Insurance costs for businesses can be expensive. It can be tempting for companies with razor-thin margins to look at the money they spend on their various insurance policies as potential opportunities to cut costs. This is particularly true of the vague-sounding “general liability insurance,” often abbreviated as GLI. But companies are generally advised to carry GLI. So why is that?
Companies composed of thousands of individual employees, vast intellectual property rights, brand recognition and physical assets like land, buildings, equipment and inventory – are similar in many respects to people. Not just in terms of having a “personality,” but in practical ways as well. Businesses, like people, can enter into contracts. Business can sue and be sued. They can go bankrupt. Corporations, specifically, can be held criminally liable for wrongdoing. They even have First Amendment rights!
Just as individuals seek to manage risk with insurance, so too do businesses. Just as individuals insure their vehicles, so too do businesses. Just as individuals insure their homes, so too do businesses insure their buildings. But the insurance risks of businesses are larger and more varied than those of individuals. Because of this, businesses often have a variety of specific types of insurance. This includes professional liability insurance, product liability insurance and cyber security insurance, to name a few.
With all of these different types of insurance covering so many specific situations, it might seem wasteful and overcautious to add a GLI policy. But, as we discuss in this post, it’s absolutely essential.
Crucial for Managing Risk
Risk management is all about identifying, quantifying and mitigating risks. If you have a company that manufactures fire suppression products, an obvious risk is that the product does not work and property and lives are lost or damaged. That is a massive risk that such a company would attempt to manage with product liability insurance.
Other risks might be so unlikely, or would have such a minimal impact, that a company may feel it’s safe to leave unaddressed.
A company doing business entirely in the Rocky Mountains, for instance, might conclude that it doesn’t need hurricane insurance because the likelihood of a hurricane impacting them is so low.
Similarly, they may not feel they need to insure the risk of broken coffee cups in the breakroom because the financial impact of a broken coffee cup is so low.
Safety Net for Insurance Gaps
Areas where risks exist but are not insured are called “insurance gaps.” Some gaps are obvious and intentional, such as the hurricane and coffee cup examples above. Others may be buried in the conditions and exceptions of an insurance policy. Perhaps a product liability insurance policy contains an exception for losses resulting from work done by certain categories of workers, for example. The company could still face significant liability if something goes wrong. But the company would be left to face that liability on their own if they had to rely solely on that one policy.
GLI can serve as a safety net for insurance gaps. A net is an apt analogy, because GLI policies don’t necessarily cover every possible scenario. A company that has a GLI policy might still find itself with insurance gaps in some situations. But one of the primary purposes of such a policy is to plug some of the holes left by more specific policies.
Customers and Other Business Partners Might Require It
While carrying GLI helps a company look after its own interests, it’s also often a requirement another company will impose before they’re willing to do business together.
When companies work together, either as vendor-customer or business partners, there’s always the chance that one company’s actions will harm the other. Requiring the other company to carry insurance, including GLI, is a very common means of protecting against that risk. GLI also removes some the of uncertainty over whether the company causing harm can actually pay for the damage it causes. For this reason, carrying GLI is often a basic and non-negotiable prerequisite for forming many business relationships.
The costs of doing business can really add up for companies of any size. Margins kept low to stay competitive can be further lowered, or even turn negative, when factoring in seemingly tangential costs like insurance.
It can be particularly hard for some business owners to stomach shelling out money for GLI, which on its face doesn’t even seem to address a specific, identifiable risk. But that’s precisely the point. GLI is crucial for managing risks that aren’t obvious and for covering gaps between other, more specific insurance policies. Covering those gaps isn’t just important to the business holding the policy; it’s also a requirement for doing business with many potential customers and business partners.