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Understanding How Much Insurance to Buy

5
Apr

Many times, determining how much insurance (policy limits) to purchase is fairly easy to determine (Property) and others is more challenging (Liability). 

Insurance is there to protect you and your business from loss/damage to property, financial harm and liability imposed by acts by you and your employees.

Property/Business Income

It is critical to determine the proper valuation of property that you intend to insure. Buildings and Business Personal Property (BPP) typically can be insured for Replacement Cost or Actual Cash Value. Each have different approaches to determining the value. Some policies can contain requirements for proper Insurance to Value (ITV) to avoid underinsuring penalties (Co-Insurance clause).

Things to consider:

  • Rebuilding costs for structures using realistic cost per square foot.
  • Impact of local Ordinance or Law provisions. Recognize potential need to take down undamaged building, associated debris removal and additional costs to bring new building up to current codes. 
  • How long rebuilding would take and impact on loss of income.
    • Business Income limit can be calculated using your financial records
    • Restoration time depends on nature of loss (i.e. Catastrophe storm – long duration)
  • Valuing your BPP and inventory should be done considering today’s cost.
  • Don’t overlook your equipment, depending on where used this may need coverage provided by Inland Marine policy.
  • What risk tolerance do you have with deductibles? Higher deductibles result in lower rates. 

General Liability/Auto Liability           

Liability provides protection of your business from lawsuits/negligent acts. 

Things to consider:

  • What is the economic value of your business long term?
  • What is the litigious environment in your area?
  • Does your business present significant exposure to others?
    • Products sold
    • Condition of premises
    • Public exposure
    • Services provided
    • Type of vehicles/distance traveled/cargo carried
  • Does your policy include defense costs outside or inside of policy limits? 
  • Are you sharing your policy limits with others (Additional Insureds you have added to your policy)?
  • Defense and indemnification you have extended to others via contracts you have signed?
  • Typical General Liability policy carries a $1MM Occurrence and $2MM Aggregate limit.
  • Typical Auto policy carries a $1MM Combined Single Limit.

Workers’ Compensation

Workers’ Compensation (WC) benefits are regulated by state statute for lost wages and medical expenses. The area where you can make a choice is the Employers Liability limit which provided protection to your business for work related injuries/disease that do not fall under WC statutes.

Limits are shown as:

Per Occurrence Bodily Injury / Per Employee Bodily Injury / Policy Limit for Disease

Many carriers routinely offer $500K / $500K /$500K limits with option of $1MM / $1MM / $1MM

Umbrella

Umbrella is an important coverage to consider as it can provide additional liability limits over your Auto Liability, General Liability and Employers Liability. Underlying policy liability limits usually need to be $1MM. Umbrellas are a very cost effective way to boost your liability limits.

Loring King

About Loring King

Loring King ARM, CRM, CIC Loring has nearly 40 years of experience in the insurance industry. He joined Member Insurance in 2015 as Sr. Vice President of Underwriting. In this role Loring is responsible for the underwriting/profitability of business placed in Member’s Captives (risk sharing portfolio). Prior to joining Member Insurance, Loring held various positions including heading the Agency/Association Captive unit for the Hartford Insurance Company, Risk Manager for Pulte Homes, Underwriting/Marketing/Program Management positions at General Agency Services, Meadowbrook Insurance, and Amerisure Companies. Loring is a graduate of Hofstra University and has earned a number of professional insurance credentials.

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