A beginner’s overview of liability and how insurance can help provide financial protection.
Legal liability means being responsible under the law for the financial loss of another. Whether it’s a customer injury, a contract dispute or breaking a law, understanding legal liability can help you avoid surprises and manage risks.
Keep reading to learn how legal liability works, read real-life examples and see how legal liability insurance can help protect your business from potential mishaps.
Jump ahead to learn:
Legal liability is when you have the legal responsibility under the law for something that goes wrong. Being held “legally liable” is when you’re held accountable for harm, damage or a breach of contract.
In business, this usually means you might have to pay damages (money) or face other legal consequences if something is your fault. When you or your business are given legal consequences by a court, it’s called a “judgment.”
Because these judgments can vary from thousands to millions of dollars, small business owners often purchase liability insurance to help protect themselves and their businesses from legal liability.
Knowing about legal liability is crucial because it helps you manage business risks and avoid costly surprises. As a business owner, you can take steps to prevent issues and ensure you’re protected if problems do arise.
Legal liability comes in several forms, each with rules and potential issues. Here are a few you might encounter as a small business owner:
Tort liability involves accidental harm or injury caused by your action (or inaction) or negligence unrelated to a contract. Avoiding tort liability is about ensuring you don’t cause damage or injury to others.
Example: If a customer slips and falls in your retail store because you didn’t clean up a spill, you could have tort liability for their injuries and associated expenses.
Statutory liability stems from violating breaking laws or regulations that apply to your business. These are different from criminal laws. To avoid statutory liability, It ensures you’re following the rules set by various regulatory bodies.
Example: If you fail to comply with safety regulations or violate employment laws, you could face fines, or legal action from government agencies, or a civil lawsuit.
This type of liability arises when you don’t fulfill the terms of a contract you’ve agreed to, aka breach of contract. It’s about keeping your promises in business agreements.
Example: Say you’re an accountant and sign a contract to prepare and deliver tax forms by a specific date but fail to do so. Your client could sue you for the damages they incurred because of the delay.
Depending on their industry, businesses face different risks when it comes to legal liability. Some must ensure customers are safe while on their premises, while others must ensure their work will not fail for years to come.
Getting covered by business insurance is a common risk management strategy for businesses because there are many different types of liability insurance. Different policies help ensure businesses get the coverage they want without making them pay for policies they don’t need.
Here’s how different types of legal liability coverage can support businesses in various situations:
General liability coverage helps with costs if someone other than an employee gets hurt on your business property or if you accidentally damage someone else’s property while doing your work. This policy also helps cover personal and advertising injury, which includes claims of reputational harm. General liability insurance can also help cover legal fees and damages so you’re not stuck paying everything out of pocket.
This insurance is sometimes called commercial general liability or public legal liability insurance.
Example: A coffee shop customer slips and falls due to a wet floor. The customer sues for medical expenses and pain and suffering. General liability insurance could help cover the customer’s medical bills and the coffee shop’s legal defense fees.
Product liability insurance is usually included with general liability. This insurance is for businesses that make or sell products. It helps cover claims related to defects or safety issues with your products that cause injury or property damage.
Example: A small toy manufacturer faces a lawsuit when a defective toy injures a child. Product liability insurance can help cover the cost of the lawsuit, including legal fees and damages awarded to the family.
Workers’ comp helps cover medical costs and lost wages for employees injured while working.
Example: An employee at a painting company injures their back while lifting heavy equipment. Workers’ compensation insurance can help pay for their medical treatment and provides wage replacement while they’re unable to work.
Employment practices liability insurance can help protect against claims related to employment practices, such as wrongful termination, discrimination or harassment.
Example: An employee files a lawsuit against their employer alleging gender discrimination and wrongful termination. The employer’s EPLI helps cover the legal fees and settlement costs.
Professional liability insurance can help cover professional errors, mistakes, negligence and sometimes even missed deadlines that cause clients financial harm.
Example: A marketing consultant gave advice leading to a client’s business loss. The client sues for damages, claiming the consultant gave poor recommendations. The consultant’s professional liability insurance helps cover the legal defense costs, including the cost of trial and the jury award.
Similar to personal auto insurance, commercial auto helps cover vehicles used for business purposes, including damage to covered vehicles and liability for accidents.
Example: A company vehicle gets involved in a collision with another car. Commercial auto insurance helps cover the repair costs for the business vehicle, medical expenses for injuries and legal costs from the accident.
While liability insurance is designed to help businesses weather various financial storms they may face, it can’t provide 100% protection in every case. It’s important to understand its limits and exclusions.
Liability insurance policies have coverage limits, which is the maximum amount your insurance company will pay for a claim. The maximum coverage amount is based on your per-claim and aggregate limits. Beyond these limits, you may have to pay out-of-pocket.
Additionally, insurance policies don’t cover everything—they have certain exclusions. Some common exclusions are:
For small businesses, liability insurance generally only applies if the harm caused is accidental, meaning due to negligence. If the property damage or bodily injury was caused intentionally, liability insurance wouldn’t help cover the damage.
So, if a customer slips and falls and breaks their wrist on your business premises, general liability can help pay their medical expenses. However, if one of your employees jokingly trips a customer and they fall and break their wrist, your insurance provider may not help cover the bill.
NEXT helps you get the right coverage for your small business. We offer customized business insurance for over 1,300 small business professions. Understanding and managing your insurance is simple, and you could save money because you won’t pay for coverage you don’t need.
You can start a quote, customize your options and access your certificate of insurance online immediately — all in about 10 minutes.
Kim Mercado is a content editor at NEXT. She writes and edits content for small business owners, and enjoys helping entrepreneurs solve their business challenges and learn about insurance. Kim has contributed to Salesforce, Samsara and Google.
You can find Kim trying new recipes and cheering the 49ers.
