As a small business owner, insurance can be confusing, time consuming and expensive. At Lockton Affinity, we strive to make it as simple and affordable as possible.
With the coverage you need as a small business owner, you will likely have to select insurance limits for some of your insurance policies. First, you will need a basic understanding of what an insurance limit is and how to select insurance limits for small businesses like yours.
Understanding insurance limits for small businesses
An insurance limit, or limit of liability, is the maximum amount the insurance company will pay under a given policy. So if a claim is filed against you, the maximum amount the insurance company will pay is the limit you selected. Any costs exceeding the limit will not be covered, but many liability policies do offer coverage for defense costs “outside of the limit”. This means that legal costs associated with defending, or settling, the claim do not erode the insurance limit.
Depending on the type of policy you have, you may see limits of liability written differently. Common examples, include:
- $1,000,000 Occurrence / $3,000,000 Aggregate
- $1,000,000 Claim / $3,000,000 Aggregate
- $1,000,000 Occurrence Limit / $3,000,000 General Aggregate Limit
Despite how the limits of liability are written, they are always set up in the same way. The first number is the maximum dollar amount for damages and expenses to be paid for a single occurrence or incident. The second number is the maximum total dollar amount that your policy will pay out in a policy term (typically an annual policy).
The limit of liability is available for the payment of legal defense costs, settlements and court awarded judgments, which would be otherwise payable by the policy holder, the company or its executives.
Selecting your insurance limits
Selecting your insurance limit is different for every small business and every type of policy. However, there are a few considerations that apply to all:
What can you afford?
The premium of a policy is directly related to the limit of liability selected. The higher the insurance limit, the higher the level of coverage. Therefore, the policy is more expensive. Take a look at your budget and resources to determine what you can afford when applying for insurance.
What is your exposure?
If your business is just starting out, a lower insurance limit may be appropriate given your assets. As your company grows, or if your operations create larger exposures for third-party damages, consider this and adjust your limits accordingly.
Are there industry or contractual requirements?
Depending on the industry you are in, your state may require a minimum limit of liability. Certain partnerships, contractual obligations and lease agreements may also enforce limit requirements.
Unfortunately there is no one-size-fits-all solution to determine the insurance limits for small businesses. If you need help selecting your insurance limits, contact us today.