General liability insurance covers incidents where your business is accused of causing bodily injury or property damage to a third party. Although businesses aren’t required to carry commercial general liability insurance by law, many find the coverage necessary in certain instances. Even when it isn’t required, it is a good idea to have at least some general liability protection.
Let’s look at when general liability insurance is required so you can be sure to have the right protection in place for the success of your business.
Why Small Business Owners Need General Liability Insurance
General liability is a fundamental policy that covers some of the most common exposures that a business faces. One study found that four out of 10 businesses will have to file an insurance claim at some point. While property claims like burglary tend to be more common, liability claims can be much more expensive because they involve lawsuits—which means paying:
- Attorney bills
- Court costs
- Any settlements or court-awarded judgments
When a lawsuit is involved, the average general liability claim averages more than $75,000 to defend.
But it’s not just the potential cost that makes general liability insurance a good idea. Businesses that have general liability insurance typically are viewed as more legitimate. People prefer to deal with a company that is willing and financially able to protect against common risks like slip-and-fall injuries or inadvertent property damage. Plus, some commercial landlords require tenants to have general liability policies, and local and state governments typically only work with insured businesses.
Tip: In some industries, it’s common for business owners to get bonded, and many think this protects their business. However, there is a difference between bonds and liability insurance. A bond protects the entity that hires the business owner. Meanwhile, general liability insurance protects the business owner.
4 Scenarios When Small Businesses Need General Liability Insurance
Here are some scenarios where general liability insurance may be required:
- Leasing property: Property owners are likely to require a company leasing property to obtain a general liability policy that also names the landlord as an additional insured. This releases the property owner of liability in claims where the tenant company is at fault. Often, landlords ask commercial tenants to get a minimum of a $1 million general liability policy.
- Getting a contract: When bidding for contracts, you may be asked to show proof of insurance to fulfill requirements. This is common when going after large contracts with the city, state, or federal government, but large private companies may only want to do work with insured businesses too.
- Subcontracting: Independent contractors often need general liability, particularly when they’re hired as subcontractors on a larger project. The general contractor often wants proof that they’re insured and responsible for their own actions and losses.
- Getting a state license: Some professions have state licensing requirements and, in some areas, one of the requirements may be to demonstrate a minimum amount of general liability insurance.
It’s important to note that a certificate of insurance lists information about your coverage and is sufficient evidence for anyone requesting proof.
How Much General Liability Coverage Does a Small Business Need?
General liability policies generally start with $100,000 in coverage. This is the minimum amount and can go upward for $10 million. Knowing that many claims average $75,000, it’s important to have at least minimum coverage, but businesses should consider increasing coverage for the outlier expensive claim.
As far as requirements go, how much general liability you need is usually determined by the entity requiring the insurance. If it is a landlord, you will likely need a minimum of $1 million in coverage. If it is another business, having minimum coverage may be enough as they typically want to know that you have protection.
What Is Required to Apply for General Liability Insurance?
Getting a general liability insurance policy is straightforward. The insurance company will want to know about your business so that it can properly underwrite the policy. Some of the information insurance companies want when you apply for general liability insurance policy include:
- Business address
- Business owner’s name
- Number of employees
- Annual revenue (projected if a new company)
- Claims history
When you’re in the process of getting general liability insurance, an insurance company may request information about your business property as well. This is because it is often more cost-effective for a business to get a business owner’s policy (BOP) that combines general liability and business property into one less-expensive policy.
General liability insurance isn’t going to be required of every business in all circumstances. Most likely, if you rent commercial space, subcontract, or go after contracts, you’ll need to demonstrate that you have general liability coverage. When required, it is up to the party requesting the insurance to set the minimum requirements, often $1 million in coverage.
Even if you aren’t required to get insurance, it is a good idea to obtain at least minimum coverage. Claims are expensive, and you don’t want to be liable to pay that out of pocket. Liability claims have bankrupted more than one business. Don’t let it happen to you.