General Liability vs. Professional Liability: What Business Owners Need to Know

In the process of helping entrepreneurs with business formation, business maintenance and business expansion, we often encounter business owners who are uncertain about the types of liability insurance they need. 

Understanding the distinctions between general liability and professional liability insurance is crucial for protecting your business from potential legal and financial risks. This article will help you understand these types of insurance, how they differ, and why many businesses carry both types of insurance.

Brief Overview of Liability Insurance

Liability insurance is designed to protect businesses from claims that result from injuries, property damage, and errors or omissions in the services provided. The two primary types of business liability insurance are general liability and professional liability insurance. Each serves a different purpose and covers different types of risks.

Knowing the differences between general and professional liability insurance can help you make informed decisions about the coverage your business needs. This understanding ensures that you are adequately protected against the specific risks your business may face.

What is General Liability Insurance?

General liability insurance protects your business from claims involving bodily injuries, property damage, and other physical risks. This type of insurance covers:

• Bodily Injury: Injuries to third parties that occur on your business premises.
• Property Damage: Damage caused to someone else's property by your business operations.
• Reputational Harm: Claims of libel, slander, or defamation.
• Advertising Errors: Copyright infringement claims related to your advertising efforts.

Some examples of situations where general liability insurance is applicable include:

• A customer slips and falls in your store, resulting in medical expenses.
• An employee accidentally damages a client's property while on a job site.
• A competitor sues your business for defamation due to a statement made in an advertisement.

What is Professional Liability Insurance?

Professional liability insurance, also known as errors and omissions (E&O) insurance, protects your business from claims related to services you provide. This type of insurance covers:

• Negligence: Claims that your professional services were inadequate or caused harm.
• Errors and Omissions: Mistakes or oversights in the services provided.
• Contractual Breaches: Failure to meet contractual obligations.

Some examples of situations where professional liability insurance is applicable include:

• An accountant makes an error on a client's tax return, resulting in penalties.
• A consultant provides advice that leads to financial losses for a client.
• A web developer's mistake causes a client's ecommerce site to lose sales.

Key Differences Between General and Professional Liability Insurance

With a clear definition of each type of insurance, it’s easy to summarize the key difference between them as follows:

• General Liability Insurance: Covers physical risks such as bodily injury and property damage.
• Professional Liability Insurance: Covers risks that are more abstract, such as errors, omissions, and negligence in professional services.

Because of the differences in what they cover, general liability and professional liability insurance are most often associated with certain types of business. For example:

• General Liability Insurance: Retail, construction, manufacturing, and other industries with physical operations.
• Professional Liability Insurance: Legal, medical, financial, consulting, accounting, and other professional services.

A typical claim scenario for each insurance type may look like the following:

• General Liability: A customer injury on your premises.
• Professional Liability: A client suing for financial losses due to professional advice.

Given all the above, many businesses carry both types of insurance. For instance, an insurance agency will often have professional liability/E&O insurance to cover potential professional services liabilities and general liability insurance to cover potential injuries to visitors to their offices.

Advantages & Drawbacks of General & Professional Liability Insurance

General liability and professional liability insurance exist to provide coverage for different, specific types of liabilities. Each is well-suited to provide coverage for unique business needs. The tables below provide some insight into distinctions between the two.

How to Decide Which Insurance is Right for Your Business

A reputable insurance agent or broker can help you choose the right type and amount of coverage you should have. These licensed and trained professionals will consider the nature of your business operations, the types of obligations you have, your risk exposure, your own personal tolerance for risk, along with factors such as legal requirements, recent trends, events, and legislation and other critical factors.  With so much at stake, working with a professional you like, and trust is essential.

Conclusion

Understanding the differences between general liability and professional liability insurance is vital for adequately protecting your business. Both types of insurance cover distinct risks and are essential for different reasons. Consulting with an insurance professional can help you determine the best coverage for your specific business needs, ensuring you are protected against potential legal and financial challenges.