Figuring out how much liability coverage to buy isn’t easy, but it’s very important.
General liability covers an entity for bodily injury, property damage, personal and advertising injury, and medical payments to a third party because of negligence of the insured. So, adequately selecting the appropriate limits provides defense costs and indemnification to that third party, which will properly indemnify that claimant.
“As an organization, ask yourself, ‘If my limits are not enough to cover the injury, what happens?’” says Andrew Rowles, vice president at SeibertKeck Insurance Agency. “You hope the insurance company will offer a settlement at your policy limits or you might look at out-of-pocket costs.”
Smart Business spoke with Rowles about setting limits of liability.
How can business owners know what limits of liability to purchase?
First, review the limits that your vendors and customers have on their insurance requirements. Many businesses purchase a $1 million occurrence policy with a $2 million aggregate limit for the general liability policy. From there, adding an umbrella or excess policy provides additional limits over your original policies.
The question becomes how much is enough. It’s a balancing act between purchasing exuberant limits that exceed industry expectations or leaving your company on the short side and potentially exhausting policies. If policies are exhausted, you could be covering claims yourself.
More exposed industries will need to buy higher limits, such as manufacturers that produce products with the potential to impact many people or those who face class action potential.
The challenge for many startup companies is having enough capital to cover the cost of purchasing adequate limits. As a well-established company, it is important to look at the cost-benefit of adding additional umbrella limits. In addition, when looking at job contracts, it is critical to make sure your limits match those of the subcontractor or contract requirements.
How can you use benchmarking to help discover the best liability limits?
A benchmarking report is a tool, not an exact science. It takes into account many different factors, such as location, industry size, revenue, employees, etc., to compare companies in the same industry segment. Benchmarking an organization against its respective industry can provide a range of insurance program premiums, limits and retentions commonly used in the industry.
Having this important tool should allow business leaders the piece of mind that they are adequately insuring their company at a competitive cost. Also, in the event of a claim, it can justify the limits purchased if the claim should exceed that limit.
An informal way to benchmark is by attending trade associations or other industry events, so you can ask peers for their limits of liability. Networking is a great way to understand how liability limits are affecting others, before you have to deal with it.
What do marketplace trends like severability tell business owners?
The severity loss trend — the change in size of an individual loss over a period of time — is staggering. According to Chubb, in 1973, a moderate brain damage injury award was $1.24 million; today, that same award is closer to $5 million.
Chubb reports that in 2010 the median compensatory award in Ohio was $13,000, while nationally 12 percent of all jury awards are $1 million or more. In addition, 57 percent of the total awarded damage for commercial/industrial product liability verdicts is for the plaintiff; the remaining amount is for additional costs. These costs include the rise in mass litigation, the high cost of defending product suits, the need for many experts in complex situations or additional awarded damages. This means $1 million of coverage is not always enough to cover the actual injury. The costs associated with a claim are far greater than what most people perceive as ‘enough insurance.’
There’s no easy answer to finding the right liability limit. It may seem ridiculous for a small company to buy $25 million in limits, but what if it has a large automobile fleet? In the end, the most important tool is to have a proactive relationship with your agent. An experienced client advocate will responsibly inform a client on how to properly balance its limit of liability and dollars. ●
Andrew Rowles is vice president at SeibertKeck Insurance Agency. Reach him at (330) 867-3140 or [email protected].
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