Is your business one incident away from financial collapse? Guarding against that contingency with the right kind of liability insurance coverage is a practical solution for most business owners. But buying insurance isn’t easy. You can spend too much, or too little.

First, you need to review your own exposures as a business owner. In doing so it helps to understand the difference between the frequency of particular categories of insurance claims, and the typical amount of the loss.

Claim Frequency vs. Claim Cost

Some of the most common claim categories involve the least amount money, and vice versa. Here’s what one industry study reveals about the dynamics around liability insurance coverage. Over a five-year period, the following were the ten most common property and liability claims, and the percentage of policyholders filing such claims:

1. Burglary and theft: 20%
2. Water and freezing damage: 15%
3. Wind and hail damage: 15%
4. Fire: 10%
5. Customer slip and fall: 10%
6. Customer injury and damage: below 5%
7. Product liability: below 5%
8. Struck by an object: below 5%
9. Reputation harm: below 5%
10. Vehicle accident: below 5%.

The two categories that average the highest claims are reputation harm ($50,000) and vehicle accident ($45,000). And the least costly? Burglary and theft ($8,000).

It’s important to look at industry-wide claims data as a starting point. You need to look at the unique risks you and your business faces when you’re assessing your liability insurance coverage needs. In general, the less expensive the coverage, the more improbable it is that you’ll face a claim. But if you’re hit with a highly improbable claim, it might be enough to put you out of business if you lack insurance protection.

Assessing Liability Insurance Coverage Needs

Assessing your insurance needs involves the gloomy exercise of imagining a lot of worse-case scenarios.

More realistic concerns are injuries to customers, fire, and so on. Workplace injuries to employees are covered by a category of liability insurance, workers compensation. That’s legally required in every state except for private sector employers in Texas.

Some risks that you may face aren’t the first to come to mind. As noted, reputation damage is relatively rare, but very costly. How might it come about? Suppose a disgruntled former employee starts posting negative (and inaccurate) statements about your company in social media and it goes viral. It can hurt your sales and/or talent recruiting efforts. Or what if one employee mistreats a customer, and word of the incident spreads? Or, for the first time ever, a customer is seriously injured by one of your products (due to misuse of the product), and the event is blown out of proportion by the media?

Sometimes reputation risk and your exposure to cyber crime overlap. For example, suppose your customer database is hacked, and you need to warn customers to take extra precautions to limit their risk of identity theft. Such an event could not only leave a sour taste in the mouths of customers, but, when the word gets out, cause prospective customers to be wary of doing business with you.

Specialized Business Insurance Coverage

While specialized liability insurance coverage is available for risks like cyber crime and reputation damage, it is also often covered under the most basic kind of business policy you can get: general liability. If it is, you face the task of determining whether it does so adequately.

General liability insurance covers medical and legal costs associated with bodily injury and damage caused by your business. This includes incidents with customers on your premises, damage to property you rent caused by fire and other natural causes and “advertising injuries”–like running an advertisement violating a copyright.

If you own your own business real estate, you’d generally need commercial property insurance to cover most categories of damage that can occur. A business owner’s insurance geared to small business owners may be available that combines elements of general liability and commercial property insurance.

Employment practices insurance has become relatively common. It covers costs associated with discrimination, sexual harassment and wrongful termination charges.

The Role of Insurance Advisers

All liability insurance coverage available to you can be overwhelming. That’s where professional insurance brokers and consultants enter the picture. A smart broker take the time to recommend a plan of coverage that meets your needs and budget.

They will also generally advise you on steps you can take in a risk management effort to mitigate the hazards that your business faces every day. It may even make you eligible for lower insurance premiums.

Installing appropriate security devices is a basic first step, if you haven’t already done so. Also, to lower the risk of theft or other problems caused by employees, conducting criminal background checks as part of your hiring process, is recommended by liability insurance companies.

As the old saying goes, an ounce of prevention is worth a pound of cure. And when the “cure” you don’t want to face is settling a multi-million dollar claim against your business, the “prevention” of buying liability insurance wisely and instituting a risk management program, it’s a small price to pay.

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