General liability insurance protects your businesses assets if your company is sued for something it did (or most often failed to do) to cause an injury or property damage. You can purchase it alone or as part of a business-owner's policy (BOP), though the liability coverage in BOPs is generally fairly low.

The amount of coverage your business requires depends on a couple of items:

• Perceived risk - Consider the amount of risk associated with your business. If you build houses for a living your business runs a greater risk than if you manufacture cardboard boxes, so you would need more liability insurance.
• Assets to be protected - Review the company balance sheet, you want to have at least 5 times the amount of the assets in Liability Insurance.
• The state in which you operate - Here in California there is a history of awarding high damages to plaintiffs, so it's normal to carry liability insurance with higher coverage limits.

How it works

With general liability insurance, the insurer is required to defend you and pay for the damage caused by you in a covered liability claim. These claims include bodily injury, property damage, personal injury, and advertising injury (damage from slander or false advertising). The insurance company will also cover compensatory and general damages. Punitive damages aren't covered because they're considered punishment for intentional acts.

General liability policies state a maximum amount the insurer will pay for that policy period - say $1 million. If your business is successfully sued for $1.5 million, the insurer will pay the agreed $1 million and you would be responsible for paying $500,000. To cover this situation most companies purchase umbrella insurance, which picks up where general liability coverage ends.

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