Liability Coverage – How Much Is Enough?

Without adequate insurance, a legal claim could swallow your financial assets and your business.

Liability Coverage – How Much Is Enough?

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Is your business adequately covered in the event of a major liability judgment against you?

"Dollar awards just keep getting bigger," says John Rothstein, a Milwaukee lawyer with the firm Quarles & Brady who has represented a wide range of businesses and organizations sued in civil court for product liability and other tort claims. "Jury verdicts are going up. A million bucks today is not the same as a million bucks in 1970."

So how much liability coverage is really enough for your business? The shortest answer to that question is, "How much do you have to lose?"


Get Professional Advice

As with any financial matters concerning your business, one size never fits all. Before you make decisions directly affecting your company's operation or bottom line, seek out experts who know your particular business: A trusted insurance agent and a good liability defense lawyer, for instance.

General rules will help guide you as you consider their advice.

"Insurance protects you and your assets," Rothstein says. "If you don't have any insurance and you get into trouble, it could cost you all your savings, your bank accounts, even your business and your home."

Rule No. 1: Don't "go bare." On the other hand, rule No. 2 says the sky is not the limit. If your assets are worth, say, $150,000, there's little point in paying for $10 million worth of coverage in many cases. (There are exceptions, which we'll get to in a moment.)

Typically, you should be covered for something over the total value of your business and perhaps personal assets, Rothstein says. "If I've got $500,000 in assets, I want more than $500,000 in coverage. The more assets you have, the more insurance coverage you better have."


Calculating the Risk

Rule No. 3 dictates that you think about the hard risks associated with your business. What sort of problems have led to suits against others in the same business you are in?

"You look at what type of losses are out there," Rothstein suggests. That can range from the loss of a human life to damage to property.

Of course, that's not necessarily cheap, either: Potential costs include redoing defective work. Damage to the owner’s property and additional costs for inconvenience may add to the bill.

So besides the value of the assets you're protecting, you need accurate calculations for a potential liability. A dramatic example: For a doctor doing delicate surgery, a misstep could incapacitate the patient – with a potential loss of tens of millions of dollars, perhaps much more than the doctor's business is worth. That doctor should get coverage for the higher number, though, Rothstein notes.

That's the sort of calculation requiring informed professional guidance tailored to your specific circumstances. But again, you want an additional cushion above your anticipated likely loss.


Manage the Risk

Rule No. 4: Look at how you can manage your risk. What sort of safety practices does your business have in place to protect workers, customers and innocent third parties who might come across your finished work? Are there other measures you can institute at reasonable cost? The more you show you have taken all reasonable precautions, the less likely you are to be found negligent, even if something bad happens through no fault of your own.

Again, that's a general principle, not formal legal advice. "Less likely" is no guarantee of immunity from a lawsuit. Always consult with a knowledgeable professional who knows your business and the laws of your state.

Last, but definitely not least, is rule No. 5: If your business isn't already incorporated, incorporate it. This is true whether your business is a one-person shop or has many employees.

Once incorporated, make sure you respect corporate boundaries. Don't use business assets for personal use, and don't use your business credit cards or accounts to directly pay for personal products or services that aren't for the business. To do otherwise risks encouraging a judge to "pierce the corporate veil" and make an award to a plaintiff from your personal assets.

Rothstein points out that sole proprietors should cover their personal assets in any case. "If you're a plumber driving your truck and you have an accident, your corporation owns the truck, but you're driving it, so you can be sued personally."


Sued? What Next?

So what could actually happen if you get sued?

Suppose your business is worth $1 million and you've got insurance for $1.5 million. Then your operation is sued, and a judge or a jury awards the plaintiff $10 million.

Assuming the case is legitimate and you've lived up to your obligations with your insurer, the insurance company will pay the $1.5 million for which you're covered.

Does that mean you still will owe the other $8.5 million? And if so, what then?

Rothstein says, in theory, you could be forced to sell your company for its $1 million in value, even after the insurance payment. "Now you're down to the remaining $7.5 million," he continues. "But you cannot get blood from a turnip." So in the end, the plaintiff would eat the balance of what is owed under this scenario.

That's little comfort if you've just lost the business. But the scenario really doesn't have to play out that far.

Plaintiffs' lawyers "are very smart people," Rothstein observes. And they understand that a business owner is going to be far more willing to settle for what is already covered by insurance.

In many cases – again, assuming a legitimate case – a demand for an amount less than the insurance coverage will be at least grudgingly accepted, whereas a plaintiff who wants much more than the business is covered for "is just going to get a fight," he says. "If you have a million and a half dollars' worth of coverage, you can probably settle a lot more cases – even cases worth much more than that."

The bottom line: Look closely at what your liability insurance actually covers, and get sound advice on what the appropriate coverage should be. Then follow it.

It's the best way to ensure you have the protection you need should the nightmare of a lawsuit come true.



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