How to Calculate Business Liability Insurance Needs
Identify potential risks., Estimate the cost of each risk., Assess the probability of each risk., Find other ways to minimize risk., Check what insurance is required., Research what is covered in a general liability policy., Identify if you create...
Step-by-Step Guide
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Step 1: Identify potential risks.
You should spend some time thinking about the risks your business is exposed to.
For example, damage by fire, flooding, or theft are obvious risks.
However, your business might also face other risks:
You might harm consumers.
For example, your business might harm people physically (if you create products) or it may harm their reputations (if you publish information).
Your employees may become injured.
The human capital in your employees is often your largest asset, and you will need to protect against loss.
Your confidential information, including data, could be breached.
If you accept credit cards as a form of payment, then your data is vulnerable to hackers.
You could commit malpractice.
Professionals such as lawyers and doctors are required to meet a certain standard of competency.
If they fail, then they can be sued for injuries.
Your supply chain could break down.
For example, you may buy component parts from a company in Germany.
If their business is interrupted, then your business will be interrupted as well. -
Step 2: Estimate the cost of each risk.
It may be difficult to assess how much a lawsuit or accident could cost your business.
However, you need to prioritize your risks, and one way to begin is to assign a dollar amount to each.
You can estimate the potential costs to your business in the following ways:
Talk to an attorney or research jury verdicts to estimate how much a lawsuit would cost you.
If you create a product, then search product liability verdicts online.
Pay attention to state where the lawsuit was held.
Jury verdicts are higher in some states than in others.Value your property by checking how much it would cost to replace items.For example, if a fire ripped through your office, you would have to replace all of your equipment. , Not all risks are equal.
For example, a lawsuit for wrongful death could be devastating to your business, since you might need to pay out millions of dollars.
However, if you run a home-based publishing business, then you are highly unlikely to cause a wrongful death.
By contrast, if you are a professional such as a lawyer or doctor, then professional liability is probably your greatest risk.
Assess how exposed you are to each risk that you have identified.
Although you don’t need to assign a probability, you can rank them from most serious to less likely. , You don’t need to buy insurance to protect yourself from every risk.
In fact, insurance might not always be available.
Accordingly, you should consider other cost-effective ways to reduce risks.
For example, you could limit the risk of property destruction by installing sprinklers or alarms., Your state may require that you purchase certain types of insurance.
For example, you will probably have to purchase workers’ compensation insurance to cover injuries your employees sustain on the job.You should check with your lawyer to identify what other insurance you must buy.
There may also be legal minimums that you must purchase.You will want to know that information as well. , Most businesses get a general liability policy, at least to start.
This type of policy can cover a variety of risks, such as the following:
Liability as a tenant, e.g., your business is damaged by fire.
Liability for false or misleading advertisements, or for defamation.
Injuries sustained at your place of business or because of a product you sell. , Product liability insurance exists to cover any injuries caused by products you manufacture, design, or sell.If the product is defective, or if it lacks adequate safety warnings, then you could be sued for personal injuries.
Although your general liability policy may cover these injuries, some businesses need additional insurance.
However, if all you do is sell packaged products, then your risk exposure is much lower and you may be able to forego buying product liability insurance. , This type of insurance protects you against lost revenues and profits sustained from interruptions to your business.For example, your business might have been destroyed in a fire.
Although your current business insurance might pay to replace damaged equipment, it won’t cover lost profits.
This is where business interruption coverage comes in. , You might forget to buy auto insurance, but it is a necessity if your employees use company vehicles.
You might also need to purchase it if you have employees use their own vehicles for work purposes.If your employees use their own vehicles for business, then you can purchase “employer’s non-owned automobile liability insurance,” which typically is not covered in a general liability policy. , There are many different forms of insurance that may not be included in a general liability policy but which your business might need.
Consider the following:
Professional liability insurance.
In many states, professionals are required to purchase professional liability insurance in order to practice.
However, it is an option in other states.
Cyberinsurance.
