Running a business comes with many risks. A customer might sustain some injury due to a fault in your product. Another customer might file a lawsuit against your company for alleged damages sustained as a result of your company’s action or inaction. Just as you would protect your business against property theft, fire, and other disasters, you need protection against lawsuits.

Without liability insurance, if a customer files a lawsuit and you lose, you will have to pay the judgment yourself. And of course, this can financially devastate your business and personal finances. Liability insurance is of three types:

In some states and countries, certain businesses are required to maintain liability insurance due to the type of services they render. Examples include medical service providers. In fact, some businesses require more than one liability policy to meet state or country laws and to ensure total protection.

What Liability Insurance Does for You?

By purchasing a liability insurance policy, you demand three duties from the insurance companies when the need arises:

  • The duty to defend
  • The duty to indemnify
  • The duty to settle a reasonably clear claim

The duty to defend

When a customer or another third party sues you, you are expected to tender defense of the claim to the insurance company. You will do this by sending a copy of the complaint along with a cover letter referencing your liability insurance policy and demanding an immediate defense. The insurance company can then respond in one of three ways:

  • Seeking a declaratory judgment of no coverage
  • Defend you against the complaint
  • Refuse to do either of the two above

If the insurance company seeks a declaratory judgment of no coverage, it no longer has to defend you against the complaint or lawsuit. On the other hand, if the insurance company decides to defend, it has either waived its defense of no coverage, or it must defend under a reservation of rights. This reservation of rights means that the insurance company reserves the right to withdraw from defending you if they discover that your claim is not covered.

If the insurance company chooses to defend you, it may either defend your claim with its own in-house lawyers or give the claim to an outside law firm.

  • The duty to indemnify

This refers to the duty to pay all funds for which the insured is held liable up to a set policy limit.

  • The duty to settle reasonable claims

Insurance companies also have the duty to settle a reasonably clear claim against you. This usually happens in situations where your settlement demands exceed the limits of your policy. In that case, the insurance company has an excuse not to settle your claims.

How to Calculate your Liability Insurance Rates

Having understood the basics of liability insurance, let’s now discuss how it is calculated. Many policy holders have no idea how the figures came about. Of course, there is no rule that you must know how to calculate it, but it helps to understand it. Here are the steps you should take in order to accurately calculate your liability insurance

Step 1-: Contact the Department of Insurance in your state or country to make inquiries regarding the required policies required for the type of business you run. In some states or countries, there are regulations as to how much coverage you must purchase. For example, commercial trucking companies in the U.S. must maintain a general liability insurance of at least $750,000.

Step 2-: Contact insurance providers or seasoned professionals to find exactly what types of liability insurance your business needs. Ask for quotes based on government requirements, the size of your business, or the revenue your business generates. Most insurance companies base quotes for manufacturing and large distribution companies on sales revenues. However, for businesses such as consulting firms, liability insurance is based on the square footage of occupancy.

Step 3-: Calculate quotes by multiplying your insurance rates by the size or revenue (whichever applies) of your company. For example, if the quote is for 10 percent, multiply your gross revenues by 0.10 to calculate your cost. Similarly, if the quote is $30 per square foot, multiply $30 by the area of your office space in square feet.

However, you must bear in mind that some insurance companies provide discounts for multiple policies. So, if you are sure you have qualified for any of such, ask the insurance agents you are dealing with so you can get the lowest rates possible.

Ajaero Tony Martins