Excess Liability Policies

The Excess Liability policy has many similarities to the Umbrella policy. However, the differences are in breadth of coverage, pricing, and policy provisions. Excess Liability policies can be written for both personal and commercial risks, but this article focuses more on the commercial application.

An Excess Liability (EL) policy works in a similar fashion as an Umbrella policy; it provides an extra tier of liability coverage for large losses. The EL policy is typically written for a combined occurrence/aggregate limit of $1,000,000, and it would step in after an underlying liability policy limit is maxed out.

Example:

Let's imagine your business has a General Liability limit of $1mil occurrence, $2mil aggregate. Your Excess Liability policy has a combined occurrence/aggregate limit of $1mil. If your company sustained a $1.5mil General Liability loss, your General Liability policy would cover the first $1mil of the loss, and then your Excess Liability would cover the $.5mil left over. If any other losses happened during the policy term, the General Liability policy would have up to $1mil of coverage left, and the Excess Liability would have $.5mil left to go over the General Liability policy, or any other liability policy. (A similar situation could be played out with automobile liability coverage.)

What makes the Excess Liability policy different from the Umbrella policy?

The main difference between an Umbrella policy and an Excess Liability policy is in the breadth of coverage of each. The Excess Liability policy typically follows the wording of the underlying liability policy exactly, while the Umbrella policy has its own coverages and exclusions. So for an Excess Liability policy, if the General Liability policy excludes claims of mental anguish, so does the EL policy (this is called a 'follow-form' Excess Liability policy). Typically, an Umbrella policy would cover claims involving mental trauma on a first-dollar basis (as a standard General Liability policy typically only covers direct bodily injury and damage to property of others). 

To summarize, the Excess Liability policy literally just adds X amount of liability dollars above your underlying liability policies, while the Umbrella policy both adds a layer of liability protection and broadens coverage. Because of this, underwriting standards will be higher for Umbrella policies than Excess Liability policies, and an Excess Liability policy will be cheaper than an Umbrella policy. 

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.

How to Find Insurance for Your New Business

Entrepreneurship is at the heart of the American Dream, and has led to many worldwide companies—McDonald’s, Coca-Cola, and Apple, just to name a few! The freedom and empowerment of owning your own business can be very fulfilling, but it takes a lot of work to get your new venture up and running. You’ll be facing plenty of ‘red tape’, along with making a business plan, finding a location, finding funding, and much more. Once you get most of that figured out, you’ll need to line up your insurance before you can open your doors for business.

Most first-time entrepreneurs have never dealt with anything more than Homeowner’s and Automobile insurance before. The transition from personal lines to commercial lines can be a bit rough—commercial insurance is a huge sector with varying policy language, scores of different coverages, and new exceptions and exclusions that you’ll never see on a personal lines policy. These differences make sense since businesses inherently deal with more risk and operate in a very different manner than your average homeowner. Even though it’s different than what you’re used to, commercial insurance still serves the same basic function—keeping you safe. Commercial insurance just expands the coverage you’ll be receiving, so both you and your business are safe!

Once you have figured out where your business is going to be located, whether or not you’ll have employees, and how you’re going to deliver your product/provide your service, you should contact an independent agent to see what your new business’s insurance options are. Contacting an independent agent will allow for multiple quotes from a single agent, saving you valuable time. When you meet with the agent, bring along the following information to increase the quote’s accuracy: square footage of your rented/purchased business space, estimated gross revenue for the first year, your resume showing pertinent experience, and your business plan (also, if you’re going to have employees, bring along the number of part time and full time employees you’ll have, and an estimated gross payroll for each). Also make sure to discuss exactly what your new business will be doing, where you will be doing it, and how you’ll be doing it. Underwriters love information, so the more details you can share about yourself and the processes your business will go through to perform your service/deliver your product, the better your premium will be!  

With that information, the agent should be able to get you an estimated premium for one year’s worth of coverage. This premium will most likely be higher than the average premium for other businesses in the industry, as you do not have any claim history yet. The agent should also discuss with you any additional coverages you’ll need that you might not have thought of or even known that you would need.

Here’s a brief list of coverages you will likely see:

General Liability: To cover slips, trips, falls, personal liability, and property damage caused by you, your business, your employees, and your premises. For contractors, it also covers any damage done by your completed work. All businesses need this coverage.

Professional Liability: For any job that requires a license, you’ll typically need to have Professional Liability (also known as Errors & Omissions insurance). Other occupations with high levels of risk may need Professional Liability as well.

Property: Commercial property forms will cover your building and your business personal property. It will also cover your business’s detached signs and will have options and policy language exclusive to commercial lines.

Business Income: After a covered loss, your business may not be able to function, but bills will still need to be paid. Business Income will pay you your expected net income while your business is out of operation.

Workers’Compensation: Any business with at least one employee is legally required to have Workers’ Compensation, even if your only employee is a family member and/or the employee works part-time.

Once you receive your quote(s), you may want to adjust your business plan to reflect the exact insurance expense you’ll be incurring, and adjust the rest of your plan accordingly. You may also want to look into limiting or adjusting some of your business’s products or services to reduce your risk, and thus reducing your premium. Discussing premium-saving options with the insurance agent is highly recommended. Risk reduction is very easy to implement before your business starts, but can be nearly impossible to do once it is in operation!

Entrepreneurship can be very challenging, but it can also be very rewarding. If you’ve decided to follow the entrepreneurial path, make sure you partner with an agent that has experience with start-ups. Also make sure that the agent is willing to work with you on developing best practices to reduce risk and keep your business claim-free and generating revenue!

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.

An Introduction to General Liability

Every establishment, large or small, retail or service, has a liability exposure. Naturally, some businesses have a higher claim potential than others. For example, an amusement park has far more exposure than a bakery, but how would each business ensure that all of their exposure is covered?

The General Liability policy (GL) covers the liability exposures found in all businesses and organizaitons, such as someone slipping and falling on their property, or the damage to someone else’s property caused by them or an employee. The General Liability policy also covers the defense costs of any lawsuits arising from these types of events. Essentially, it is a business’s primary defense against many unforeseen, often unpreventable, accidents.

What Determines the Proper Limit for the General Liability?

Setting a proper General Liability limit for a business highly varies. The best way to 'ballpark' the limit is to look at what the business is doing. Does this industry typically have a lot of claims? What is the claim severity for this type of business? Does the business have any special circumstances that increase or decrease its risk? It is imperative that you think of all the potential causes of a General Liability loss. The limit should then be set to adequately cover the total costs to defend and settle any suits that could come up or any damages that could be done.

Most any insurance agent will tell you that you can never have enough liability coverage. However, since most people can’t afford infinite coverage, you must carefully work with your agent to determine the proper GL level. Come claim time, it's always better to have too much coverage!

How Do the General Liability Limits Work?

Most General Liability limits are split, meaning that there is a limit per occurrence, and a separate aggregate limit. For example, let’s assume your General Liability has a $1 million occurrence limit and $2 million aggregate limit. You then have a loss of $1.5 million under your General Liability. The General Liability policy will cover $1 million of that loss, and you will also have another $1 million dollars left for any other claims that may occur that year. The $.5 million would not be covered and would require you to pay out of pocket—unless you had an Umbrella policy. 

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.