It is fairly easy to determine the amount of insurance you should buy to insure your building against fire, wind and other potential causes of loss. It is much more difficult to determine how much liability insurance you should buy to protect your business against legal liability lawsuits.
There are many different types of liability insurance. The most common types are referred to as General Liability, Automobile Liability and Employers Liability (part of the Workers’ Compensation insurance policy). Almost all businesses purchase these three types of coverage. What other types of liability insurance you may purchase is dependent upon your size and type of business and your exposure to other potential types of legal liability.
In addition to these types of insurance, additional coverage is available to provide excess amounts of liability insurance above your General, Automobile and Employers Liability insurance. Under this insurance policy, called an Umbrella policy, the additional limit of insurance responds after the primary policy limits are exhausted. For instance, if your Automobile Liability policy has limits of $500,000 and you buy a $2,000,000 Umbrella Liability policy, you would have up to $2,500,000 of liability protection available for an at-fault automobile liability claim.
An Umbrella Liability policy is the least expensive method to increase limits of liability insurance, because one policy is issued with higher limits rather than increasing the limits on two or three primary policies. Therefore, you should buy your basic policy limits at the lowest available limits above which an insurance company will write an Umbrella Liability policy.
The cost of an Umbrella Liability policy is relatively inexpensive. As a guide, the cost will usually be 15% to 20% of the General Liability and Automobile Liability premiums for a $1,000,000 policy. No charge is usually made for the excess Employers Liability coverage. And, it is generally less expensive, per $1,000,000 unit of coverage, to buy even higher limits of insurance.
There is no easy answer to the question of how much liability insurance should be purchased. There are relatively few multi-million dollar liability lawsuits, but nobody can predict who will be hit by a catastrophic claim. So, the typical answer of “buy as much insurance as you can afford”, while not scientific, does incorporate the cost-benefit considerations on which business owners base decisions every day. At the very minimum, however, IRMS recommends that all business owners purchase an Umbrella policy with a limit of at least $1,000,000.