Legal Insurance for Businesses

What is legal insurance for a business?

Unlike general liability insurance, which primarily covers third-party claims for bodily injury or property damage, legal insurance specifically focuses on the legal costs and professional fees associated with defending your business or pursuing legal action. This coverage can be particularly valuable for businesses operating in industries with high litigation risk, such as manufacturing, health care, or professional services, though any business can benefit from this protection.

The insurance typically covers both defensive legal situations (when someone sues your business) and offensive legal needs (when your business needs to take legal action against others). Coverage may also extend to routine legal assistance (such as advice) and consultation services, helping you navigate complex business decisions before they become legal problems.

Why legal insurance matters

One of the main potential advantages of purchasing legal insurance for your business is cost. Having this kind of coverage can often provide legal representation at a lower rate than if you had to pay expenses out of pocket and on the spot. This can be extremely valuable, especially if your company is operating in an industry that is highly susceptible to lawsuits, such as the manufacturing of a product that could potentially cause injury. 

Still, because all types of business could be subject to lawsuits, legal insurance is worth considering no matter what your company does. Some of the most common types of claims businesses face include:

• Hiring, firing, wage, and other employment decisions
• Discrimination and harassment claims
• Other disciplinary actions taken against employees
• Intellectual property claims, such as copyright, trademark, and patent infringement
• Breach of contract
• Personal injury and tort claims
• Criminal charges

Because there is such a broad range of circumstances in which a business could face litigation, even businesses that don't have an obvious risk of lawsuits may still desire legal insurance for unforeseen events.

In addition to providing coverage for unforeseen events, legal insurance may also provide coverage for those that are foreseeable, such as routine legal advice on business matters. For example, your policy might cover advice on intellectual property issues, such as protecting the company's trademark and brand.

Types of business legal insurance coverage

Business legal insurance encompasses several distinct types of coverage, each designed to address specific legal risks and situations that businesses commonly face.

General legal expense insurance

General legal expense insurance provides broad coverage for a wide range of legal issues that can affect any business. This foundational coverage typically includes defense costs for contract disputes, business tort claims, and regulatory compliance issues. For example, if a supplier claims your business breached a purchase agreement, this coverage would help pay for legal representation to defend your position and negotiate a resolution.

Employment practices liability insurance

Employment practices liability (EPL) insurance specifically addresses legal issues related to your workforce and employment decisions. This coverage protects against claims of discrimination, harassment, wrongful termination, wage and hour violations, and other employment-related disputes brought by current and former employees, and even job applicants who believe they were treated unfairly during the hiring process.

Professional liability insurance

Professional liability insurance, also known as errors and omissions (E&O) insurance, protects businesses that provide professional services or advice to clients. This coverage addresses claims that your professional services caused financial harm to a client due to errors, omissions, or negligent acts. Consultants, accountants, architects, and technology service providers commonly carry this type of coverage.

Intellectual property insurance

Intellectual property (IP) insurance protects businesses against claims related to patents, trademarks, copyrights, and trade secrets. This specialized coverage can be particularly valuable for businesses that develop products, create content, or operate in technology-driven industries where IP disputes are common. The coverage typically includes both defensive protection (when someone claims you infringed their IP) and offensive coverage (when you need to enforce your own IP rights).

Cyber liability and data breach coverage

Cyber liability insurance has become increasingly important as businesses face growing threats from data breaches, cyberattacks, and privacy violations. This coverage addresses legal costs related to data security incidents, including regulatory investigations, customer notification requirements, and potential lawsuits from affected individuals. 

How to compare and choose business legal insurance

Selecting the right business legal insurance requires a systematic approach that considers your specific business risks, budget constraints, and coverage needs. Taking time to make an informed decision can save your business significant money and ensure you have appropriate protection when legal issues arise.

Step 1: Assess your business's legal risks

Begin by conducting a thorough assessment of the legal risks your business faces based on your industry, size, location, and business model. Document any past legal issues your business has encountered and identify potential future risks based on your growth plans and market expansion strategies.

Step 2: Research coverage options and providers

Investigate the different types of legal insurance coverage available and identify which options best address your identified risks. Look for insurers with strong financial ratings and positive customer reviews, particularly regarding their claims handling process and customer service quality.

Compare the specific coverage features offered by different providers, including coverage limits, deductibles, exclusions, and additional services such as legal advice hotlines or preventive legal consultations. Some providers offer package policies that combine multiple types of legal coverage, while others allow you to customize coverage based on your specific needs.

Step 3: Consult with professionals

Consider working with an experienced insurance broker or agent who specializes in business insurance to help navigate the selection process and ensure you're getting appropriate coverage for your needs. An insurance professional can help you understand complex policy terms, compare options from multiple insurers, and negotiate better terms or pricing.

Additionally, consult with a business attorney to review your final coverage selection and ensure it aligns with your overall legal risk management strategy. Your attorney can help identify any gaps in coverage and recommend additional protections that might be beneficial for your specific business situation.

How LegalZoom supports business legal protection

By helping you establish proper business structures like LLCs or corporations, LegalZoom provides the foundational legal framework for your operation. We can also help you manage business compliance, which can be crucial when filing insurance claims or defending against legal challenges.

Business legal insurance FAQs

Am I required to have legal insurance for my business?

Business legal insurance is generally not required by law, making it an optional but highly recommended form of protection for most businesses.

However, certain industries and business situations may have specific requirements or strong recommendations for legal insurance coverage. For example, professional service providers, such as consultants, architects, or financial advisers, may find that clients or industry regulations expect them to carry professional liability insurance that includes legal expense coverage.

Some business insurance policies or commercial lending agreements may require or strongly encourage legal expense coverage as part of a comprehensive risk management strategy. While not legally mandated, this coverage can be a practical necessity for businesses that want to maintain their financial stability and operational continuity in the face of legal challenges.

What's the difference between business legal insurance and general liability insurance?

Business legal insurance specifically covers legal costs and attorney fees for various business disputes, while general liability insurance primarily covers third-party claims for bodily injury or property damage caused by your business operations. Legal insurance focuses on the cost of legal representation and court proceedings, whereas general liability covers the actual damages you might owe to injured parties. Many businesses benefit from having both types of coverage since they address different aspects of business risk.

Do I need business legal insurance if I already have an LLC?

Having an LLC provides personal asset protection but doesn't eliminate your business's exposure to legal costs and disputes. While an LLC structure can limit your personal liability, your business can still face lawsuits, employment disputes, contract disagreements, and regulatory issues that generate significant legal expenses. Business legal insurance complements the protection offered by your LLC structure by covering the costs of legal representation and dispute resolution.

How much does business legal insurance typically cost?

Business legal insurance costs vary significantly based on your industry, business size, coverage limits, and risk factors, but most small businesses can expect to pay between $500 to $3,000 annually for basic coverage. Professional service businesses or those in high-risk industries may pay more, while simple retail or service businesses might pay less. The cost is generally much lower than the potential expense of even a single legal dispute, making it a cost-effective form of protection for most businesses.

Michelle Kaminsky, Esq., contributed to this article.