Kickstarter Lesson #232: Everything You Need to Know About Liability Insurance

14 September 2017 | 16 Comments

“Wait, is that something I need for Stonemaier Games?”

This is a question I’ve asked dozens of times since founding Stonemaier Games 5 years ago. I have an undergraduate degree in international business, but so much of what I’ve learned about running a company has come from actually running a company.

My most recent deep dive into an area of business I know nothing about is liability insurance. I saw a few posts in the Tabletop Game Publishers Facebook group, and I started to wonder if Stonemaier Games needed this type of insurance.

I ended up working with Benjamin Arana at Kreismann-Bayer Insurance Agency. He’s exactly the type of person I’d want to work with for something like this: He wasn’t pushy, he answered all of my questions by my chosen mode of communication (e-mail), and when I made a decision, he acted quickly to set it up. If you read the following and decide you want liability insurance, you can contact Ben at barana@kreismannbayer.com.

I asked Ben if he’d be willing to answer some questions about liability insurance for the benefit of my readers, and he agreed. Thanks Ben!

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Most products these days have a variety of warnings and logos on them (e.g., choking hazard). Do those labels actually do anything to protect a company in the unfortunate situation that someone, say, chokes on a component?

Yes. Business product liability insurance protects on three fronts. No matter whether you are the product manufacturer, seller, or distributor, it will protect you from certain types of legal liability associated with a product defect that causes personal injury or damage associated with its use.

Three Potential Product Claims

  1. Manufacturing or Production Flaw. If the way you produce a product results in creating something that is unsafe, you can be held responsible.
  2. Defects in Design. If the way your product is designed causes harm to a consumer, you could be held responsible for damage or injury.
  3. Defective Warnings or Instructions. If your product is labeled improperly, i.e., leaves off warnings or contains unclear instructions, and the use of the product results in injury, you could be held responsible.

Of course, no matter which potential product claim is made, the individual making the claim must be able to prove the following points:

  • Was the product defective? In order to file a claim, it must be proven that the product was indeed defective.
  • Causation. Was the consumer actually hurt by the defective product in question?
  • Was there an injury? Did the consumer indeed sustain an injury by using the defective product?
  • Did the manufacturer breach duty? It is usually assumed that the maker (manufacturer) of a product has a duty to produce a product that is safe.

Can you tell us the basics of general liability insurance? Is the main reason companies get it because they want a cushion of funds to fall back on in case they get sued?

Liability insurance (also known as Commercial General Business Liability) protects a company’s assets and pays for obligations. Liability insurance also covers the cost of your legal defense and any settlement or award should you be successfully sued. Most companies get liability insurance for one or more of the following reasons:

  • Claims against the product itself (as mentioned in the previous question).
  • Medical costs incurred if someone gets hurt on your property or when there are property damages or injuries caused by you or your employees.
  • It can also cover claims of false or misleading advertising, including libel, slander, and copyright infringement.

Could you give us an example of how it works? Like, say someone sues Company Alpha because they hurt themselves using an Alpha product. What happens next? Does the insurance only factor in after legal proceedings?

As with many insurance plans, your general liability policy will outline the maximum amount the insurance company will pay against a liability claim. So, if your small business gets sued for $250,000 for medical costs associated with an injury, plus an additional $100,000 in legal fees, but your coverage maxes out at $300,000, then you are responsible for paying the difference of $50,000.

If an incident occurs that may lead to a claim, you should notify your insurance company or agent immediately. Be prepared to explain what has happened in detail including the time, date, the names of any witnesses, and any other pertinent information.

The insuring agreement gives the insurer the right and imposes upon the insurer the duty to defend any suit seeking covered damages from the policyholder.  An insurer’s obligation to defend is determined by comparing the allegations of the underlying complaint against the coverage afforded under the policy.  If even a single claim potentially falls within coverage, the insurer generally must defend the entire action.  Importantly, the insurer’s duty to defend arises even when the underlying lawsuit or claim is groundless, false, or fraudulent.

The insurer’s defense obligation may be extremely valuable to the policyholder.  As a practical matter, a policyholder may incur tens of millions of dollars in legal fees for large scale environmental or product liability claims, even where the policyholder ultimately avoids liability.  Additionally, these defense costs are typically provided in addition to policy limits.

Do you recommend general liability insurance to companies of all sizes and structures? How much does the annual cost vary for, say, companies with revenues of $100k, $1 million, and $10 million?

The coverage you need depends on the type of business you are in and the perceived risk associated with it. For example, a building contractor will need more coverage than a web designer or consultant.  Your business location is also another factor that comes into play.

