As independent insurance brokers, we are often asked by clients and prospects “how much liability insurance should I (We) carry” to protect my assets or protect the assets of my business. There is no simple formula that an insurance professional can turn to in order to determine an accurate answer. Let’s look at some examples of how to approach the clients’ needs.
The key in assessing the limit of liability needed is examining the exposure and finding out what assets are at risk. A consumer in his or her early 20’s may not have the accumulated assets that a consumer in his or her 50’s or 60’s has. Someone that has more assets at risk or wants to protect an attachment of their future earnings should certainly consider a higher limit of umbrella liability. Transferring the risk to an insurance company is far less expensive than self insuring and paying your own legal fees (defense costs).
As the facts are gathered, we consider how many residences are owned or rented by the client. Are they private homes, co-operatives, condominiums, or rentals? Where are the residences located? What is the size of each residence? Is there a swimming pool or trampoline on premises? Are there any pets living with the family? Are any of the properties used for rental income (business purposes)? Don’t forget to include the value (if properties are owned) in the client’s asset total. In some states, a consumer’s home(s) can be awarded as part of a court judgment.
Vehicles owned or leased sometimes create the largest exposure for a consumer. Those families that have newly licensed drivers should, without question, have higher limits of liability in place. Bodily injury and property damage claims caused by vehicular use prompt insurance companies to increase reserves (possible future claim payments). This, in turn, may cause increases in premiums we, the consumer, pay. A young child walking out from between two parked vehicles is severely injured and now an insurance company has to decide how many of their dollars may be at risk. Bodily injury caused by a collision of two or more cars is another type of accident which could lead to a lawsuit involving multiple parties, including the insurance carriers.
Watercrafts owned or leased create yet another exposure for the consumer, especially if the boat is twenty six feet or longer. As we can all appreciate, what occurs on the water can be far more serious than what happens on land.
Do we know how our children will react in certain circumstances? A fraternity party at a college could get out of hand, and inebriated college students may get into a fight. Liability protection is provided under the parents’ personal liability
policy and depending upon actions brought by injured parties, the umbrella policy limits may come into play.
Providing protection for a business is a little more complex, but the process is similar. Analyzing the exposures can differ from business to business, but the bottom line is to arrive at a limit of protection which will protect the assets of the business.
Is the premises owned or rented, and how many square feet are being occupied? What is the operation of the business? Does it manufacture, wholesale, sell to the public, own real estate, provide services to the public, or is it a not for profit operation?
Most businesses have employees or independent contractors working for them. Aside from workers compensation and state mandated disability benefits, businesses today are subject to wrongful termination and sexual harassment suits. Employment practices liability has become very important to provide protection against these suits from employees. Defense costs from an action of this sort could cost an employer $10,000.
Products manufactured, sold to retailers or the public should be insured in the event bodily injury or property damage is caused to a consumer. Personal injury (libel and slander) is an exposure for all businesses which should be protected. Damage to others property (building or contents) which emanates from another party’s premises should be insured (i.e. electrical fire). If a guest slips and falls on the premises of a business, protection should be in place for this exposure.
Vehicles that are owned or leased by the business create another exposure that the business has to protect. A serious bodily injury or property damage claim could wipe out all the assets of the business.
So how much protection should a consumer or a business buy? No one wants to become “insurance poor”, but it is extremely important to carry enough liability insurance to insulate the policyholder’s assets. Having peace of mind knowing that you have protected your personal and/or business assets with adequate limits of insurance is certainly as important as having a will. You have taken some control of your own destiny. Take an overall look at your entire insurance program so that some premium dollars can be reallocated to the purchase of proper liability protection. Believe me, it is far less expensive to pay a premium each year than it is to defend and possibly pay the judgment awarded by the court. Call your advisor today and ask for a comprehensive review. A one-hour meeting today may save you or your company thousands or millions of dollars tomorrow.