Liability risk: What it is, how to manage it for your small business

Learn how to assess — and lower — your liability risk to help keep your employees and customers safe.

Harry Lew
By Harry Lew
Published Jul 23, 2024
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a small business owner looks at product inventory and considers their liability risk

If you or your employee harms someone physically or financially, a court might order you to make things right. The cost of doing so — a company’s liability risk — can be high.

Many small businesses rely on liability insurance to mitigate their liability risk and its associated legal costs. Could it be a good fit for your line of work?

Jump ahead to learn:

What is liability risk?

According to Cornell University’s Legal Information Institute, business owners can be held liable for their own action (or inaction) that injures or harms a third party. This might include:

  • Harm to other people’s health.
  • Damage to the property of others.
  • Failing to uphold a business transaction like a written or oral contract.

Your liability risk is your likelihood of having legal action taken against you for your actions. Liability insurance can help protect your business or personal assets if a court rules against you.

If you’re a sole proprietor, the stakes can be especially high. Since there’s no legal separation between you and your business, your personal assets could be at risk for court judgments or settlements.

What are some examples of liability risk?

Liability lawsuits can emerge from many common disputes, including:

1. Employees alleging wrongful action

Employees often file lawsuits against their employers. The reasons range from sexual harassment and unjust firing to breach of contract or discrimination based on federally protected status. Whatever the cause, defending against staff litigation can result in large financial losses.

2. Employee injuries

Most employers are required to provide employees with workers’ compensation insurance to fund medical care for job-related injuries and illnesses. However, injured employees can still sue their employer for these types of accidents, which can lead to litigation and expensive payouts.

3. Libel or slander

When business owners or employees make false claims about an individual or organization, they could get sued for defamation. Libel refers to false statements made in print; slander applies to oral statements that damage a third party’s reputation. Either allegation can result in litigation and large financial settlements.

4. Product failures

If you sell a product to someone who gets injured while using it, they might seek damages in court. Product liability cases can be disruptive because they can lead to class action lawsuits involving thousands or millions of injured consumers. In this case, product liability insurance could help.

5. Professional mistakes

Business owners or employees don’t have to injure someone or damage their property to be found liable for damages. If their professional work violates their standard of care or fails to comply with regulations or contract provisions, they may be on the financial hook for damages. In this situation, professional liability insurance could help.

6. Landlords upset with small business tenants

If your landlord claims that your business caused damage to their property, you could be held liable for repairs.

7. Cybersecurity breaches

Small businesses could be held accountable for electronic data theft or disclosure of private customer information. Whenever third-party data is stolen and published, the data owners could seek legal redress for the incident. Companies hosting the customer data could also face costs related to regulatory compliance and credit monitoring to affected parties. Look for cyber insurance for potential protection.

8. Onsite injuries or damage

Slip-and-fall incidents or third-party property damage from customers or passers-by at your retail shop could result in medical expenses, pain and suffering — and legal action against your business. Similarly, if one of your workers breaks a visitor’s property while working, you might also face legal liability. Either way, general liability insurance could potentially help pay for damages.

9. Completed operations incidents

Sometimes damages don’t arise until after a company completes its work. For example, a construction contractor might successfully finish a project with no onsite injuries or damages. But months later, damage from faulty electrical or plumbing work might surface. Such incidents can result in the building’s owner suing the contractor for damages.

What is insurance for liability risk?

Liability insurance can help cover legal costs such as attorney fees, expert witness fees and court expenses. It may also cover mandated payouts if a judge or jury holds your business accountable for the loss.

Small businesses often turn to liability insurance, a type of business insurance, to help mitigate their liability risks. Liability policies can address different liability risks, including:

General liability insurance

This common form of liability coverage can help cover bodily injury, property damage and advertising injury that you or an employee inflict on someone else. General liability insurance can also help cover vicarious liability claims to help protect you against the errors and omissions of someone who works for you.

Professional liability insurance

Professional liability insurance can help protect those who sell their knowledge or expertise for a fee. This form of insurance activates when professionals like attorneys, accountants, medical professionals and management consultants make a mistake or fail to do something important at work.

Like other forms of liability insurance, it can help cover legal expenses and payouts resulting from judicial proceedings.

Product liability insurance

Product liability insurance can be helpful if your business sells a defective product that harms a customer. If your insurer approves your claim, your policy could shield you from the financial aftermath of judicial action.

Cyber insurance

This can help protect against cybersecurity incidents that divulge private customer data, such as a data breach. Cyber insurance can be especially useful in highly regulated industries such as healthcare and financial services, where data breaches can trigger substantial regulatory fines and reputation loss.

Employers liability insurance

If sick or injured workers sue their employer for damages, employers liability insurance, a benefit of workers’ compensation insurance, can provide funds to cover legal services and financial settlements during employer/employee disputes.

Employment practices liability insurance (EPLI)

When employees allege wrongful termination, sexual harassment and benefit plan mismanagement, EPLI coverage can help power a legal defense for covered losses.

Liquor liability insurance

If you run a restaurant, bar, catering company or otherwise serve alcohol as part of your business, you could be held responsible for intoxicated customers who cause damages if it’s found that they’ve been overserved. Liquor liability insurance can help shield you, your employees and your business from the costs of negligence around serving alcohol.

Though the names may be different, liability insurance policies share a basic function: To help protect business owners against claims of bodily harm, financial harm or property damage.

How can a small business control its liability risk?

Business insurance is one way to help control liability risk, but it’s not the only way. Keep these six tactics in your back pocket to help minimize your risk exposure:

  1. Research and comply with all state and federal laws surrounding your business operations and compliance. Put a safety program in place to show you’re committed to preventing injuries and accidents.
  2. Document your company’s risks in a comprehensive risk management plan and share it with your team.
  3. Train employees to identify and remove safety hazards.
  4. Take advantage of training workshops available from the Equal Employment Opportunity Commision (EEOC) to prevent employment decisions based on race, religion, gender or disability.
  5. Keep detailed records of your entire product lifecycle, from design and manufacturing to customer fulfillment. Design and deliver products with customer safety in mind.
  6. Treat customer complaints seriously. Document them in writing and resolve issues to prevent future incidents.
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How NEXT helps small businesses manage their liability risk

Liability insurance from NEXT can help ready your business for growth.

Start a quote, customize your options and access your certificate of insurance online — all in about 10 minutes.

If you have questions, our licensed, U.S.-based insurance professionals are ready to help.

Start a free quote with NEXT.

Harry Lew
About the author
Harry J. Lew is a writer and editor with a passion for simplifying insurance for small business owners. He has over 30 years of experience writing for numerous insurance companies, publishers and professional associations. He was a content manager for Gallagher, a global insurance broker. Harry's writing has also appeared in Insurance Forums, Producer's Web, Financial Planning, Consumer's Digest and National Underwriter.
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Business insurance is divided into different policies. We offer seven types so it's easy to design the coverage that fits your business.
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General Liability
Protect yourself from accidents that cause physical injury or damaged property.
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Shield yourself from lawsuits that claim your work errors caused financial losses.
Workers' Compensation Insurance
Workers’ Compensation
Cover medical bills and lost wages if your employees have an accident at work.
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Commercial Auto
Stay on the road with coverage for dents, tows and damage to someone else’s vehicle.
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Tools & Equipment
Upgrade your general liability coverage to protect any gear that’s stolen, damaged or lost.
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Commercial Property
Keep your building, inventory and equipment protected from fire or water damage.
Business Owner’s Policy Insurance
Business Owner’s Policy
Combine general liability and commercial property into one policy to protect your business.
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