This can protect you from damage due to data breaches.
Management liability and employment practices liability insurance.
This type of insurance can protect against liability for wrongful employment acts such as harassment, discrimination, retaliation, and wrongful termination., You need to talk to an insurance broker in order to properly calculate how much liability insurance you will need.Even if you want to buy insurance on your own, you should still consult with an experienced broker.
You can find brokers in the following places:
Ask other businesses if they used a broker.
If so, get the name and contact information.
Contact a business trade association.
They might sponsor a particular broker or agent.Look in the phone book.
People still advertise using Yellow Pages.
Perform online research.
Type “your state” and then “insurance broker.” Look for independent brokers. , Schedule a meeting.
Gather together the list of risks you identified and ask the broker how much liability insurance you should get.
The broker can help analyze your risks and let you know how much you can expect to pay in premiums.
The broker can also help you get a package policy, which bundles together different types of insurance.
This will usually reduce the amount you pay. , You might need more coverage than is typically offered.
If so, then you might need to purchase “umbrella” or “excess” coverage.Talk with your broker about whether or not you should get excess coverage.
You need to make sure that you are not overinsured or underinsured.An umbrella policy can help make sure that you get just the right amount of coverage. , You may need to provide your broker with detailed analyses of the value of your business.
Any business can be sued, but businesses with deeper pockets could face higher liability.
You should get necessary financial reports from your accountant to show your broker.
If you don’t have a business accountant, then you should get one.
You can get a referral from your attorney or another business owner. , You can go through the broker in order to purchase your insurance.
Make sure that you understand all of the details of the insurance before purchasing, such as your deductible and how to make claims.
Remember to periodically reassess your coverage.
Your business might grow or change, and you might have many more employees or offer new products or services.
If so, stay in contact with your broker and purchase new policies, if necessary. -
Step 3: Assess the probability of each risk.
-
Step 4: Find other ways to minimize risk.
-
Step 5: Check what insurance is required.
-
Step 6: Research what is covered in a general liability policy.
-
Step 7: Identify if you create or sell products.
-
Step 8: Research business interruption coverage.
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Step 9: Check if you need automobile insurance.
-
Step 10: Identify other potential forms of insurance.
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Step 11: Find an insurance broker.
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Step 12: Meet with the broker.
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Step 13: Discuss excess coverage.
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Step 14: Utilize your accountant.
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Step 15: Purchase coverage.
Detailed Guide
You should spend some time thinking about the risks your business is exposed to.
For example, damage by fire, flooding, or theft are obvious risks.
However, your business might also face other risks:
You might harm consumers.
For example, your business might harm people physically (if you create products) or it may harm their reputations (if you publish information).
Your employees may become injured.
The human capital in your employees is often your largest asset, and you will need to protect against loss.
Your confidential information, including data, could be breached.
If you accept credit cards as a form of payment, then your data is vulnerable to hackers.
You could commit malpractice.
Professionals such as lawyers and doctors are required to meet a certain standard of competency.
If they fail, then they can be sued for injuries.
Your supply chain could break down.
For example, you may buy component parts from a company in Germany.
If their business is interrupted, then your business will be interrupted as well.
It may be difficult to assess how much a lawsuit or accident could cost your business.
However, you need to prioritize your risks, and one way to begin is to assign a dollar amount to each.
You can estimate the potential costs to your business in the following ways:
Talk to an attorney or research jury verdicts to estimate how much a lawsuit would cost you.
If you create a product, then search product liability verdicts online.
Pay attention to state where the lawsuit was held.
Jury verdicts are higher in some states than in others.Value your property by checking how much it would cost to replace items.For example, if a fire ripped through your office, you would have to replace all of your equipment. , Not all risks are equal.
For example, a lawsuit for wrongful death could be devastating to your business, since you might need to pay out millions of dollars.
However, if you run a home-based publishing business, then you are highly unlikely to cause a wrongful death.
By contrast, if you are a professional such as a lawyer or doctor, then professional liability is probably your greatest risk.
