How to determine how much liability insurance one needs?

Answer 1

The determination as to desirable liability limits is an art, not a science. But a few of the factors, at least in the commercial setting, are discussed below.

The first area to check is to determine if the federal government requires you to carry minimum liability limits, then you need to check your local and state governments to see if they have any requirements relative to the business that you operate.

You may also be required by contract with your customers or vendors to carry minimum liability limits . In addition, if you lease commercial office space for your business the landlord may require you by contact to carry minimum liability limits. The contract (including a lease) may require that the the customers, vendors, or property owner be named as an additional insured on the policy.

In the absence of these requirements, you will need to evaluate what your bodily injury or property damage exposures your business has to determine your liability requirements. Again, this is an art, not a science. Factors to consider include that nature of the business, whether the public comes onto the premises, whether motor vehicles are used, the "hard" and "soft" assets that are to be protected, and numerous other factors. The advice and counsel of an experienced commercial insurance agent or broker is invaluable.

There is no magic number as to policy limits. However, you should be aware that some policies have different policy limits for bodily injury damages and for property damage, whereas other policies combine the limits into what is referred to as a "combined single limit". One type is not necessarily better than the other, but they are different. You may also want to consider a commercial umbrella policy, which sits atop of the primary policy and provides additional coverage. Since the primary limits have to be exhausted, or at least threatened to be exhausted, umbrella policies are fairly inexpensive.

If you provide a service to your customers for a fee, you may want to carry errors & omissions insurance as well. This is different from liability insurance and protects you against claims arising from errors or omissions that are made by your enterprise. These policies are most common for professional service providers (physicians, lawyers, etc.).

A similar analysis applies in the personal insurance setting, such as homeowners coverage. Homeowners is usually a package policy that covers the structure and the contents. It is available on an actual cash value basis (which takes into account depreciation) and on a replacement cost basis. It also generally provides liability coverage for persons injured, through your negligence, in or on the insured premises. Determining how much liability insurance is desirable involves an assessment of your risk tolerance, what and how much property/assets you have to protect, and other factors.