“I probably need legal protection insurance first, don't I?” I hear this sentence from female founders quite regularly. When I then ask which situation specifically worries them, it is usually about things like: What if a client claims that a contract was not properly fulfilled and demands compensation? What if an important deadline is missed and the client suffers a financial loss as a result? Or what if it turns out that an image on one's own website was not as royalty-free as thought, and suddenly claims are in the air?
The line of thought is understandable: Someone is demanding something from me, maybe I need a lawyer, in the worst case the matter goes to court – so legal protection. From an insurance perspective, however, it is worth asking another question first: Am I liable for the alleged damage?
When someone wants compensation from you
That is exactly what business liability insurance is for. In the case of personal injury and property damage, we typically talk about public liability insurance. For service providers, consultants, agencies and many digital business models, however, professional indemnity insurance or professional liability insurance is particularly relevant. It covers purely financial losses that can be caused by professional activity.
A typical case would be incorrect advice, a missed deadline or another professional error through which your client loses money. Depending on the contract, certain legal infringements, for example in the area of copyright or personal rights, can also be co-insured. Which components are actually needed therefore depends heavily on what your company actually does. You can find more background, also from the perspective of different business models, in the blog post on commercial liability insurance.
And here comes the part that quickly confuses liability and legal protection conceptually: A liability insurance company does not simply pay any amount that someone demands of you. It first checks whether you are liable at all and whether the claim is justified in this amount.
The passive legal protection of liability
If a claim is justified and insured, the liability insurance covers the damage. If it is unjustified or excessive, it defends against it. This may require lawyers, experts and, if in doubt, a court case. This defense is part of the insurance coverage and is referred to as passive legal protection.
The “passive” part is quite helpful for classification: Someone is demanding compensation from you and you have to defend yourself against it. This is precisely why a liability case can very well end up in court without your commercial legal protection insurance being responsible for it.
Commercial legal protection solves other problems. If, for example, you want to enforce a claim yourself, have an employment law dispute with employees or need support in other insured areas of law, it can become relevant. Especially with contract law, however, it is worth taking a close look at the tariff: Not every legal protection policy automatically covers all disputes with clients, suppliers or service providers.
Who actually wants what from whom?
For the first sorting, a fairly simple question therefore helps: Who is actually demanding something from whom – and why? If a client claims that you have caused them damage through your work and demands compensation, we look first at liability. If, on the other hand, you want to enforce a claim yourself or are arguing with an employee about an employment law issue, for example, we are looking more at legal protection.
Of course, there are cases that are more complicated. Otherwise, insurance would probably be suspiciously simple. For the first overview, however, this distinction works quite well – and above all prevents people from choosing insurance policies solely by their name.
The next step
That's why when people say “I definitely need this insurance, don't I?” I usually ask in return: What is the specific situation you want to protect yourself against? Because legal protection insurance can make a lot of sense for your company. However, it in no way replaces liability insurance – and liability insurance in turn does not replace complete legal protection.
If you are currently setting up your company, I would therefore first sort out the actual risks: Where can you cause greater damage to others, which legal conflicts are realistic in your business model and which of these do you want to bear yourself? After that, you can decide quite soberly which insurance comes first and what can wait (more on this in the blog post on insurance in the founding year). Spoiler: In the vast majority of cases, it is good liability insurance.