This type of insurance is ideally suited to small or medium businesses, including single-person services. Business liability insurance protects your personal assets if someone tries to sue you.

Though it helps keep the separation of business and personal, being part of an LLC doesn’t provide your personal assets with complete protection.

This insurance has three main types. They are general liability insurance, professional liability insurance & product liability insurance (Already mentioned above).
Sole proprietorships and partnerships tend to purchase this insurance since these companies are the most vulnerable to risks while also having limited to no corporate and personal protection. Legal burdens, medical costs, compensatory expenses, bodily injuries, property damages, and personal indemnification.

Even though this insurance type isn’t as specific in terms of policies and coverage as the other insurances stated in this article, it is still a viable option for some businesses that do not require specific needs for their companies. And in the scheme of things, general claims that can bring forth punitive damages can happen quite unexpectedly in any company. So getting your company insured by business liability insurance is still a wise option for you.

Employment Practices Liability Insurance

Corporations and other big industry players have readily fundamentals when it comes to legal and employment practices that small businesses and startups do not have. In the same vein, regular employees have substantial and thorough employment contracts as opposed to newly hired problems and job applicants which basically do not have enough weight (Or none at all) to cover for themselves.

Because of these predicaments, a lot of incriminating circumstances may befall the company and the employee. That is why employment practices liability insurance was formed and included in the United States labor law.

It is a known fact that workplace misconduct is commonplace. So this coverage protects you and your partners from litigations developing from workplace misconduct. This includes wrongful termination, discrimination, harassment (physical, psychological, power abuse, sexual, etc.), deprivation of job opportunities, contract breach, employee mismanagement, and many more.

Employment Practices Liability insurance (EPLI). This insurance can be sold as separate liability insurance but it is usually packaged with other management liability policies.

This insurance will also save and prevent you from long and taxing legal processes, feuds, and company disputes
Finally, Employment Practices Liability insurance is not just for one person, though it can be for individual protection, but for a collective business entity. It is aimed to protect owners from lawsuits brought on by their employees.

Business Owner’s Policy

Business Owner’s Policy (BOP) is an amalgamation of property and general liability insurance.

It’s often purchased by owners of small or medium businesses (SMB owners, as it is sometimes known) who work in their own space, including their home residence.

If your business is from home, or you regularly see clients at your home, a BOP may be the right insurance option for you.

That being said, the business owner’s policy is not only limited to all commercial property insurance policies. The coverage can be tailored-fit according to the demands and needs of your chosen business. And as time advances, socioeconomic conditions change. And these factors alone can dictate whether or not your business will endure and push through the tide. This is why Business Owner’s Policy might be the best choice for businesses who plan on being flexible and remain effective in their respective industries while making themselves, their business assets, properties, professional reputation, and private investments protected at the highest level.

This buffed-up insurance, specifically property insurance, has two varied forms. The first one is the standard type which covers the basic commercial property insurance policies. The second one is a special or premium type. This policy covers all the policies in the standard while also incorporating more comprehensive policies (based on your profession and/or company) to further expand the scope of your insurance.

Aside from the combined policies of general liability and property insurances, Business Owner’s Policy (BOP) makes sure that you and your company can get financial aid in case of catastrophic and other unexpected events. Your office building, your company equipment, bodily injuries, income losses, and possible lawsuits will all be covered when you choose this insurance and the suitable premium of this policy.

And speaking of policies, the cost of the premium for Business Owner’s Insurance, like the other previous insurances mentioned in this article, will greatly depend on the attributes you choose to include. The computation typically comprised type of business and/or profession, history of claims, total property valuation, location of the business, and leveled risks based on previous scenarios as well as those that can possibly be encountered in your industry.

Ready to Purchase Limited Liability Insurance?

There are many different limited liability insurance plans to consider, and it can seem overwhelming. Perhaps you’re thinking that it is too much of a hassle or this is just another useless thing someone is trying to sell to you.

But be assured that investing in insurance is a sound investment (pun intended). To put it another way, it is better to have it and not need it, than to not have it and find your personal and business assets at risk because of an inescapable decline in the economy, an unexpected act of nature that puts your company operations unable to cope up with the times, and/or a hefty-priced lawsuit to try and afford.

Choosing the right insurance can seem daunting because it is so important. Know your business well enough to know any risks it could involve. It would also be wise to seek professional advice on what you may need and go from there.

If you have found this interesting, you may want to look at our other articles. Or, contact us today with your questions or concerns, and we’ll get back to you as soon as we can!

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