What do I need to protect my business?

In business it can often be hard for a person to decide just how much liability is enough. If you have a small business with little exposure to loss then you often will find a limit of $2 million or even up to $5 million adequate for your possible horrible situation that might occur.

Elliott Special Risks LP (ESR) has some interesting views on why you should be considering more than the usual $2 or even $5 million limit to protect your business. We would like to share this information with you, the person trying to make a decision about what is best for your business.

Here are a few things you might want to consider:

Limits of $50 million or more should be considered if you have an elevated exposure to severe bodily injuries, multiple bodily injuries or catastrophic property damage exposures. Fire and explosion that damage surrounding commercial and industrial properties are the most common causes of catastrophic property damage losses. What do you manufacture? If there is an explosion could you find yourself in this situation?

If you have a U.S. premises or product exposures or vehicles operating in the U.S. then you should also consider higher limits. U.S. court awards tend to be much higher than those here in Canada. You can help to minimize some of the fluctuating currency risk if your principal exposures are in the U.S. by buying your General Liability coverage in American dollars.

You will have requirements from your landlord or a major customer that you carry a certain limit of insurance. To meet these external insurance requirements is necessary, but it is not a substitute for thoughtfully considering the right level of protection for your business. If the insurance you are purchasing is to protect the interests of your business partner or landlord then your own needs should be above and beyond the amount purchased.

When you add a company as an additional insured then you are limiting the funds that you have to pay out claims as the company named now has a piece of your "insurance pie".

The long-term, corrosive consequences of personal injury litigation shouldn't be underestimated. Big lawsuits tend to take a long time to resolve. While they remain outstanding, they can foster an environment of uncertainty that can inflict real damage. The threat of underinsured litigation can cause havoc with your financial stability. Your ability to borrow, build, and grow — and even corporate buy-outs — can be jeopardized.

An insurance loss isn't always discovered immediately — especially if, like product liability losses, they occur away from your premises. Even when a loss is reported promptly, its full severity may become apparent only after several years, perhaps as the trial date draws closer. Some lawsuits are finally adjudicated 10 years or more after the original injury.

You don't have to be the principal defendant to be a victim of this kind of financial instability — big lawsuits attract a lot of fringe defendants as well. Thanks to joint and several liability and the hunt for deep pockets, blame can shift from those who are most responsible to those who can most afford to compensate the injured victims.

If you are going to consider self-insurance (not purchasing enough insurance to handle a disaster and expecting to be able to finance the consequences yourself) then do this for loss frequency, not severity. Large losses have a mighty big sting, so adequate excess limits always make sense, even for businesses willing to self-insure layers of loss frequency.

You may have the financial resources to absorb a large loss over time, but the short-term fiscal impact on spending or borrowing will always justify purchasing higher catastrophe-level insurance.

Self-insurance must be carefully balanced against predictability. New legislation, regulations and precedent-setting court awards will have a measurable but manageable effect on the frequency layer. In the excess layer, the effects are likely to be rare but pronounced, even catastrophic. Adequate insurance limits are the only hedge against this sort of social inflation.

Talk to your agent or broker about purchasing higher limits of insurance if you know that catastrophe could strike your business and you would not be able to recuperate with the level of insurance coverage you currently have. Umbrella policies are a cost-saving method of getting a much higher limit of insurance to help protect your ongoing business operation and profitability.

Take control of your insurance. Ask the questions and get your answers. Weigh your risk.