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What Is Liability Insurance?

Monday, March 24, 2014/Categories: errors-and-omissions

One essential component of a thriving technology company is business liability insurance adequate to protect against major financial and legal perils. But what is liability insurance, exactly?

In the context of small technology firms, this coverage has a distinct purpose. Read on for an in-depth explanation of what liability insurance is, how it works, and how it can protect the business you’ve worked to build.

What Is Business Liability Insurance?

Business liability insurance does for businesses what car insurance does for drivers: it protects you against the potentially costly events (including lawsuits and natural disasters) that could otherwise drain your assets.

While there are several types of business liability insurance available (including General Liability, Property Liability, and Errors & Omissions Insurance), they all offer three types of protection:

  • Legal defense for claims against your business. If one of your clients brings legal charges against your firm (e.g., that you failed to deliver on your promised services), you would need to defend yourself in court. Your liability insurance provider has a legal obligation to provide for that defense, which often means providing a lawyer to build a defense and present it in court.
  • Financial compensation for damages. If your firm is found liable in court (e.g., if the court finds that you did indeed fail to deliver on your services and that your failure caused your client a financial loss), your liability insurance will pay the damages for which you are found liable, up to the limits of your policy. In other words, if the court rules that your negligence caused $250,000 in damages to your client, your liability insurance will pay that amount.
  • Settlement of claims when appropriate. What is especially helpful about liability insurance is that insurance providers have a legal obligation to settle claims against your business when possible and appropriate. If, for example, you stand to be liable for an amount that exceeds your policy’s limit if you go to court, your insurance provider has an obligation to settle out of court to prevent you from having to pay additional judgment expenses out of pocket.

What Is the Benefit of Liability Insurance?

In short, liability insurance is what allows you to avoid significant, unexpected expenses that could derail your company financially. By paying a small amount in the present (in the form of your liability insurance premium), you buy yourself the assurance that your insurer will cover large expenses that occur in the future.


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