Commercial general liability insurance (CGL), is a basic form of coverage offered by liability insurance companies to protect against the financial burdens arising from an array of risks, including: bodily injury, property damage, medical payments, personal liabilities and advertising liabilities.
Outside of its presence in the licence criteria of certain specialised professions (e.g. construction contracts, real estate agents and dentists to name a few), it is not generally mandated by law. While it is not a legal requirement, small businesses may discover it is a ‘soft’ operating requirement in some industries and a highly recommended investment at the very least.
A Brief Overview
During a 2016 report conducted by Insureon that surveyed more than 1,000 small business owners over the course of 12 months, the following was brought to light:
- 35.3% of small businesses experienced an incident covered by insurance that could have led to litigation in the 12 month period
- The Hartford’s much cited 2015 report on claims data predicted roughly 8.8% of small businesses would make an insurance claim per annum
- This suggests that small businesses are experiencing the kind of risk events that trigger insurance claims, but aren’t filing for them
- Likely because the cost of dealing with the claim externally is less significant than the effect of a claim on insurance premiums
- Despite this, 60% of business continue to be insured in this way
Why would the majority of businesses carry on with CGL if by seemingly all accounts it is redundant and not generally legally required?
An Extra-Legal Necessity
Beyond the need for CGL when applying for a professional licence in some US industries, a necessity for CGL can exist that isn’t legally enforced; an ‘extra legal necessity’ permitted to subsist by the common practices of businesses. For example, when contractors, engineers or landscapers (to name a few) sign a contract with a larger company, the latter often requires the former to possess CGL in order to hire them as part of a greater project. In this way, small businesses may find a necessity for CGL in order to remain competitive with their counterparts.
Landlords may also ask architects, electricians and other professionals to provide a certificate of insurance as proof of CGL insurance coverage before allowing them to sign a lease for an office or workspace. This document demonstrates to the landlord that the professional is verified as capable of being able to deal with any personal injury or property damage lawsuits that could arise. More importantly, the property manager has peace of mind that they won’t be stuck paying the costs of a lawsuit against the tenant.
A Highly Recommended Investment
Small businesses may also own CGL where there is neither a legal nor extra-legal necessity for it, merely because it is a smart investment. Whilst the cost for each specific business can vary based on a number of indices - namely: amount of coverage, industry and risk factors, location, number of employees - CGL costs are relatively cheap, at an average of $42 per month. This is important when considering the cost of claims small businesses can be exposed to: fire damage (up to $35,000), customer slip and fall ($20,000), customer injury ($30,000) and property damage ($30,000). Moreover, at a paltry $300-$1000 a year for insurance that can protect against all these categories of claims, many small businesses will choose to opt for CGL because they would rather foot the bill of $428 for general liability to pick up the tab than a $30,000 bill in legal fees. This persists even if the business only files 25% of risk events that could lead to litigation (for fear of premium rises), because that 25% is more than worthwhile.
Concluding Remarks
Thus, apart from specific instances, CGL offered by liability insurance companies is not generally required by law in the US. Despite this, most small businesses will find that they need it regardless, either because: (1) an extra-legal need renders it impossible to operate/maintain competitive in their industry without it, or (2) the potential cost of exposure to expensive legal fees far exceeds the low cost of average of CGL.
