Should You Increase Or Decrease Your Business Insurance Limits?
by Vilma Maki
The first step toward having the right insurance coverage for your business is buying a policy. But how much coverage should you pay for? Do you have the right coverage limits? Should you raise or lower them? To help you find the ideal balance, here are a few questions to answer.
1. What Are Lender and State Requirements?
Begin by looking into required minimum coverage amounts so you stay compliant with these. Lenders often mandate a minimum type and amount of insurance on any secured asset. You may also need to adhere to state and federal mandatory minimums. Failure to do so could mean fines and penalties. Lenders may also charge you high fees to add their own mandatory insurance.
2. What Risks Does Your Business Face?
Evaluate your biggest risk points so you know where to beef up your insurance coverage. If you have a large online presence, for instance, you may need more coverage against cyber security issues and defamation online and on social media. Companies growing their product lines may want higher limits on product liability. And a business in an area known for natural disasters may need more standard property insurance.
3. How Much Can You Self-Insure?
Insurance is about protecting your finances. So coverage limits are not just about asset value. They're also about how much you could potentially fill the gap between the insurance check and your actual costs. A business with healthy reserves can afford to reduce insurance coverage on occasion and take on more financial risk. But one with little budgetary wiggle room may need to increase coverage.
4. What Would It Cost to Replace Things?
Most types of business insurance allow the owner to choose their own coverage amounts. It's easy to estimate your needs incorrectly, though. Perhaps you owe $50,000 on a crane valued at $100,000. But neither of these is what it would cost you to replace that crane. If you can't find that model anymore or if the market is tight, you'll have to buy a new one for $300,000. Insuring it for lower amounts leaves a financial hole in real life.
5. Are You Personally at Risk?
What is the structure of your business and how does it shield you from personal liability? Sole proprietors and many LLC owners are at personal risk of lawsuits and asset seizures, while corporations may protect owners from being responsible for business debts or liability. If you don't increase coverage to protect your own finances, make sure your business structure is airtight and you never pierce the corporate veil.
Where to Start
Can you do better at matching your insurance coverage limits to your business needs? If so, start by learning more. Meet with a business insurance agent in your state today.
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About Me
After we purchased our first home, we realized that it might be a good idea to evaluate our insurance coverage. Although we had purchased homeowners insurance before, we had never owned a policy as large as the one we would need for our new place. Also, our new home had a trampoline and a swimming pool, which made us worried about liability. To iron out the details, I decided to meet with our insurance agent. We talked about things like monthly premiums, coverage limits, and deductibles, and it was incredible to learn more about the terminology. This blog is designed to help you with the same types of questions.