LLC liability insurance comes in many forms and offers different levels of protection. Find out which policies match your business needs
Structuring your business as a limited liability company, or limited liability company, allows you to protect your personal property by separating it from your business assets. This means that a third party cannot go after your personal property if your business is sued or files for bankruptcy.
But how do you protect your business assets? This is where liability insurance for your LLC plays an important role. However, this type of coverage comes in many forms. To get the policy that matches your business needs, you must also understand what kind of protection each one provides.
The insurance company will help you achieve this by giving you an overview of the different liability insurance policies that LLCs have access to. We will explain how each policy works and how they can protect your business assets. Read on and find out if liability insurance for an LLC is a worthwhile investment for your business.
As an LLC, your business needs liability insurance to protect it financially from claims for property damage, bodily injury, and reputational damage due to your day-to-day operations. Covers medical payments, legal costs, and settlements resulting from litigation.
LLC liability insurance comes in several types, each providing different levels of protection. Here are some of the most basic coverages an LLC needs to protect its business assets.
1. Public liability insurance
General liability insurance protects your LLC from claims of bodily injury or property damage arising from your business activities. It also covers lawsuits arising from copyright infringement and damage to reputation such as defamation, slander, false arrest and malicious prosecution.
Some policies provide product liability coverage as well. This protects your business against claims for bodily injury or financial loss caused by a product you design, manufacture, or sell.
You can purchase general liability insurance along with business property insurance and business interruption coverage in a business owner’s policy (BOP). Getting these types of business insurance as a package allows you to deduct a significant amount from your premiums compared to buying them separately. However, BOPs are only available to LLCs with fewer than 100 employees and revenues not exceeding $1 million.
General liability insurance is not mandatory for LLCs, but some companies and some clients may make it a condition before doing business with you. The cost depends on a range of factors, including the industry in which you operate, how many employees you have, and where you operate. If you want to learn more about how general liability insurance is calculated, you can click the link to access our guide.
2. Professional liability insurance
If your LLC provides a professional service, you may be required either by law or industry standards to have professional liability insurance. This covers your business against claims for financial losses resulting from the services it provides. This policy pays legal costs and settlement costs resulting from the following:
Professional liability insurance is mandatory for some professions. Depending on the industry, it may also be referred to as errors and omissions (E&O) insurance or malpractice insurance. Here are some occupations that require coverage:
- Medical practitioners: These include doctors, nurses, dentists, psychologists, physical therapists, and other healthcare providers. Medical malpractice insurance protects against claims of negligence that result in patient injury or death.
- Lawyers: Malpractice insurance is mandatory in two states – Idaho and Oregon. But nearly half of US states have adopted some form of disclosure rule that requires attorneys to tell clients whether or not they have coverage.
- Real Estate Professionals: E&O insurance is required in many states including Colorado, Idaho, Iowa, Kentucky, Mississippi, Nebraska, New Mexico, North Dakota, Rhode Island, South Dakota, and Tennessee. Requirements, however, vary between states.
- Insurance Agents and Brokers: E&O insurance is mandatory for insurance sales professionals in several states. Just like those for real estate professionals, each state imposes a different set of requirements.
- Government Contractors: Companies that work on government projects are required to carry professional liability insurance under federal buyout regulations. This is to protect them from the risks to the contractor.
You can learn more about how this type of coverage can protect your LLC in our comprehensive guide to professional liability insurance.
3. Electronic liability insurance
If your business handles and stores sensitive customer data, electronic insurance is the type of LLC liability insurance you must have. It protects your company from lawsuits filed by customers, vendors, and even employees for damages caused by a cyber incident. The policy covers court fees, settlement costs, and regulatory fines.