If you are on the higher end of the risk scale and already have general liability insurance, you can also opt for excess insurance or umbrella insurance that increases your coverage limits. This will cover you in situations in which you’re worried that your existing coverage won’t cover all your costs should someone file and win a claim against you.

Sometimes a client contract will require that your business has the appropriate coverage or umbrella insurance to perform work on their behalf. Likewise, some construction contractors may add you to their general liability policy as an additional name to be insured for the duration of the project.

Liability insurance premiums are typically based on a business’ sales and payroll estimates provided prior to policy inception. If the actual amounts turn out to be higher after the policy has been issued, you may need to pay an incremental premium. Conversely, if the amounts are less than estimated, you could get a refund.

Other factors that influence your liability premiums include your type of business and the risks generally associated with it. For example, a toy manufacturer may pay $3 per $1,000 of sales. Thus, on $10 million of sales, the premium would be $30,000. A company that manufactures a less “risky” product or engages in a less risky business, such as a florist, may pay $1.50 per $1,000 of sales, or $15,000.

Insurance companies evaluate a business’s risk for liability coverage based on numerous factors: the number of claims filed within an industry or probability of a claim for a similar type of company; the financial stability and longevity of a business; state laws; business products and/or operation; and a business’ approach to handling and preventing potential risks.

Does the origin of the lawsuit matter for general liability insurance? That is, if someone sued Company Alpha, does it matter in the eyes of the insurance company if that person is in the same country as Alpha or another country?

Base policies cover the US, It’s Possessions, and Canada.  Some provide limited coverage in Mexico.  Policies may be endorsed with International Coverage.

We also talked about workers comp. How does a company determine if they are legally required to have workers comp insurance?

Workers’ compensation is a state-mandated, “no-fault” insurance system that pays benefits to workers injured on the job to cover medical care, part of lost wages and permanent disability. In return, employers receive immunity from civil lawsuits by employees over such workplace injuries.

As a general rule, firms with five or more employees must be covered, although contractors with even one employee must also buy coverage. It is important to note that Missouri law does not distinguish between employees of different employment statuses. The statutory definition of “employee” includes both full- and part-time employees, seasonal and even temporary employees.

Sole proprietors and partners are not themselves covered unless they elect to be covered. On the other hand, close family member-employees and members of limited liability companies are presumed to be covered unless they opt out.

Is there anything else you would like to share or recommend?

Some other important policy options for businesses include:

  • An umbrella liability policy provides extra protection above a standard policy. Umbrella policy coverage limits are typically within the $1 million to $5 million range and are appropriate for business owners who have large assets or may be especially vulnerable to lawsuits.
  • Crime Insurance protects businesses from theft and malicious damage, such as employee embezzlement.
  • “E–insurance” or Internet Business Insurance covers web-based businesses for damages caused by computer hackers and viruses.
  • Short-term disability covers a portion of the policyholder’s salary for a short period, typically from three to six months following a disability. The specific time period and percentage of replaced income vary with different policies. Some states require employers to carry short-term disability insurance for their employees (check with your state insurance department).
  • Long-term disability coverage typically begins after the policyholder is disabled and unable to work for at least six months. It can extend for a specified number of years or until the insured retires or reaches the age of 65, depending on the policy selected.  

Answers sourced from the following:

  • National Association of Insurance Commissioners
  • Small Business Administration
  • Missouri Department of Insurance
  • Trusted Choice, Independent Insurance Agents

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To my fellow creators, what are your thoughts on liability insurance?

16 Comments on “Kickstarter Lesson #232: Everything You Need to Know About Liability Insurance

  1. I’m going to put in a vote for cargo insurance. Liability of carriers is in most cases very very low, and if something happens to it you’re going to be out of luck.

  2. Jamey – Your Kickstarter guide has been a fantastic read and the information provided in these blogs is wonderful. Yet another topic I hadn’t thought of, but enjoyed the read.

    On a totally unrelated note (at least to this article) I launched my own Kickstarter today –
    and funded on day 1! Thanks for the great guide.

  3. I got some liability insurance for us at Overworld Games because we had some IP licensing contracts that required it. If we weren’t doing licensed games, I wouldn’t have gotten this at our size since it is close to $2000/year for the coverage we needed.

  4. Jamey,

    An excellent thought piece. Fortunately, the burden of proof remains on the claimant and if project designers exercise good judgment in the execution of their projects, most, if not all claims can be settled (or are simply never raised to begin with).

    Cheers,
    Joe,

  5. Insurance is certainly one of the areas I’m having to read up on a lot at the moment as well, it’s always been a big unknown to me. An event I’m attending this week requires a £2 million public liability coverage in order to exhibit and that certainly was an unexpected (although reasonable) request.

  6. Not something I’ve really thought about. Do you have a list of the different types of insurances you use?

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