Liability Insurance For Businesses

The 2010s saw a boom in the number of startups and small business ventures that sprung up across India. The establishment of central IT hubs and the increase in demand for consumer-centric products created a boom for smaller companies. However, at the same time, it exposed a clear sore point, often ignored by new companies: Business Liability Insurance (BLI). 

BLI is a safety net for businesses in case of major screw-ups and the impending doom of long-drawn-out litigation. Let's say there's an app that bases itself on navigation and it fails to register an unofficial roadblock that causes an accident or a financial advisor advises a client to gamble all their money on one stock. Here, there is the risk of litigation for negligence and damage caused to the user of the app or the financial advisor. 

What is an Insurance Policy?

In all its technicality, an insurance policy is a conditional contract, which is aimed at providing financial security, when a certain condition is fulfilled. It is a guarantee that in the event of a certain type of loss or damage, it will ensure that a certain amount of money to cover the costs is paid by the company. 

However, in simpler terms, think of insurance as a piggy bank with a purpose and release clause. A company or business venture puts a certain amount of money in the piggy bank, this is the agreed-upon premium. The premium is decided upon the probability of risk that the business may incur.

A simple departmental store may not have the same risk, as a company like Union Carbide making poisonous gas. At the time, when the damage happens, the piggy bank is broken, that is the condition fulfilled. Therefore, the money is, then, given back to the person paying the premium along with the additional amount required to cover the entire damage. 

What is Business Liability?

Business Liability refers to the responsibilities and duties that a business must adhere to. The failure to perform these duties may lead to damage or loss. A business is responsible to make up for that cost. However, saying that there are duties and responsibilities is a broad argument. 

Liabilities are mainly divided into three types: 

  • General Liability
  • Product Liability 
  • Professional Liability

General Liability: The Case of Union Carbide

General Liability refers to the common responsibilities and duties of an employer and producer. Union Carbide was a pesticide plant in Bhopal. A gas leak caused the death of employees as well as those living in the area surrounding the factory. 

The Supreme Court in the landmark case of U.O.I. versus Union Carbide held that Union Carbide has the responsibility to ensure that they take the necessary precautions that are required in the creation of pesticides. U.C. is responsible not only for the production of the gas but also for the safety of its employees and any third party affected by it. Therefore, U.C. owes each affected person the financial equivalent of their hardship faced. 

In this case, a business is liable for general damage caused in the production of the goods. Insurance would be against any legal suit filed by injured employees and any mishap due to the gas. However, the deadly nature of the product and the probability of accidents would result in absurdly high premiums. 

Therefore the overall key takeaway is that in a business, one must be insured against the most probable accidents and mistakes that could occur in the course of business. Here, the leaders must be aware of possible risks to employees which, if ignored, may cause severe legal risk. 

Product Liability: The Johnson & Johnson Case

Product liability means that the manufacturer and seller of any product sold to a customer are liable for any defect or damage arising out of it. J&J is a popular pharmaceutical company that sold several apparatuses that are used in hip replacement surgeries. The product, however, was defective, leading to medical complications and a hefty lawsuit. Here, the damage is done to the consumer themself. Here, there are different scenarios where liability would arise:

  • If the consumer had a chance to investigate the product before using it
  • If the complications arise because of a very particular unforeseeable condition that a consumer has
  • If the seller alters the product after it is manufactured.

However, in general cases, sellers and manufacturers of consumer-based products should always insure themselves against consumer litigation. However, here, a business should take into account that consumer cases are small but numerous, therefore, the need to engage several lawyers may arise. Therefore even though the premiums are low, the business may have to take several insurances.

Professional Liability 

Professional Liability, as the name suggests, refers to the practice of professionals. So why do professionals receive exclusive insurance? This is because of a legal term called 'fiduciary relationship'. The term refers to the trust placed by a client in a professional. Professionals are deemed to have greater knowledge of their craft and are exclusively authorized to perform it. Therefore, the standard of care for a lawyer or doctor is greater. However, there is a grey area here. 

The job of a lawyer, doctor or financial advisor is inherently based on the facts of a client's case. A doctor cannot save a fatally injured person, a lawyer cannot save every guilty person and a financial advisor cannot predict the market's outcome. Therefore, such professions are given general immunity. Liability arises out of malpractice and negligence. The law sets a standard that all professionals must meet. They just adhere to standards set by law and the field they are licensed to practice in. However, mistakes may happen and in that event, professional insurance protects the interests of these people. 

In conclusion, businesses will always have risks and rewards. It is always wise to ensure safety through insurance. However, insurance is not immunity. In case of egregious accidents and negligence, the court may award criminal punishment or fines that even the insurance company may not meet. Moreover, the insurance companies' terms and conditions are aimed at denying insurance to premium payers, therefore it is best to work towards avoiding liability.

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