A common question we receive from commercial clients is, “How much liability insurance do you think I need?”
The answer to this question is difficult and based upon many factors. Most of the factors driving this decision are based upon your operations and type of business. Unfortunately, you may never properly determine the amount in which a claimant and his lawyer will ask for in the event of a lawsuit.
Something every business should take in to consideration is that when a claimant sues you for more than the amount of your liability insurance limits you are required to obtain your own attorney and pay for their representation at your own expense for the amount in excess of the limits carried.
Some business firms operate in more hazardous fields than others and in general are subject to more frequent and larger claims that those which have little exposure. For example, if your business operates a fleet of trucks or has a large number of automobiles on the road, you are naturally subject to an increase of large liability claims due to automobile accidents. If your firm builds anything, either as a subcontractor or a general contractor there is the chance of injury to others during the course of construction or after construction is complete. The same holds true if you manufacture a product, and that can made more complicated by the type of product. Some products, such as a file cabinet, may never contribute to a claim; while chemical or chainsaw manufacturing can easily contribute to a large claim or lawsuit. Employees not under the constant guidance of a supervisor are also more likely to contribute to a large liability claim.
The guessing game as to how much liability insurance to carry could go on and on. In the final analysis a business owner should purchase the basic primary insurance policies such as: property, general liability, automobile, and workers compensation; at limits to satisfy the umbrella policies primary policy limit requirements, usually around one million dollars. The next step is to consider the purchase of a commercial umbrella insurance policy. Umbrella policies are available in limits starting at one million dollars offering price breaks at each additional million. For example, if an underwriting company were to quote a $1,000 premium for the fist million of umbrella protection the second million may only cost $750. We always recommended obtaining a quote for several levels of coverage above the first million. Many business owners find that three or five million dollars of umbrella coverage is quite affordable. When an accident occurs there is certainly a piece of mind when you realize that you have provided adequate protection for your firm by having limits of coverage, primary and umbrella, that equal or exceed the amount of the claim or lawsuit.
Another benefit to having an umbrella policy is when you as a business owner talks to your banker it is reassuring for the banker to know, although there is a large suit pending, you have it covered by carrying an adequate limit of liability coverage which will include the legal expense. Any business that must obtain and submit to others an audited financial statement will look superior due to the purchase of an umbrella with limits that equal or exceed the amount of a claim or suit.
Another reason to consider purchasing an umbrella policy is if you decide to sell the business and retire during a pending lawsuit, it could complicate or delay in the sale until the suit is settled, which can take years.
Every business should consider carrying an umbrella liability policy and those subject to large claims should investigate carrying high limits. Any good property/casualty insurance agent will be able to help you with your coverage options.