Cyber insurance also pays for the financial losses your business incurs due to a cyber attack. These include:
- The cost of responding to a data breach
- The cost of recovering and restoring damaged or lost data
- Lost income resulting from work stoppage
- Ransomware attack payments
- The cost of risk assessment for future cyberattacks
- The cost of notifying customers of a cyberattack
- Anti-fraud services
An internet incident can be costly for your business, especially if you don’t have the proper coverage. If you want to know how much damage a single attack can cost a company, check out our latest cybercrime report.
4. Commercial car insurance
Just like private car drivers, all commercial vehicle drivers need to carry insurance in order to be able to operate on US roads. Depending on the state, commercial vehicle drivers are often required to have minimal liability insurance coverage under commercial auto insurance. This consists of:
5. Product liability insurance
It may be worth considering product liability insurance if your LLC manufactures, designs, or sells products. This type of coverage protects your business from lawsuits from customers who claim injuries or losses due to your product. It pays for legal defense costs, as well as third-party compensation if your company is found to be at fault.
Other types of liability insurance for an LLC
- Commercial Umbrella Liability Insurance: Also called excess liability coverage, this type of policy covers losses that exceed your coverage limits.
- Directors and Officers (D&O) Insurance: Designed mostly for large corporations, D&O insurance protects the directors and senior management of a company against financial losses resulting from business-related lawsuits.
- Workers’ Compensation Insurance: Aside from covering job-related injuries and illnesses, workers’ compensation insurance protects your business from lawsuits filed by an employee due to illnesses or injuries that are not subject to state legal benefits.
However, LLC liability insurance is not the only form of coverage businesses need. If you’re a small business owner working to determine what types of policies can keep your company protected, our comprehensive guide to small business insurance can help.
Liability insurance coverage consists of a group of policies that provide different levels of protection. This is why it is difficult to come up with a one-size-fits-all estimate of how much coverage costs. The table below shows how premiums cost for different types of LLC liability insurance based on a comparison of different rates and insurance company websites examined.
The cost of liability insurance for an LLC is also affected by several other factors. These include:
- Number of employees
- Nature of your work
- Where does your business work?
- How many property and equipment does your business own?
- The types of policies you purchase
- your annual revenue
- Coverage limits and deductibles
LLC stands for Limited Liability Company. This type of business structure protects the owners from personal liability for the company’s debts and claims. This means that if the business is sued or unable to pay its debts, the owner’s personal property—including his house and car—cannot be legally pursued. This type of protection is what makes the LLC a popular business structure for startups and small businesses.
An LLC can have one or more owners, also referred to as members. LLC members usually share responsibility for running the business in a system called managed members. That is unless they bring in someone from the outside to handle the day-to-day aspects of running the business – run by the manager.
However, in terms of taxation, an LLC is not considered separate from its owners. Instead, it operates like what the Internal Revenue Service (IRS) calls a “flow-through entity,” just like a sole proprietorship and partnership. In this type of entity, business income flows through the corporation to the members of the LLC, who then report their share of the profits or losses on their individual income tax returns.
The tables below summarize the advantages and disadvantages of an LLC.
Regardless of the structure, no company is completely immune from lawsuits. Even with all the necessary risk management strategies and safety precautions in place, errors and accidents can occur in your day-to-day operations. And depending on the severity of the damage, a single lawsuit can have massive financial consequences for your company. This is especially true of the many small businesses and startups that comprise the LLC population across the country.
This highlights the importance of liability insurance for an LLC. This set of policies provides protection for your business assets against injury and property damage claims for which your business is legally responsible.
While many types of coverage are not mandatory, it is helpful to have some level of protection in the event of unforeseen events. Some policies may cost more than others. But given the type of protection they offer, the coverage you pay could spell the difference between keeping your business or stopping operations.
Liability insurance is one of the most popular policies taken by companies because of the protection it provides, but there are many types of coverages available. Find out how other forms of business insurance can help you get through tough times in this comprehensive business insurance guide.
Do you think liability insurance for your LLC is a worthwhile investment? Can LLCs survive without one? Share your thoughts in the comments section below.
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