There is no set formula regarding how much liability insurance a business needs. However, the more coverage you have, the more bulletproof your company becomes.
If you are running a very successful business, you will probably want minimal disruption if an incident occurs in which you may be seen as liable. Therefore, the more coverage you have, the greater the likelihood that your company will not be affected by such an incident.
Conversely, if you don’t have enough coverage, the incident may result in you paying hundreds of thousands — if not millions — of dollars out of pocket. For many companies, that would be a death knell.
Hitting your limits
Your liability coverage will usually be included in your company’s property insurance as well as commercial auto policies. You may also have errors and omissions coverage for professional services.
The problem with not having enough liability occurs when you are faced with a legal situation where the injured party or parties don’t want to settle for the coverage amount you have purchased.
For example, if you have a $2 million liability policy and the combined parties will not settle for anything less than $4 million, then you have a problem on your hands.
If you go to court and your insurance company agrees to pay your limit to the other parties, then you are probably going to be on your own to cover your legal costs at this point.
Multiple plaintiffs are not uncommon
Oftentimes when a liability occurs, it affects more than one person. Take the 2015 explosion at a fertilizer plant near Waco, Texas. About 15 people died and over 100 were injured, many seriously.
While your business may not have the risk potential of a fertilizer manufacturer, there are always potential dangers that can affect more than one individual. Your liability limit is not in any way a per-person limit.
Understanding the numbers
In most cases, you will see two numbers on your liability policy:
- Your occurrence limit. This refers to any single accident/incident and to subsequent related incidents. For example, in the Texas fertilizer plant incident, the blast constituted an occurrence. So, any death, injury or property damage from that accident is only covered by this occurrence limit.
- The annual aggregate. This limit is if there are multiple and unrelated accidents or incidents. For this reason, the occurrence limit is extremely important and is the number you should look at as your coverage amount.
The ultimate backstop
There are a number of ways you can purchase higher limits. Some insurers will allow you to increase your liability limits on each of your policies. However, you may be capped at a certain limit, depending on the policy type, the size of the policy and the company.
The best solution is to purchase an umbrella policy. This will extend the limits on all or most of your policies. For example, if you have a $2 million occurrence limit, the coverage amount in an umbrella policy will pick up any coverage thereafter.
Umbrellas can be purchased in increments of a million dollars. It’s not unusual for a business to purchase $10 million or more of this excess coverage.
Deciding on limits
There are a few good ways to determine how much coverage you need. We can help determine how much you should have.
Liability limits should be taken seriously because your business is your livelihood. Any liability incidents are not pleasant, especially when they put your business or your assets at stake.
Robust insurance policies help neutralize these incidents and are crucial to the ongoing success of a business, especially when an undesirable incident occurs.
We help small businesses determine the right policies and right amount to sleep right at night. Contact VMA Director Sales and Membership, shannon@visualmediaalliance.org or 415-710-0568 to make sure you’re covered.