Why Businesses Get Sued Even When They Have Insurance 

You might think that having business insurance means you’re covered in case of any possible lawsuit. However, business owners are often surprised to find that they’re in court despite having paid their premiums on time and waiting for their insurance to handle all matters. The thing is, being insured doesn’t always shield your business from lawsuits. 

So why does it happen? Why do businesses rack up lawsuits and have to pay out of pocket, even though they’re insured? Understanding your legal rights after an accident or incident involving your business is crucial, particularly when it comes to policy gaps, limits, or conflicts with your insurer. Here are the things no one informs you about: gaps, limits, and the realities of business liability in lawsuits. 

1. Insurance Doesn’t Cover Everything 

Most business policies, general liability, professional liability, or commercial property, are affected by specific exclusions. These are situations or types of claims that the insurance company does not cover. For example: 

• Intentional wrongdoing or fraud 
• Breach of contract claims 
• Some employment disputes, like harassment or discrimination (unless you have special coverage) 
• Cyber-attacks or data breaches (unless you carry cyber liability coverage) 

Therefore, even if you are insured, a lawsuit based on one of these exclusions could still expose your business to risk. 

2. Your Policy Might Have Limits 

Every insurance policy comes with coverage limits, which are the maximum amounts your insurer will pay for a claim or over the course of a year. If the damages awarded in a lawsuit exceed those limits, your business is responsible for paying the rest. 

Example: If your liability insurance covers up to $500,000 and you’re sued for $1 million in damages, your business may be on the hook for the remaining $500,000. 

3. Late Reporting or Technical Mistakes Can Void Coverage 

Insurance companies require you to follow specific procedures to maintain coverage. That includes reporting claims or incidents promptly and accurately. If you: 

• Delay telling your insurer about a potential lawsuit 
• Fail to provide necessary documents or information 
• Don’t follow the insurer’s instructions 

4. The Lawsuit Might Not Fall Under Covered Activities 

Sometimes, the lawsuit falls outside the scope of what the insurance was intended to cover. For example, general liability insurance might cover slip-and-fall accidents but not lawsuits related to professional mistakes, such as providing incorrect advice or making an accounting error. For those, you’d need a professional liability policy (also called errors and omissions insurance). 

And even then, the policy must be active at the time the mistake occurred, not just when the lawsuit is filed. 

5. Third Parties Can Still Sue, Even If They Know You’re Insured 

Having insurance doesn’t prevent people from filing lawsuits. If someone thinks they’ve been harmed, whether it’s a customer, former employee, or another business, they can still sue you. Insurance helps defend against these claims, but it doesn’t stop them from happening. 

In some cases, just having insurance can make you more of a target since plaintiffs know there may be money available. 

6. The Insurance Company May Dispute the Claim 

Insurers often investigate and evaluate claims carefully before deciding whether to provide legal defense or pay damages. If the insurer believes the claim falls outside the policy terms—or that your business made a mistake—they may refuse to cover it. That leaves you having to fight both the lawsuit and your insurance company. 

Business insurance is essential, but it’s not a magic shield. Companies can and do get sued, even with policies in place, because insurance only goes so far. Between policy exclusions, coverage limits, delayed reporting, and legal fine print, many businesses find themselves vulnerable when they least expect it. 

What is the best way to protect your company? Don’t just buy a policy and forget about it. Work with a trusted broker to review your coverage regularly, understand the limits and exclusions, and take proactive steps to manage risk. And if you ever face a lawsuit, consult a qualified attorney right away—because navigating legal trouble takes more than just a claim number.