Commentary: Viewpoint - Insurance is essential when running a

Daily Record, The (Baltimore), Apr 1, 2005 by Terry O. Mayer

Perhaps the most baffling task when designing your business insurance program is how to select liability limits. While establishing liability limits on property values and business income is typically straightforward, setting the proper limits for automobile liability claims or a product liability claim can be difficult to determine.

Many companies also find it difficult to choose a liability limit to protect directors and officers against suits from minority shareholders or employees.

In my opinion, I believe that establishing the right liability limits are much more art than science. Multimillion-dollar lawsuits can hit any company, even small ones, and the following outlines the broad liability issues that most if not all companies wrestle with.

General and Auto Liability. Automobile liability protects your company against lawsuits resulting from accidents alleging negligence. Your level of exposure to these types of suits will depend on several factors. For example, how many vehicles does your company operate? Are they private passenger sales cars, heavy trucks or something else?

Other considerations include the types of controls you have over your drivers, the amount of driver turnover, and the level of their training. Obviously a heavy truck traveling at high speed can do a lot more damage than a slow moving city vehicle that makes frequent stops.

The legal climate in the territory you operate your vehicle is also important. What have been the largest awards for serious accidents? Your attorney should be consulted for this type of information.

General liability is an insurance term for exposures that include premises liability and product liability. Typically lawsuits alleging libel, slander, false arrest and malicious prosecution are included in general liability.

The issues you consider to determine the general liability limit directly relate to the nature of your business. For example, how safe is your premise or the products that you sell?

If you are a contractor, what type of work are you performing and what is the potential exposure? A contractor doing structural work for schools may have a greater exposure than a landscape contractor for example. I recommend that you consult with your attorney who can provide relevant information on the potential size of settlements awarded in the geographical location where your business operates.

Other factors you need to consider when choosing auto/general liability limits are company structure, company financial picture and cost.

Today most companies are incorporated. This structure provides a great deal of protection to the owners as far as lawsuits naming them personally. Other structures, such as limited liability corporations, also provide some personal protection.

However, if your company is a sole proprietorship or a partnership you should consider your personal exposure. Generally, these owners and partners do not have the kind of shield that other corporate structures offer.

Business owners should also consider their company financial situation when choosing coverage limits. A company with substantial net worth and retained earnings would certainly not want to declare bankruptcy in the event of a large, uninsured liability suit. In general, the higher the value of your company, the more you will want to buy protection.

Finally, you should consider cost when choosing insurance limits. The rates for liability coverage are typically much lower as the limits are increased. For example, your premium for the first $1 million of coverage may be $5,000, yet you can buy an additional $5 million limit for $2,500. Note that these higher limits are normally purchased via an umbrella policy.

D&O and Employment Practices Liability. Umbrella policies rarely include directors and officers (D&O) and employment practices liability. In addition, these coverages are normally purchased on claims made policy (versus occurrence).

In short, this protection is limited to the coverages provided on the policy and then only for the time you actually continue the coverage. You should discuss the D&O exposure with your attorney and insurance broker to determine if coverage is needed.

If your company has an outside board of directors, the answer will certainly be yes. I recommend that you research (with your attorney) prior litigation against similar firms. Most firms choose a limit after viewing the cost at various levels.

Unfortunately, cost is often the key factor since D&O premiums are often substantial. One way to obtain an adequate limit at a reasonable cost is to accept a high deductible (or retention).

Employment practices exposure relates to suits brought by employees (or prospective employees) alleging some form of discrimination or harassment. Any firm with employees has this potential exposure and which could lead to significant litigation.

As with other liability coverage, cost is also a factor in this instance. Even though cost and deductibles have decreased in recent years, it can still be substantial if your company has many employees.