Liability insurance covers claims as a result of actions for which your business is legally liable (responsible). It is important to point out that you can be held liable for the actions of people acting on your behalf, paid or volunteer, under the doctrine of respondent superior. Under this doctrine the business (the master) can be held vicariously liable for its employees (servants or agents) misdeeds if the employee is operating within the scope of their duties. If you, or your employee, is at fault for an accident - or someone claims that you are, you may be expected to reimburse the cost of damages to another person for their injuries or loss of property resulting from that accident.

This includes incidents involving your vehicles, as well as those which may occur on your businesses premises (i.e. slip and fall), as a result of your products (product liability, as in the Tylenol scare), or your actions (professional liability, as in liable, malpractice, etc.).

Example - Your own a florist, someone forgot to turn off the hose watering the Azaleas, Customer A comes in and slips and falls, crashing into the refrigerated glass case. Customer B witnesses it all. Much blood and an emergency room visit later, Customer A is now treating with the Skull and Bones Chiropractic Clinic and is represented by Dewey, Cheatum and How. They have Customer B's sworn statement about how negligent you were in leaving the water running. They only want $15,000 (so what if Customer A only has $1,000 in medical bills, he's had a lot of pain and suffering!) to settle, or they'll file suit. If you have liability insurance, the insurance company is already handling the demands of the attorney; and if suit is filed, the insurance company will handle your legal defense against the suit.

OR

Your part-time worker is distracted as she delivers those brochures the insurance company replaced, and rear ends a brand new Lexus. The other driver isn't hurt, but she is livid that she no longer has a trunk. She also uses her car in her real estate business, so needs a comparable rental vehicle. Ouch. And the U Wreck 'Em, We Rack 'Em body shop is delighted - her son needs braces. If you have adequate liability insurance, you hand the whole issue over to your insurance company and relax.

It is important to know that if you use your personal vehicle in your business, there is a strong possibility that your personal auto policy may not cover liability claims for damages resulting from an accident during the conduction of business activities. You would be wise to look into a Commercial Auto Policy, or a business endorsement to your Personal Auto Policy.

Liability can also be purchased for non-owned vehicles. In instances where an employee delivers, or performs some other functions, for your business in their own cars. Most Personal Auto Policies exclude liability coverage when the covered auto is used for business. Unless, you choose to take your chances and go bare in these instances, call your insurance company or read your policy

There are many instances in which your business could become liable - legally responsible - for another person's claims of damages (including products liability, defamation, etc.) resulting from your actions or the actions of those working on your behalf. If you have the proper insurance, the insurance company takes the problem off your hands and pays for the damages up to the limits you have chosen for each policy coverage (See Limits section). In addition, if you are served with a lawsuit, the insurance company absorbs all defense costs (including hiring an attorney on your behalf) and basically takes over the handling of the all legal issues. Even if the suit is frivolous. In most states, the cost of defense if over and beyond the policy limits you have chose for the policy.

Example - In the florist example, the insurance company determines that Customer A's demand of $15,000 is unreasonable. Customer A rejects the insurance company's counter offer and sues you. You turn the suit papers over to the insurance company within the specified time (varies state to state, but do it as soon as you are served). The insurance company hires the appropriate attorney and an answer is filed on your behalf. Defense costs in the amount of $8,000 are incurred since it goes to trial. The judge enters a judgment in the favor of the plaintiff (Customer A) for $4,000. To make matters worse, the witness is now making a claim citing that he was hit with flying glass when Customer A fell through the glass case. The policy limits you have chosen is only $10,000. No problem. The plaintiff is paid $4,000 and your policy still has $6,000 in coverage to deal with Customer B (the witness).

You can, always, involve your own counsel at any time in the process.

In summary, liability insurance takes care of claims for injury, or damage to property, to other people not associated with your business. And it protects you in the event one of those people decides to sue you - no matter the merit of the lawsuit. You simply hand the whole ordeal over to the insurance company. However, no policy covers every event; and every policy varies. You must take a look at your operation and discuss possible exposures from which you need protection:

• Do you operate off-site?
• Serve alcoholic beverages at functions?
• Sell products that could cause harm?