Everything You Need to Know About Insurance Coverage Limits

May 08, 2018

Liability insurance exists to protect you and your business in the event that someone decides to sue your company. Instead of having to pay for damages from your own funds, liability insurance covers the costs of damages you're responsible for causing.

In order to keep costs reasonable, your insurance company will set insurance limits of liability. The coverage limit by definition is the maximum amount that the insurance company will pay out for a single incident or claim. In general, higher limits will result in a more expensive policy. Therefore, it's in every business owner's best interest to balance risk and budget to choose the appropriate level of insurance coverage.

Balancing Cost and Coverage

An insurance rates is determined by assessing risk, or the likelihood of a claim being filed, as well as the maximum amount that may be paid if such a claim were to be filed. In other words, if it's likely that the insurance company will pay out a substantial settlement in the future, the premiums will be higher. 

Whenever an incident maxes out your policy, you can be held liable for the difference. For example, if you are responsible for $2 million in damages but carry only $1 million in insurance, you may have to pay the other $1 million out of pocket.

As a business owner, this puts you in the position of deciding between taking a risk with low minimum insurance coverage or paying more per month for coverage with better protection. In most cases, a happy medium can be obtained that will balance your needs with your budget.

The minimum liability insurance you carry should be enough to cover the most likely scenarios your specific business could be involved in. High-risk environments are usually better suited to higher minimum liability insurance limits.

Common Types of Small Business Insurance Coverage

General liability insurance is one of the most common types of commercial liability policy that a business might need. It covers things like accidental customer injuries, electronic data loss and defense costs in the event of a lawsuit. It does not cover your own business property, professional services, employee injuries or intentionally malicious activity.

Policies sold by Hiscox begin with limits as low as $300,000 and as high as $2 million. A common liability limit for this type of policy is $1 million.

Another very common type of commercial liability coverage is professional liability, or errors and omissions insurance. E&O policies are essential for service professions like consulting where clients may act on your professional advice.

Hiscox E&O policies generally start with limits of $250,000 up to $2 million. The minimum insurance in New York is $500,000 due to state regulations.

The amount of insurance that you need depends on the type of business you have, the level of risk you anticipate, what you can afford to pay in premiums and how much you are willing or able to pay if your limits are exhausted by a single large incident.

Understanding your specific policy's coverage limit definitions is vitally important as failing to do so could put you at risk of being underinsured. Commercial liability policies are generally sold with limits listed on the policy's declarations page. When buying insurance, you will be able to choose the liability limit. The limit is the maximum amount that will be paid for any single incident regardless of how many people are involved in it. Liability claims are filed per incident rather than per lawsuit.

The finer points of limits of liability can become quite complex, and it's important to have your specific policy explained to you by an expert who understands your needs and the details of the policy you've purchased. Whether you have commercial liability insurance already or you're looking to invest in a policy, the commercial insurance professionals at Hiscox can help you understand the best option for your needs, so reach out to them today.