Business Owners Should Consider Small Business Liability Insurance

Liability insurance is defined as a risk limiting and distributing device, wherein a person known as the insured undertakes to pay a certain amount in fees and premiums to a common fund under the control of the insurer, which will be responsible for paying the amount of judgment on a lawsuit or any other claims that may or may not be brought about by the acts or omissions of the insured, provided the same is covered by the policy and not specifically exempted by it.

As a general rule, injury and damage caused intentionally or falling directly within the coverage of a contract is not subject to liability insurance. As such it is geared more towards non contractual liability and third party liability. In addition the payment will be given directly to the injured party or the representative of the injured party, not the insured. A very important tip to remember when looking for liability insurance is to realize that the size of the business as well as the type of the business is relevant in terms of coverage as well as fees and premium amount.

Small Business Owners

Liability insurance is especially relevant to small business owners and startup companies because they are generally limited in terms of liquid assets. This is because most of the liquid assets of the individual owner or owners have been invested towards the business or the enterprise. This means that should they encounter a liability that is way beyond their capacity to pay, the assets of the business have to be liquidated to meet the obligation. Now, if the assets liquidated are necessary for the continued existence of the company then this means the business shuts down.

Two Scenarios

The first scenario is Mr. X puts up Company XYZ, a trucking company. Due to shortage in the initial business capital Mr. X chose to prioritize the establishment and acquisition of necessary business permits, certificates, lease of a warehouse, the purchase of 2 brand new tractor type trucks and the hiring of employees. Mr. X believes that he has enough time, after recouping his expense, of purchase the necessary liability insurance. Fast forward a few months but still Mr. X does not purchase the necessary insurance. This is because he is of the notion that he has been operating safely for several months now, why waste money on liability insurance. The second scenario is Mr. Y, who puts up substantially the same business, named it Company YZA, did the same things, but chose to buy cheaper tractor type trucks and a smaller warehouse to be able to afford liability insurance.

Suppose each of their trucks meet with an accident, trucks become a total loss, the goods shipped become wastage and they are sued by the other party to the accident and by third parties who were adversely affected by the accident. Who do you think would come out of the debacle unscathed, and who among the two will still be able to continue with the business? Mr. X may have insurance to pay for the repair or replacement of the truck but the liability incurred to the other party and third party will probably eat up even that insurance money. Mr. Y can still replace the truck and use the liability insurance to pay for the claims filed against his company.

Who would you rather be, Mr. X or Mr. Y? Most of you would probably answer Mr. Y but statistical data show that a great majority of business owner chooses not to enroll their companies on liability insurance, and even if they do enroll it, the insurance amount is way below the actual need of the company. Both scenarios play out day in and day out but there are more Mr. X's than Mr. Y's.

Remember these simple statistical facts: The longer you choose to ignore the enrollment of liability insurance the more likely it is for you to believe it to be unnecessary, regardless of how well your business is doing. The earlier you acquire liability insurance the least likely you are to forego the same. Hence, when talking about insurance it is better to enroll sooner rather than later.

In Closing

The discussion as well as the scenario does not only apply to small business or startup companies. This also finds application to manufacturing companies, service providers, sellers of goods, etc. Why gamble on the fact that you will not meet with third party liability if logic and statistical data dictates otherwise? Remember, business expenses increase as the business income increases and insurance fees and premiums also increase based on the size of the business so putting off insurance coverage for latter will not really make things easier for you.