Assess how exposed you are to each risk that you have identified.
Although you don’t need to assign a probability, you can rank them from most serious to less likely. , You don’t need to buy insurance to protect yourself from every risk.
In fact, insurance might not always be available.
Accordingly, you should consider other cost-effective ways to reduce risks.
For example, you could limit the risk of property destruction by installing sprinklers or alarms., Your state may require that you purchase certain types of insurance.
For example, you will probably have to purchase workers’ compensation insurance to cover injuries your employees sustain on the job.You should check with your lawyer to identify what other insurance you must buy.
There may also be legal minimums that you must purchase.You will want to know that information as well. , Most businesses get a general liability policy, at least to start.
This type of policy can cover a variety of risks, such as the following:
Liability as a tenant, e.g., your business is damaged by fire.
Liability for false or misleading advertisements, or for defamation.
Injuries sustained at your place of business or because of a product you sell. , Product liability insurance exists to cover any injuries caused by products you manufacture, design, or sell.If the product is defective, or if it lacks adequate safety warnings, then you could be sued for personal injuries.
Although your general liability policy may cover these injuries, some businesses need additional insurance.
However, if all you do is sell packaged products, then your risk exposure is much lower and you may be able to forego buying product liability insurance. , This type of insurance protects you against lost revenues and profits sustained from interruptions to your business.For example, your business might have been destroyed in a fire.
Although your current business insurance might pay to replace damaged equipment, it won’t cover lost profits.
This is where business interruption coverage comes in. , You might forget to buy auto insurance, but it is a necessity if your employees use company vehicles.
You might also need to purchase it if you have employees use their own vehicles for work purposes.If your employees use their own vehicles for business, then you can purchase “employer’s non-owned automobile liability insurance,” which typically is not covered in a general liability policy. , There are many different forms of insurance that may not be included in a general liability policy but which your business might need.
Consider the following:
Professional liability insurance.
In many states, professionals are required to purchase professional liability insurance in order to practice.
However, it is an option in other states.
Cyberinsurance.
This can protect you from damage due to data breaches.
Management liability and employment practices liability insurance.
This type of insurance can protect against liability for wrongful employment acts such as harassment, discrimination, retaliation, and wrongful termination., You need to talk to an insurance broker in order to properly calculate how much liability insurance you will need.Even if you want to buy insurance on your own, you should still consult with an experienced broker.
You can find brokers in the following places:
Ask other businesses if they used a broker.
If so, get the name and contact information.
Contact a business trade association.
They might sponsor a particular broker or agent.Look in the phone book.
People still advertise using Yellow Pages.
Perform online research.
Type “your state” and then “insurance broker.” Look for independent brokers. , Schedule a meeting.
Gather together the list of risks you identified and ask the broker how much liability insurance you should get.
The broker can help analyze your risks and let you know how much you can expect to pay in premiums.
The broker can also help you get a package policy, which bundles together different types of insurance.
This will usually reduce the amount you pay. , You might need more coverage than is typically offered.
If so, then you might need to purchase “umbrella” or “excess” coverage.Talk with your broker about whether or not you should get excess coverage.
You need to make sure that you are not overinsured or underinsured.An umbrella policy can help make sure that you get just the right amount of coverage. , You may need to provide your broker with detailed analyses of the value of your business.
Any business can be sued, but businesses with deeper pockets could face higher liability.
You should get necessary financial reports from your accountant to show your broker.
If you don’t have a business accountant, then you should get one.
You can get a referral from your attorney or another business owner. , You can go through the broker in order to purchase your insurance.
Make sure that you understand all of the details of the insurance before purchasing, such as your deductible and how to make claims.
Remember to periodically reassess your coverage.
Your business might grow or change, and you might have many more employees or offer new products or services.
If so, stay in contact with your broker and purchase new policies, if necessary.
About the Author
Steven Tucker
Experienced content creator specializing in home improvement guides and tutorials.
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