If you’re a business owner, you likely already know the value of liability insurance, because – unfortunately – you’re probably a target for lawsuits. This is crucial considering the litigious society we live in; more than 15 million civil lawsuits are filed annually, and one of three small business owners have been sued or threatened with lawsuits.
So how do you prepare for a time when you may be on the receiving end of a lawsuit?
Excess liability insurance
You obviously need commercial insurance coverage. However, to be truly prepared, there’s another policy you also may need – excess liability coverage, or “umbrella liability.” It offers $1 to $5 million – sometimes $10 million – of liability coverage in addition to the liability limits of your existing commercial insurance policies (including general, professional, and employers’ liability, as well as hired or non-owned commercial auto liability.)
Aren’t my commercial liability limits sufficient?
First, liability limits of those policies may have exclusions, so certain claims may not be covered. Excess liability insurance may help fill those gaps, but more importantly, this policy extends liability coverage from existing commercial policies is usually grossly inadequate when compared to the current costs of commercial lawsuits, claims, and judgments. One claim (and the legal fees) can put your business into bankruptcy unless you have very deep pockets. Excess liability could save your business should you exhaust the limits on your other commercial policies.
Granted, not all lawsuits ask for millions of dollars; the numbers depend on the business type and claim. But here’s one liability lawsuit scenario that could apply to most small businesses: Say the court awards $1.5 million in damages to the claimant. However, your professional liability has a $1 million limit. Excess liability would kick in and pay the remaining $500,000.
Without it, your business and/or your personal assets (such as your home and your savings accounts) could be seized to pay the judgment. A lawsuit such as this could well ruin you and your business.
Like all policies, rules on coverage, exclusions, and special situations vary from company to company and by state.
Excess liability overview
Businesses that definitely need excess liability include those that offer professional services; handle sensitive and/or private customer data; and manufacture and sell consumer products.
Those that may be ineligible include companies with extraordinary exposures to risk (such as a white water rafting business); those that revolve around a celebrity or number of celebrities (including actors, writers, public, and political figures and professional athletes); and those with prior claims or liability lawsuits.
As with most policies, cost is commensurate with risk, but it can be relatively inexpensive. Low-risk policyholders without prior claims may be able to purchase $1 million in excess liability insurance for less than $200 annually.
Some providers may require you to increase liability limits on other policies first, so your primary business policy has the highest available limits.
Doing so will increase your premiums somewhat, but the alternative makes obtaining excess liability coverage well worth it for your own peace of mind.