General liability insurance versus professional liability insurance

If your next mission is starting your own business, you're in good company. Veterans own nearly 2 million U.S. businesses, according to the Small Business Administration.

Before you hang out your sign, it's critical to have the right liability insurance in place. Having adequate coverage helps protect your company — and possibly your personal finances — from claims and lawsuits that can threaten your ability to continue to do business as usual — or even stay open at all.

Choosing liability insurance can be confusing. USAA can help you assess your needs to determine which policies will best protect your small business. Coverage can vary by state and type of business. The two primary types of liability insurance are general liability insurance and professional liability insurance.

What's covered by general liability insurance?

General liability insurance, also known as commercial general liability insurance, is broad coverage designed to help protect small business owners from claims and lawsuits that may arise from common risks associated with owning a business. For many businesses, depending on state laws or industry standards, carrying a general liability insurance policy may be a mandatory requirement. Here's what may be covered by general liability insurance:

Bodily injury claims

If someone other than an employee claims they suffered an injury at your business, general liability coverage can help cover legal costs. This coverage may cover accidents like slips on wet floors or items falling on someone.

Medical bills

If the person who suffered bodily injury incurs medical expenses as a result, general liability insurance can help cover the cost of their medical bills, so you aren't paying out of pocket.

Property damage

General liability can provide coverage in the event you or your employees damage someone else's property. Perhaps you're working at a customer's home and your ladder falls and breaks their window. Maybe your receptionist spills coffee on a client's laptop. General liability insurance can help cover costs to replace these items.

Reputational harm

If a customer or business associate sues you for defamation of character claiming you damaged their reputation via slander, libel, malicious prosecution or privacy violations, a general liability policy helps with legal costs.

Advertising errors

This has to do with being sued for copyright infringement or false advertising. For example, if you accidentally or mistakenly use someone else's copyrighted work or advertising slogan without permission or if you make false claims in your advertising, then general liability insurance may cover resulting costs.

What's not covered by general liability insurance?

While a general liability policy protects you from a range of business-related risks, there are certain areas it doesn't cover.

Damage to your property

General liability insurance only covers the damage your business or employees cause to another person's property and not your own.

Employees injured while on the job

General liability insurance doesn't cover work-related injuries or illnesses sustained by your employees. Workers' compensation insurance covers those damages.

Professional mistakes or negligence

General liability insurance doesn't cover financial losses suffered by your customers or clients due to errors or negligence on the part of you or your employees. Professional liability insurance provides that type of protection.

What's covered by professional liability insurance?

To help protect your business from claims of negligence or financial harm resulting from your professional service or advice, you may need professional liability insurance. This type of insurance is also known as errors and omissions insurance, or malpractice insurance. It covers:

Negligence

Your business may be negligent if it fails to deliver the work promised to a client or misses a critical deadline. For example, one of your engineers falls behind on work, causing your client costly delays on a building project.

Misrepresentation

Misrepresentation occurs if your company shares false or misleading information to affect a client's decision to sign a contract. For example, one of your real estate agents fails to disclose to a client that their newly purchased home has existing construction issues, causing a major leak.

Inaccurate advice

Inaccurate advice occurs if you or one of your employees gives poor or inaccurate counsel to a client. For example, your accounting firm provides incorrect tax advice to a client that they act on, causing them to lose money.

Errors and omissions

Errors and omissions occur if mistakes made by your company result in financial loss for your client. For example, one of your IT professionals gives inadequate instructions to your client on how to use new software, resulting in high-dollar damage to your client's network.

Violation of good faith and fair dealing

A violation of good faith and fair dealing occurs if your business does something that deprives your client of the full benefits of a contract. For example, your interior design client doesn't receive all the furnishings promised in the contract, resulting in replacement costs and lost revenue.

Mistakes made by contractors

If a mistake is made by a general or third-party contractor who you hired to work on a client's project, you can still be liable. For example, after a client moves into a new building designed by your company, they find cracks in the foundation, which could mean costly repairs.

You can still be sued even if your business isn't at fault. Professional liability insurance can cover legal expenses that result from fighting false claims as well.

What's not covered by professional liability insurance?

While a professional liability policy helps cover a variety of unintended consequences, there are certain types of losses it usually won't cover. These include business auto accidents, work-related injuries and data breaches. Here are a few other coverage options you may want to discuss with your insurance professional.

Commercial auto insurance

If you use your vehicle for business, you may not be adequately protected by your car insurance policy. Commercial auto coverage typically includes owned and non-owned vehicles used for business. It could help protect you, your employees, contractors and passengers.

Workers' compensation

If your business has employees, most states require you to have workers' compensation coverage. It helps cover medical fees and lost wages for work-related illnesses and injuries.

Surety bonds

If a customer files a claim for unsatisfactory or incomplete work, a surety bond may help provide the money necessary to settle those claims. This could be needed for construction projects, professional licensing, permits and other situations.

Cyber insurance

Cyber insurance coverage helps protect your business from the cost of cyberattacks and data breaches. This includes hacking, ransomware and even credit monitoring for your customers.

What liability insurance do I need?

So, do you need general liability insurance, professional liability insurance or both? That depends on the types of risks your company may face, and how much of that risk you can afford to shoulder. To recap:

General liability insurance

This provides protection from common risks and mishaps that can happen in day-to-day business operations. Examples include a customer slipping in your store and damage to a client's property. General liability coverage is required for most commercial leases or contracts.

Professional liability insurance

This covers you if negligence or errors on the part of your business cause physical or financial harm to your clients. Examples include a dentist breaking a patient's tooth during a routine cleaning and an accountant making a costly error on a client's tax return. Professional liability coverage is required for some licensed professionals in certain circumstances.

In a nutshell, general liability insurance coverage is something that can benefit every small business owner. And if you provide professional services or give advice to clients, you should consider carrying both general liability and professional liability insurance.