The Proper Amount of Business Liability Coverage
There is no set formula regarding how much liability a business needs. However, the more coverage you have, the more bulletproof your business 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. Thus, the more coverage you have, the greater the likelihood that your business will not be affected by such an incident. Moreover, if you don't have enough coverage, the incident may result in hundreds of thousands-if not millions-of dollars costing you out of pocket.
Hitting Your Limits
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. You can pay the difference out of pocket or be forced to go to court. 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. After all, the insurance company has agreed to pay its maximum obligation under your policy. Of course, if you don't have the funds, bankruptcy is an option. But do you really want to deal with problems and the disruptions to your business that can result from bankruptcy? Also, bankruptcy may not be an option if you don't qualify for it under bankruptcy laws.
Multiple Plaintiffs Are Not Uncommon
Often times when a liability occurs, it affects more than one person. Take the recent explosion that occurred outside of 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 plant, there are always potential dangers that can affect more than one person. Your liability limit is not in any way a per-person limit. It's a flat limit-no matter how many people are injured. The bottom line is this: the numbers can add up when a number of people are injured. Insurance companies will then pro-rate and split up the limits between all injured parties. Once the insurance runs out, it's up to you to hire an attorney to settle all remaining cases.
Understanding the Numbers
In most cases, you will see two numbers on your liability policy. The first is your occurrence limit and the second is the annual aggregate. Occurrence 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 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 Umbrella Solution
There are a number of ways you can purchase higher limits. Some companies 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. An umbrella policy 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 Your Amount
There are a few good ways to determine how much coverage you need. A discussion with your insurance agent about your business, your risks and your exposure is probably a great starting point. It may also be smart to have this discussion with your attorney or an attorney who handles liability cases. You can also do research on online legal sites to review incidents that have occurred in businesses similar to your own. However, the problem here is that you will only see the cases that went to court, since out-of-court settlements are bound by a gag order.
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.
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