Does Business Insurance Cover Lawsuits?
Lawsuits are a part of operating a business. According to data, 2021 saw 1,548 workplace-related rulings delivered, setting a new record for business lawsuits.
Businesses that lack insurance pay the heavy price of legal cases that can often leave their operations crumbling. Business insurance, such as general liability insurance, usually protects against these potential lawsuits, ensuring you can pay for the settlement and legal fees.
Here’s what you need to know about lawsuits coverage by business insurance policies and how you can stay financially afloat amidst rising legal fees and settlements.
The Different Types of Business Insurance and How They Cover Lawsuits
Business insurance covers a broad range of lawsuits. That’s because businesses can be sued for various reasons, such as a data breach, server outage, or car accident.
Depending on your policy, you will get protection against a selected group of cases. Here’s the breakdown.
General Liability Insurance
General liability insurance covers lawsuits brought by external parties to your company. These lawsuits typically cover third-party property damage, bodily injury, defamation such as libel or slander, false advertising, and copyright infringement.
General liability insurance is very affordable for most small businesses. Moreover, it is a common requirement in client contracts, office leases, and mortgages. It is a highly recommended insurance policy for companies with a public storefront that regularly interacts with clients.
Most insurance providers recommend a business owner’s policy (BOP) that bundles general liability and commercial property insurance, protecting against a wider range of lawsuits arising from liability and property risks.
Cyber Liability Insurance
Cyber liability insurance covers the cost of data breaches and other cyber incidents that occur in your business or with clients. This includes legal fees for regulatory penalties and fines, finding and fixing a security flaw, customer breach notifications, crisis management and public relations, credit and fraud monitoring, and cyber extortion demands.
The businesses and professionals highly at risk of expensive lawsuits resulting from cyber liability include database administrators, cybersecurity companies, network design businesses, and software developers.
Errors and Omissions Insurance
Also known as professional liability insurance, errors and omissions insurance protects business owners from third-party lawsuits related to mistakes, negligence, and professional oversights. This includes the following:
Breach of contract
Accusations of negligence
Errors and omissions (E&O) insurance protects your business regardless of who is at fault. It is an essential coverage for small businesses providing expert advice or services.
Directors and Officers Insurance
Directors and Officers (D&O) insurance protects corporate officers and board members from lawsuits related to decisions they make for the company. This type of business insurance covers the following common cases:
Lack of compliance with industry regulations
Failure to follow corporate bylaws
Libel or infringement of intellectual property
With directors and officers insurance, executives don’t have to pay for legal fees out-of-pocket. Investors, officers, and directors often ask for proof of D&O insurance before agreeing to work with your business.
Employment Practices Liability Insurance
This type of business insurance covers employee lawsuits related to discrimination, harassment, and other violations of employee rights. These also include claims of wrongful termination, breach of employment contract, mismanagement of benefits, privacy invasion, and breach of employee contract.
An employee practices liability insurance policy is an excellent investment for a small business with several employees. This insurance is often sold as a claims-made policy, meaning your insurance policy must have been active when the incident occurred, and the lawsuit was filed.
Employee practices insurance policy doesn’t cover employee injuries. For lawsuits regarding employee illnesses and injuries, you need coverage from worker’s compensation insurance.
Hired and Non-Owned Auto Insurance
Hired and non-owned auto insurance (HNOA) protects businesses from liability lawsuits for accidents in leased, rented, or personal vehicles used for business purposes. This insurance covers cases regarding bodily injury and property damage liability.
If your business involves employees using vehicles to make deliveries or visit clients, you should have a hired and non-owned auto insurance policy. Personal car insurance policies are not enough to cover business vehicles.
The standard policy for hired and non-owned auto insurance only provides liability coverage. If you want your personal vehicle protected for business purposes, you should get commercial auto insurance, including collision or comprehensive coverage.
What Are the Limits on How Much an Insurance Policy Will Pay?
All the listed business insurance policies will cover legal costs associated with your business. However, they have a limit.
The limits imposed by an insurance policy on lawsuits vary. The insurance provider will typically provide limits on an occurrence or incident and general aggregate basis.
The limit on an occurrence or incident dictates the maximum the insurer will pay for a single event or lawsuit. This limit typically rises with the premiums you pay and the risks covered by the policy.
Occurrence or incident limits can also vary based on the lawsuit. For instance, an insurer may offer different limits for cases regarding slander, libel, or a privacy-related lawsuit.
The general aggregate limit dictates the maximum the insurer will pay for all incidences over a given period. This limit also depends on how much you pay for premiums and the risk covered. The more you accrue lawsuits, the closer you reach your general aggregate limit.
The general aggregate limit does not always refer to the same pool of money. The insurer may provide a complete operations and products aggregate, separate from the available aggregate, based on how claims are typically processed.
For instance, claims from product liability lawsuits are typically processed and delivered in batches. If this money is processed from the same pool as other claims, you may draw your yearly total from one incident, leading to a lack of coverage for others.
You should discuss with your insurer how they separate their aggregates to understand how your policy will be affected.
Talk to an Expert
Lawsuits will always be a part of running any business. Apart from having the right coverage, you should always swiftly communicate with your insurer about upcoming claims and lawsuits against your business. This will give them enough time to investigate and prepare a response and defense for your case.
Contact an insurance professional today and learn how you can secure your business.