How About A Way to Figure Adequate Liability Insurance Limits?

This is a guest blog written by Scott Simmonds, CPCU, ARM, CMC Insurance Assurance Consulting; www.ScottSimmonds.com

How do you determine how much liability insurance a business should have?

Here are the “normal” liability insurance policies for most businesses:

Auto Liability – Pays for bodily injury and property damage caused by a motor vehicle accident.  Should include coverage for accidents caused by the operation of owned vehicles and non-owned vehicles (by an employee, for example).  My Minimum Recommendation: $1,000,000.

 General Liability – Pays for bodily injury and property damage liability.  Most policies also include coverage for libel, slander, wrongful eviction, false arrest, and publication that violates privacy. Coverage applies at your locations, at other locations in the course of your business, for products liability, and for completed operations.  My Minimum Recommendation: $1,000,000 each occurrence / $2,000,000 in the aggregate.

 Employers’ Liability – Part of workers’ compensation insurance.  Pays for bodily injury that comes from the employment relationship but excludes injuries covered under workers’ compensation.  The best way to describe this coverage is with an example.  A boat builder comes home every day with fiberglass dust in his clothes.  The dust gets into the air at home and in the clothes of the family in the laundry.  A child in the home gets sick from the dust.  That would be covered by employers’ liability. My Minimum Recommendation: $100,000 (most umbrella insurers will require $500,000).

 Employment Practices Liability – Liability insurance for acts of employment harassment, wrongful termination, failure to hire, discrimination, and other similar allegations. EPL policies almost always provide for defense cost coverage within the limit of coverage – increasing the amount of insurance you need.  My Minimum Recommendation: $1,000,000.

 Fiduciary Liability – Protects the fiduciaries, directors, and officers of employee welfare plans (group insurance, pension plans, 401k plans) against actual or alleged wrongful acts. Covers liabilities imposed by the federal law ERISA.  My Minimum Recommendation: $1,000,000.

 Directors’ and Officers’ Liability – Provides coverage for allegations of third parties for mismanagement, failure to act properly, and other “wrongful acts” against directors and officers. Coverage also can be included for the organization, known as entity coverage. Not all companies need D&O insurance.  The coverage is necessary for non-profits and companies with diverse ownership interests.  If you have a small company with 3 owners all active in the business, you can probably do without D&O.  These policies almost always provide for defense cost coverage within the limit of coverage – increasing the amount of insurance you need.  My Minimum Recommendation: $1,000,000.  More coverage may be advisable depending on exposure to loss and the assets of the organization.  It is also a value decision.  Get quotes at a variety of limits and judge the value of the protection compared to the cost.

 Umbrella Liability – Provides extra liability coverage above the general liability, auto liability, and employers’ liability coverage. Also known as excess liability.  Every business should have at least a $1,000,000 umbrella.  There is no magic to this number.  $5,000,000 is a more realistic minimum. 

 I know of a four employee, $200,000 sales contracting firm that accidentally burned down a $7,000,000 church. Not many insurance agents would have suggested beforehand that the contractors buy a $10,000,000 umbrella.  Obviously, hindsight is 20/20.

 You have to decide how high is up.  Again, get quotes at a variety of limits and judge the value of the protection compared to the cost.

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