Protecting your business with insurance

A review of business liability insurance options

If you’re starting a business, you already know how you structure it matters. A sole proprietorship, partnership, LLC or corporation will each affect your exposure in different ways, but none of them removes risk entirely. That’s where business liability insurance comes in, as it can help fill the gaps left by entity choice alone.

What business structure covers and what it doesn't

Each choice of business structure offers a different level of personal liability protection. A sole proprietorship offers no separation between you and the business at all. Every debt, judgment or lawsuit lands on your personal assets. A general partnership works similarly, with each partner exposed to the others' actions.

An LLC or corporation generally shields owners from company debts and liabilities, limiting claims to business assets. But that protection is not absolute. Courts may pierce the veil in cases such as commingling, fraud or abuse of the entity. Moreover, lenders often require personal guarantees that can expose personal assets. Separately, owners can still face personal liability for their own negligent or wrongful acts.

The coverages worth knowing

Although insurance doesn’t eliminate personal exposure for fraud or intentional misconduct, it does protect against certain business risks. Here’s the menu of potential business insurance options:

• General liability insurance is the foundation. It pays for bodily injury, property damage and personal injury claims, plus the cost of defending against them.
• Professional liability adds protection if you sell services and could be sued for malpractice or errors.
• Product liability does the same for physical products that cause harm.
• Cyber liability covers losses from data breaches, ransomware and other digital incidents — a near-essential coverage for any business that stores customer data.
• Employment practices liability protects against claims from employees, including discrimination, harassment and wrongful termination.
• Commercial property insurance covers buildings, equipment and inventory against fire, theft and the like.
• A business owner's policy bundles general liability and property coverage at lower combined cost.

In addition, if you have employees, most states require workers' compensation and unemployment insurance, with a handful also mandating short-term disability coverage. Crime coverage is also worth considering for businesses that handle cash or have meaningful theft exposure.

For high-exposure businesses, an umbrella policy sits on top of the primary policies and adds another layer of coverage when the underlying limits aren't enough.

When you have more to protect

Higher personal net worth can make you a larger target for plaintiffs, even when the underlying claim is weak. Standard general liability policies often have limits of $1 million per occurrence and $2 million aggregate, which may be insufficient to protect your business and preserve your wealth. A commercial umbrella policy can extend that limit by several million dollars at a relatively modest cost. And if you also serve on company boards, directors and officers (D&O) insurance protects against personal liability for board-level decisions.

What good coverage buys

Insurance offers a measure of relief from the fear that some bad event will destroy everything you've built. Talk with an insurance broker who works with companies in your industry, compare quotes from more than one carrier, and revisit the coverage you select each year. When done well, insurance coverage doesn't just protect what you've built. It also frees you to hire more people, sign larger contracts, and expand into new markets without putting everything else at risk.