Business Insurance: What You're Actually Buying

We had general liability insurance when a client claimed that work we had delivered caused them a financial loss. We assumed the insurance would respond to the claim. The insurer explained, politely and in writing, that general liability does not cover claims arising from the quality or accuracy of professional services. That is what professional liability insurance is for.

We had general liability. We did not have professional liability. The claim was eventually resolved without a payout, but not because the insurance helped. We had been paying for a policy that did not cover the risk we actually faced.

What general liability covers

General liability insurance covers third-party claims for bodily injury and property damage. If a client visits your office and is injured, general liability responds. If your work causes damage to a client's physical property, general liability responds. If someone claims defamation or copyright infringement in your advertising, general liability may respond, depending on whether your policy includes personal and advertising injury coverage.

General liability does not cover claims arising from your professional work product. It does not cover financial losses a client claims resulted from your advice, your deliverables, or your errors. For a business that provides services, recommendations, or expertise, the most likely claims against you are not bodily injury or property damage. They are professional failures.

What professional liability covers

Professional liability insurance, also called errors and omissions (E&O) coverage, covers claims that your professional services caused a financial loss to a client. If a client sues you claiming your advice was wrong, your deliverable was defective, or your work was negligent, professional liability is the coverage that responds.

For any business that provides services, advice, or expertise, professional liability is the coverage that actually matches the risk of what you do. General liability does not.

Professional liability policies are written on a claims-made basis, meaning the policy that responds to a claim is the one in force when the claim is made, not when the work was done. When you switch insurers, you need either a new policy with a retroactive date that covers prior work, or tail coverage from your old insurer extending coverage for claims arising from prior work. Switching without one of those creates a gap in coverage that may not be obvious until a claim arrives.

What a business owner's policy is

A business owner's policy (BOP) bundles general liability coverage with commercial property coverage in a single policy. For a business with a physical location and physical assets, the bundle is typically cheaper than buying each coverage separately.

The property coverage in a BOP covers your business property against covered losses: fire, theft, water damage, and similar perils. It does not cover everything, and the exclusions matter. Flood damage is typically not covered by a BOP and requires a separate flood policy. Earthquake coverage is often excluded. Business interruption coverage, which covers lost income if your business has to close temporarily after a covered loss, is included in most BOPs but with limits that may not reflect your actual revenue exposure.

A BOP does not include professional liability. It does not include workers' compensation. Combining a BOP with professional liability and workers' compensation coverage is the baseline stack for most service businesses with employees.

Workers' compensation

Workers' compensation insurance is required by law in almost every state for businesses with employees. The requirement applies from the first employee's first day. It covers medical expenses and a portion of lost wages for employees injured on the job. It also protects the employer from employee lawsuits arising from workplace injuries in states where workers' comp is the exclusive remedy.

The premium is calculated based on your payroll and your industry classification. Higher-risk industries pay higher rates. A desk-based service business pays substantially less than a construction company. The premium is real but not typically large for low-risk operations.

Operating without required workers' compensation is an exposure on two dimensions: the state may fine you, and if an employee is injured without coverage, you are personally liable for the cost of their care and any wages they miss. The coverage exists to protect both the employee and you from that scenario.

The assessment to do once a year

Sit down with your policies annually and ask: if the most likely bad thing happened, does my coverage respond to it? For a service business, the most likely bad thing is a client claim about the quality of your work. Professional liability responds. For a business with a physical location, the most likely bad thing is damage to that location or its contents. A BOP responds. For a business with employees, an injured employee creates a workers' comp claim.

If the most likely bad thing is not covered by the insurance you have, the insurance you have is not doing the job you think it is doing.

We paid for coverage for two years that would not have responded to the claim we actually faced. Nobody reviewed our policies with us before we needed them. We are telling you to do that review now, before something happens that tests what you actually have.