Insurance Guide: Liability Insurance For The Self-Employed

By Marshall Lee

After 18 months of self-employment, business is booming. Carl’s Careful Carpentry is in the black: you’ve recouped your investment, paid your debts, and customers are lining up around the block. You’re a born solopreneur, and your future’s looking bright.

Until…on an otherwise unremarkable day, you leave one of your tools lying around a worksite. Your client, distracted by a his cell phone, trips over the tool and falls, hard. A broken wrist. And by the weekend you’re receiving calls from an attorney. Your client—he seemed like such a nice guy!—has filed a claim against your business. If he wins the case, your business will go belly-up, and you will spend the next few years fighting to rebuild your reputation and your finances.

Unless, of course, you’ve got the right insurance.

Not Just for Carpenters: Why Buy Liability Insurance?

Merriam-Webster defines liability as, “The quality or state of being responsible for an action; especially in the case of a financial obligation.” Responsibility is a good place to begin when it comes to understanding liability. You have a responsibility, as a self-interested individual, to protect yourself and your business from excessive risk. The problem: when you own a business you are always one step—one trip, one slip—away from liability.

For better or for worse, we live in a litigious culture. Now that we’ve established legal precedence for nearly every act of neglect, injury, and accident, it is easier than ever for a plaintiff with a grievance to convince a judge that someone else should pay for their distress.

And in the business world, distress comes in a lot of flavors: if you are a roofer, then a customer can sue you over leaks; if you are a CPA, then a customer can sue you over bad advice. Anything that results in loss of income, mental anguish, physical pain, or professional turmoil is fertile ground for a lawsuit.

The very simple rule of thumb? Better Safe Than Sorry. This is where liability insurance, or LI, comes in. LI is the safety net protecting you, your business, your finances, and your family from frivolous lawsuits.

According to the Insurance Information Institute, about 40 percent of solopreneurs and small business owners have no insurance at all. Self-employed people often claim that they are cash-constrained and cannot afford business insurance, but the truth is that not carrying insurance can cost a lot more, indeed, MUCH more than an annual premium. By neglecting to insure yourself you are risking not just your income, but your livelihood, your ability to earn money now and in the future. and your personal assets.

Are you convinced? Okay, then it’s time to start looking for an LI plan that fits your business.

Finding the Right Coverage at the Right Price

I recommend that you begin by sitting down with an insurance agent to find out what type of coverage your business needs. Depending on your profession, you may need either Comprehensive General Liability Insurance (CGL), Contractors Liability Insurance, Small Business Liability Insurance, or Personal Indemnity Insurance. An agent doesn’t see a cent until you sign a contract, so think of this first meeting as a bit of free advice; you still have the option of shopping around and comparing quotes from different providers.

CGL insurance for example, usually does two things. First, it covers you in the case where you are negligent and someone gets injured as a result. Second, often, it will also cover the cost of your legal defense in that case. So you can see why it is so valuable.

Your annual premium will depend on the type of business you own, as well as the amount of coverage you choose to purchase. Before you sign a contract shop around online, and make sure you carefully inspect every policy. Ask an agent or a representative to explain any items that you find confusing. By asking the right questions, you might uncover gaps in the policy that could lead to problems in the future.

While certain business structures such as LLCs protect your personal assets in the event of a liability claim, generally they do not protect you personally from professional malpractice or wrongdoing. And there is always the possibility that an attorney will find a means of stripping back your corporate shield in order to expose you to personal liability in the event of a lawsuit. Think of the attorney as a shark. If the water’s full of fins, then you definitely want a sturdy cage before you make the plunge.