How Much Liability Insurance Is Enough?

There aren’t many activities in life riskier than starting your own business. Two of the biggest risks any business faces are the loss of essential property and personal injury claims. In minor cases, these risks can cause loss of income, but in the worst-case scenario, they can bring your business operations to a screeching halt and force you to close the doors.

Obviously, your success is dependent upon keeping risks and losses to a minimum. Liability insurance helps you lower vulnerability to risk by transferring some or all of the risk responsibility to your insurance carrier. The more risk you can transfer, the less vulnerable you become. That’s why it is so important to evaluate your operation frequently to determine where there is potential risk. Through a risk analysis, you consider all possible risks and determine which are the most significant for your particular business.

There are many types of third-party liabilities that businesses should be covered against. In addition to property loss and personal injury, businesses should be protected against claims such as damage to the property of others, allegations of false advertising, and legal liability stemming from employment practices. In the event that a claim is filed against you, liability insurance will provide you with a legal defense. Should the judgment go against you, your liability insurance will pick up the tab for covered damages up to the policy’s limits. Keep in mind that liability insurance can also serve as the collateral needed to post an appeal bond. A large award can be potentially reduced or reversed on appeal. Without the ability to post a bond, however, your company will not be able to start the appeal process.

Evaluating your level of risk is a complex issue. Although young companies generally have a low level of liability risk, you should buy coverage with an eye toward the future. This is especially important if you are developing products with the potential to impact a large number of people. The greater the potential impact, the greater the possibility your company will find itself as the defendant in a class action lawsuit. Other factors you need to consider include the size of your company’s operations, geographic locations, industry trends, organizational structure, amount of capital at stake, you and your staff’s degree of experience and expertise in the field, and any general industry hazards.

Determining the amount of liability coverage you need should be considered a work in progress. As you expand, you will encounter situations that necessitate increasing your coverage. A review of your risk analysis should be done periodically, perhaps at each renewal. You should also review your insurance needs whenever you business changes in size, diversifies into new markets, or relocates.

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