Do You Need Liability Insurance?

Even small-time entrepreneurs might want to consider protecting themselves from potential lawsuits.

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After learning about why small business owners should consider forming an LLC to protect their assets, we started wondering about other ways entrepreneurs can protect themselves financially. What if the part-time knitter who starts selling her creations online gets sued by a buyer who has an allergic reaction to the wool? Or what about the science fiction writer who publishes his e-book through Amazon, only to get sued for infringing on another writer’s copyright?

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That’s where liability insurance, which covers legal fees as well as any potential settlements, comes in handy. “In general, it’s good for anyone to have it, especially if you’re making physical contact with clients or they’re coming to your home,” says Meg Mateo Ilasco, author of Craft, Inc.: Turn Your Creative Hobby Into a Business. Liability insurance is usually relatively affordable; basic coverage for up to $1 million typically starts around $200 a year.

Here are five questions to ask yourself when you’re deciding whether to take out liability insurance:

What harm could your product or service cause?

“When I talk about crafts, I always say the three most harmful things are candles, bath and body products, and baby products,” says Ilasco. Ilasco suggests that anyone selling them look into liability insurance, which might require extensive product testing to first ensure the products are safe for distribution.

What are the other risks of your business?

“If you’re selling products, then you want product liability coverage. If you have third-party traffic [coming into your home or workplace], then you want slip-and-fall coverage,” says James Duggan, a wealth planning attorney based in Chicago. Likewise, someone with employees will want to make sure they have coverage for sexual harassment claims, he adds. After brainstorming about potential risks and liabilities, you can delve into the coverage that makes the most sense for you, which brings up the next question.

What type of coverage applies to your situation?

Richard Law, president of Allstate Business Insurance, suggests working with a local agent or insurance adviser to make sure you get the right type of coverage. A blogger or publisher of e-books might need some kind of copyright or cyber liability coverage, for example. “There are now boutique types of liability coverage, from data recovery to copyright infringement,” Law says.

Indeed, the complexity of the liability insurance world often means that people end up getting the wrong type, or they don’t understand the exemptions that apply so they have less coverage than they think, adds Duggan.

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Do any of your contracts require it?

Ilasco didn’t get liability insurance when she was just selling her stationary online, since she figured there was little chance of someone suing her for a paper cut. But once she started selling in rented-out spaces at sample sales, she took out liability insurance. The rental space required her to have it, and she also wanted to make sure she was protected in case someone got hurt or injured at the sale.

Ilasco points out that many insurance companies also offer event-based coverage that lasts for the duration of a product sale or craft fair. She also has a rider on her home insurance the covers any damage to her products.

How big is your business?

If you sell just a handful of products in your spare time, taking out a separate policy might be overkill. Instead, says Duggan, you can probably add additional coverage to an existing homeowners’ insurance policy, for example. He recommends reviewing the policy closely and paying special attention to any exemptions to make sure you’re covered in the right areas.

Twitter: @alphaconsumer