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Business liability insurance: Do you have enough?

When a Texas fertilizer plant exploded in April, the blast killed 14, injured more than 200 and caused tens of millions of dollars in damage. Yet, the plant had only $1 million in liability coverage, which pays for the losses that a business causes to others.

The Insurance Council of Texas estimates that insured losses from the explosion could reach $100 million. If the plant is found to be liable for that amount and can’t come up with the additional $99 million, the disaster could push the plant into liability insurance

One of the biggest business lessons of the disaster: You can never have too much liability insurance.

Many businesses will run successfully for years and never be liable for more than $1 million in damages, says Bill Wilson, associate vice president of education and research for the Independent Insurance Agents & Brokers of America.In fact, $1 million is a typical amount of liability insurance for small businesses to carry, Wilson adds. But in a situation like the Texas fertilizer plant incident in which your business is responsible for someone’s death, you could be ordered by a court to compensate the victim’s family for the amount of money the victim might have earned in his or her lifetime,Wilson says.

There are different types of liability insurance,each designed to cover a different type of risk. A general business liability insurance policyis the first line of defense when it comes to paying for losses caused by the company. Additional types of liability insurance, which offer more protection, include:

Professional liability insurance, which covers damages if someone is harmed by a product or service a business offers.

Employment-related practices liability insurance, which covers lawsuits brought against the company by employees who’ve been harmed by your business, including discrimination and sexual harassment incidents.

Fire legal liability insurance, which pays for damages if your business is found responsible for a fire that causes property damage to someone else.

The Texas fertilizer plant reportedly hadgeneral business liability insurance, with no umbrella policies to offer additional coverage. Most businesses won’t need every type of liability insurance, says Donna Childs, author of Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses. Rather business owners should identify which risks they are most vulnerable to and buy a policy that offers coverage for that risk. For example, “if you have people driving vehicles belonging to the company and making deliveries, you probably want additional auto liability coverage,” Childs says.

How much business liability insurance do you need?

If you’re looking for a general rule to determine how much business liability insurance you need, there is no such thing, Wilson says. The question is best considered on a case by case basis since some businesses by their very nature will need less liability insurance than others. For example, a portrait painter may be less likely to cause harm to someone than a surgeon.

However, there are five steps you should take to determine the right amount of liability insurance for your business, whatever industry you are in.

1. Talk to an attorney.

A lawyer can help you assess what you might be held liable for and what the likelihood is of that happening, Wilson says. An attorney also can provide insight into outcomes of lawsuits that similar businesses have faced so you can get an idea of how much was awarded in damages. Ideally you’d want enough liability insurance to cover that amount.

2. Consult an accountant or financial professional.

Once you have an understanding of the risks that are unique to your business, you must determine how much in assets your business has to protect.You wouldn’t want a lawsuit to wipe out your business completely, so ideally you want to make sure your insurance exceeds your business’s assets and income streams, Wilson says. You want to look at the property you own, and what could be garnished from your income for the next 10 or 20 years if you’re found liable for a major loss, Wilson adds.

3. Know the legal requirements.

Some states have minimum business liability insurance levels for specific professions. For example, in the state of Alaska, businesses that operate within the state’s park system such as water taxi operators and hiking tour guides must have enough liability insurance to pay a minimum of $100,000 for damage per person and $300,000 per incident.

4. Know what you can afford.

Another factor to consider when buying business liability insurance is your budget. Annual liability insurance premiums range from $750 to $2,000, according to the U.S. Small Business Administration.You should buy as much as you can afford, Wilson says.

5. Expect your insurance needs to change.

Business liability insurance isn’t something you buy once and never think about again. As your business grows, you’ll have more assets to protect and you’ll want to buy more business liability insurance to protect them. Likewise, if your business expands or branches into new areas, you should determine whether there are new things your business can be held liable for.Evaluating your business liability insurance “should be part of your annual planning process,” Childs says.

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