Many customers establishing new ventures are curious as to how much commercial insurance they need. In certain circumstances, a customer, vendor, or bank can drive the limit required. However, in the aforementioned cases, they are choosing limits that primarily work for them, not you. Moreover, in many cases, no third party is demanding a specific limit, so what limit should you choose?
A good place to start is to determine what sort of coverage you are looking at. Property Coverage (coverage for your stuff) is often what people wring their hands on, but that is relatively simple. You need to select a limit that will fully cover you in the event of a catastrophe. Insurance is based upon the idea of indemnity, which loosely translates into putting you back in the position you were in before the claim occurred. As such, you want to make sure you limits are sufficient. For example, if you have inventory worth $500,000; make sure to have a $500,000 limit of coverage. This may seem obvious, but people often times try to select a lower limit to reduce the costs. This is a bad idea, as insurance is nonsense until you need it. Having not enough insurance will wreak havoc on your new venture. Additionally, there can be penalties within your policy that further reduce your payout for not insuring to full value – i.e. Coinsurance Penalty.
When one is looking at Casualty (aka General Liability) limits are more difficult to determine. Typical General Liability policies are issued with limits of $1,000,000 Per Occurrence & $2,000,000 in Aggregate. These can be sufficient for many startups but not all. Because the Liability coverage protects you against judgments from lawsuits, a good rule of thumb is to select a limit not less than the value of your assets. For example, if you have a business with an NOI of $5,000,000; you definitely want more than a $1,000,000 limit. If you had a $1,000,000 claim, the plaintiff can potentially become a “partner” in your business.
Obviously, this is a macro perspective on limits alone. The rubber meets the road with the Terms & Conditions and Exclusions. You need a competent broker to propose contracts that have the customized coverages your business needs so that you do not have a policy with good limits; that will not applied because the contract did not have the correct attachment points.
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