Businesses often overlook the need to buy extra or excess liability insurance limits, but these prudent coverage purchases are an essential safeguard, protecting against asset depletion from unforeseen risks.

Additional limits protection provides coverage over and above primary policies, which typically offer coverage up to $1 million per occurrence.

Accidents and claims resulting in liability due to negligence can easily exceed the available primary limits. Defense costs alone can be staggering.

The reality today is that no business–be it a business involved in the manufacturing, construction, food processing, institutional, or service industry–is immune from inadequate limits losses, especially in an environment of skyrocketing legal costs. A litigious society produces increasingly more generous liability damage awards, often disproportionate to the damage sustained.

Financial ruin of a business can be one tragic result.

It should be understood that excess or umbrella policies do not replace primary coverage but serve to supplement it by triggering increased limits after the primary coverage limit has been reached or exhausted. For example, a liability claim amounting to $4 million and which is covered by $1 million on a primary general liability policy would require a $3 million excess or umbrella to satisfy the total payout.

Think of primary insurance policies more as responders to claims of a frequency nature, and excess as being available for large or severe claims incidents.

Limit needs will vary–from $1 million to $25 million or higher depending on financial size and complexity of risk exposures. For example, a sole owner artisan contractor risk comfort zone may be an additional $1 million at a reasonable cost.

On the other hand, a large general contractor that generates $50 million in sales would likely need at least $5 million in additional limits not only to satisfy contractual obligations, but also to protect the firm's own assets from the impact of a financially crippling loss event.

As a rule of thumb, the more hazardous a firm's operations, activities and services provided, the more serious attention a firm should give to substantially higher limits protection. Operations such as mining, hospitality, long-haul trucking and manufacturers of medical devices, aircraft/vehicle parts or machinery are among those in this category. (See related text box, “Claims Scenarios.”)

From the agent and carrier perspectives, excess and umbrella coverage sales to single businesses that already buy primary liability coverage represent a good cross-selling opportunity. In addition, beyond such individual sales, “special programs” of additional limits can be sold to groups of business through association memberships.

For example, a tanning salon group plan of 250 subscribed member stores in a master policy program is an opportunity. Each member is eligible to purchase its own separate excess limit for nominal (group discounted) cost.

EXCESS OR UMBRELLA?

When purchasing additional liability insurance limits, buyers have two options–excess and umbrella policies. Essentially, an umbrella policy is a standalone policy with its own insuring agreement. Excess coverage, or follow-form excess, literally tracks the coverage provisions of underlying policies, while providing additional limits.

The difference and benefits of each are summarized on the accompanying chart (“Coverage Options”).

Both excess and umbrella forms pay losses on behalf of insureds, rather than operating as reimbursement covers.

No matter which form is selected, a word of caution is in order since not all excess and umbrella forms are standard or created equal. Agents must carefully review premium quotes and coverage offerings with their clients to determine the best protection value for the cost. Simply put, a $5,000 premium is not necessarily a better coverage value than a $7,500 premium for the same excess/umbrella limit, if the level of coverage provided is considerably less.

Keep alert, read carefully and engage consultation with insurance professionals before recommending a policy.

Agents want to be sure they are getting the “best bang for the buck.” At the same time, serious buyers are cautioned not to get caught up in the pitfall of fixating on cost versus obtaining the necessary and complete insurance protection for the business operations exposure.

BUYING TIPS

Some all-important buying essentials to consider when evaluating carrier options include:

o Carrier financial strength (A-rated)

o The ability of markets to provide rapid quote and bind service.

o Consistent, flexible underwriting and technical expertise.

o The ability to craft creative solutions and customized coverage to address unique situations.

o Responsiveness in adapting to industry and technological trends.

o A staff of professional, educated underwriters who understand and can explain coverage components and provide insight and advice about loss exposure.

o Clear coverage definitions making distinctions between what is covered and what is not covered readily apparent.

In searching for the most competitive combination of coverage value for the quoted price, buyers will seek carriers who recognize superior risks and price them accordingly.

To take advantage the best pricing from these markets, agents and advisors should make sure an insured:

o Has a formal loss control program.

o Has strong experience, reputation and leadership skills in the business field.

o Has sound management controls over business operations and a skilled workforce.

o Conducts periodic self-inspections of premises and operations.

o Has adequate field supervision at project sites.

o Has favorable loss run reports for the past three-to-five years.

o Is receptive to correction of hazards and risk improvement suggestions.

Excellent deals abound in the current marketplace for low-cost excess or umbrella policies, and it makes sense to obtain excess or umbrella quotes with several limit options. It could be money well spent at a reasonable cost.

Can your client afford not to purchase the extra protection?

The accompanying claims illustrations underscore the tradeoff between the nightmare outcomes taking calculated risks through “self-insurance” and sound financial planning strategies that appropriately shift risks to an insurance company, offering peace of mind.

Considering the potential consequences of an accident–injured parties and related high costs of medical treatment, lost wages, possible physical and mental therapy, and legal proceedings that may eventually end up in court–inadequate insurance limits are a recipe for financial disaster.

A likely cure is a measured and carefully formulated coverage program that includes additional limits protection over and above the major primary underlying policies.

Ken Laderoute, CPCU, is vice president of the Domestic Special Risk Division of Burns & Wilcox. He may be reached at [email protected].