One guiding principle in risk management is “Don’t risk a lot for a little.” But how that motto impacts your particular insurance choices isn’t always clear. There is one thing you do need to realize, and that is that juries are often outraged at organizational negligence, especially when those organizations are perceived to have deep pockets.
Assuming your organization won’t ever face a negligence claim isn’t advisable. Instead, consider the factors below and select sufficient coverage to adequately protect your organization.
Your business type
If, for example, you sell hardware to consumers, your risks of being sued are somewhat limited. On the other hand, if you manufacture handguns, your risk factor is considerable. That said, every business, no matter how small, should be aware of today’s million-dollar verdicts; damages awarded can easily range from $1 million to $20 million or more.
Your organizational appetite for risk
Every management team should determine its individual “risk tolerance.” Some companies embrace risk, while others are extremely risk-averse. Either approach is fine; however, if you assume more risk, you should be prepared with sufficient cash or credit reserves to cover any underinsured loss.
Where you operate
Certain legal venues make defending cases highly problematic. Each year, the American Tort Reform Association (ATRA) outlines the worst U.S. venues for civil litigation. However, you don’t have to live in an ATRA “hellhole” to be impacted.
If your organization sells products or operates in those areas, you may still feel the pinch. In ATRA hellholes, you will very likely face an unsympathetic court system if, for example, a product you’ve developed malfunctions and injures someone.
The liability limits of comparable businesses
The insurance industry can assist you in identifying what is happening in your industry, but you need to ask these kinds of questions of your trade associations. You also should keep up to speed yourself by regularly reading trade journals online and following recent verdicts.
For example, the National Law Journal annually lists some 60 of the largest verdicts from the previous year. Some samples: a $64 million award for an age discrimination claim and a $32 million verdict for the death of a sheet metal worker struck by an improperly welded beam.
Insurance premiums fluctuate from year to year depending on many factors, including interest rates on investment income and previous years’ losses in your company and industry.
Resist the temptation to decrease limits when the market “hardens” (that is, when rates increase). Sophisticated insurance buyers who have enough liquidity to pay higher losses may choose to respond to a hard market by retaining more risk, but they will avoid lowering limits just to save money.
In the final analysis, the best advice is this: “Don’t risk a lot for a little.” In other words, saving a few hundred or even thousands of dollars in premium will not seem like such a great idea in retrospect if you suffer a loss or losses that exhaust your coverage limits. Your insurance professional can help you select the right coverage.