Liability Claims & The High Costs of Them
When it comes to liability claims and insurance and I’m talking about general liability, products liability, auto liability, professional liability – also known as E&O Liability, cyber liability, or D&O liability – is the common $1M limit enough protection? And if it’s not how much do you need and how do you get it.
So this question of limits came up recently in a conversation with an attorney friend of mine when we were talking about a claim scenario on a professional liability policy and he told me that his client had a $1M of professional liability insurance and it made me think – you know what, we’ve been selling and buying $1M limits since the 1980s?
Why is that? Why is it so common, and is it really realistic in todays world?
To be honest, I don’t think it’s sufficient for today’s liability claims, and I’ll break down some reasoning why I think that.
First, let’s breakdown into two different groups the policies I mentioned a minute ago. General liability, and auto liability are commonly written on an occurrence basis and it’s fine to write these policies with limits of $1m because you can easily and cost effectively gain higher limits of protection with an umbrella policy.
Where I think a lot of business owners and insurance brokers get it wrong is that they either forget to get an umbrella policy or they only price out what a $1M limit costs and they go with that. The point here is that going to $2 or $3 million on a small business account may only be a few hundred dollars and it may be worth it.
At the very least, ask for pricing options .
….and make a decision from there, thinking about the potential liability claims that could occur in your future.
Now, if you have vehicles in the business then you need more than a $1M auto limit and more than $1M umbrella limit – auto liability claims have the propensity to blow up to huge numbers and being protected is critical.
You’ve got to think about the potential for auto claims that involve multiple injured parties or worse a fatality or two – these are what are called nuclear claims which are reaching catastrophic levels. The more autos you have, the heavier those autos, the higher the limits you should be thinking about.
Claims Made Policy Forms
Okay, so let’s look at the second group of policies I mentioned earlier and these are claims-made policy forms and include: E&O or Professional Liability, D&O or Directors and Officers Liability, Cyber, Employment Practice Liability or EPLI, and pollution or environmental liability.
The first point to make here is that 99% of all business umbrella policies do not provide extra or excess protection over these types of policies.
As an example, if you’re a lawyer and you have a business owners policy, and an umbrella and a Lawyers Professional Liability policy or LPL, your umbrella does NOT provide excess protection over your LPL policy.
In order to get higher limits of protection over these policies you will commonly need to purchase specific excess protection over each policy form. There are some exceptions to this rule, but most of these policies cannot be grouped together to purchase excess insurance over more than one coverage type.
So, why do you need excess protection over a $1M policy for this group of policies?
For a couple of reasons. The first reason is like the occurrence policies mentioned before – claims are way higher than they were in the 80s or 90s. A million dollar limit may not be sufficient to protect you in a lawsuit covered by these policies.
Second reason is that most claims-made policies include defense costs within the limit of liability – what that means is that if you have a claim, the costs of defending you in court – the lawyers fees, court costs, etc. come out of your policy limit, they deplete the amount of coverage you have. Get involved in a long drawn court battle and your insurance company spends $150,000 on legal fees and you have a million dollar policy – that means there’s only $850,000 left in the policy to pay any settlement amounts.
Get it? That’s why higher limits may be really important.
Now, when it comes to cyber insurance, this is a huge issue, here’s why.
It doesn’t matter how big your business is, if you experience a data security event, which means a breach of data, a hack, a ransomware attack, etc. these types of events usually spawn very significant costs in the form of notification expenses, legal fees, crisis management, forensic and remediation costs, ransom payments, fines, penalties, lawsuits, and the list goes on.
Here’s my thinking on this.
Get optional quotes for higher limits. Most insurers can offer up to $3M limits as options in their primary policy. Often the difference between $1m and $2m is minimal – at the very least consider taking the $2M – if you experience a claim, you’ll thank me. if you don’t have a claim, it’s not a big dent in your budget.
Here’s the bottom line…..
The purpose of business insurance is to protect your most valuable asset and to give you peace of mind. Don’t be lulled into thinking that the protection you purchased 20 or 30 years ago is sufficient. Times have changed and unfortunately a lot of brokers aren’t thinking this way. Ask to see higher options on your renewals and budget accordingly.
Spending a little more today could make a huge difference if a big claim happens.
Have other questions, issues or concerns over whether your business insurance is right?
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