Businesses often overlook the need to buy extra or excessliability insurance limits, but these prudent coverage purchasesare an essential safeguard, protecting against asset depletion fromunforeseen risks.

Additional limits protection provides coverage over and aboveprimary policies, which typically offer coverage up to $1 millionper occurrence.

Accidents and claims resulting in liability due to negligencecan easily exceed the available primary limits. Defense costs alonecan be staggering.

The reality today is that nobusiness--be it a business involved in the manufacturing,construction, food processing, institutional, or serviceindustry--is immune from inadequate limits losses, especially in anenvironment of skyrocketing legal costs. A litigious societyproduces increasingly more generous liability damage awards, oftendisproportionate to the damage sustained.

Financial ruin of a business can be one tragic result.

It should be understood that excess or umbrella policies do notreplace primary coverage but serve to supplement it by triggeringincreased limits after the primary coverage limit has been reachedor exhausted. For example, a liability claim amounting to $4million and which is covered by $1 million on a primary generalliability policy would require a $3 million excess or umbrella tosatisfy the total payout.

Think of primary insurance policies more as responders to claimsof a frequency nature, and excess as being available for large orsevere claims incidents.

Limit needs will vary--from $1 million to $25 million or higherdepending on financial size and complexity of risk exposures. Forexample, a sole owner artisan contractor risk comfort zone may bean additional $1 million at a reasonable cost. On the other hand, alarge general contractor that generates $50 million in sales wouldlikely need at least $5 million in additional limits not only tosatisfy contractual obligations, but also to protect the firm's ownassets from the impact of a financially crippling loss event.

As a rule of thumb, the more hazardous a firm's operations,activities and services provided, the more serious attention a firmshould give to substantially higher limits protection. Operationssuch as mining, hospitality, long-haul trucking and manufacturersof medical devices, aircraft/vehicle parts or machinery are amongthose in this category. (See related text box, "ClaimsScenarios.")

From the agent and carrier perspectives, excess and umbrellacoverage sales to single businesses that already buy primaryliability coverage represent a good cross-selling opportunity. Inaddition, beyond such individual sales, "special programs" ofadditional limits can be sold to groups of business throughassociation memberships. For example, a tanning salon group plan of250 subscribed member stores in a master policy program is anopportunity. Each member is eligible to purchase its own separateexcess limit for nominal (group discounted) cost.

EXCESS OR UMBRELLA?

When purchasing additional liability insurance limits, buyershave two options--excess and umbrella policies. Essentially, anumbrella policy is a standalone policy with its own insuringagreement; excess coverage, or follow-form excess, literally tracksthe coverage provisions of underlying policies, while providingadditional limits.

The difference and benefits of each are summarized on theaccompanying chart ("Coverage Options").

Both excess and umbrella forms pay losses on behalf of insureds,rather than operating as reimbursement covers.

No matter which form is selected, a word of caution is in ordersince not all excess and umbrella forms are standard or createdequal. Agents must carefully review premium quotes and coverageofferings with their clients to determine the best protection valuefor the cost. Simply put, a $5,000 premium is not necessarily abetter coverage value than a $7,500 premium for the sameexcess/umbrella limit, if the level of coverage provided isconsiderably less.

Keep alert, read carefully and engage consultation withinsurance professionals before recommending a policy.

Agents want to be sure they are getting the "best bang for thebuck." At the same time, serious buyers are cautioned not to getcaught up in the pitfall of fixating on cost versus obtaining thenecessary and complete insurance protection for the businessoperations exposure.

BUYING TIPS

Some all-important buying essentials to consider when evaluatingcarrier options include:

o Carrier financial strength (A-rated)

o The ability of markets to provide rapid quote and bindservice.

o Consistent, flexible underwriting and technical expertise.

o The ability to craft creative solutions and customizedcoverage to address unique situations.

o Responsiveness in adapting to industry and technologicaltrends.

o A staff of professional, educated underwriters who understandand can explain coverage components and provide insight and adviceabout loss exposure.

o Clear coverage definitions making distinctions between what iscovered and what is not covered readily apparent.

In searching for the mostcompetitive combination of coverage value for the quoted price,buyers will seek carriers who recognize superior risks and pricethem accordingly.

To take advantage the best pricing from these markets, agentsand advisors should make sure an insured:

o Has a formal loss control program.

o Has strong experience, reputation and leadership skills in thebusiness field.

o Has sound management controls over business operations and askilled workforce.

o Conducts periodic self-inspections of premises andoperations.

o Has adequate field supervision at project sites.

o Has favorable loss run reports for the past three-to-fiveyears.

o Is receptive to correction of hazards and risk improvementsuggestions.

Excellent deals abound in the current marketplace for low-costexcess or umbrella policies, and it makes sense to obtain excess orumbrella quotes with several limit options. It could be money wellspent at a reasonable cost.

Can your client afford not to purchase the extra protection?

The accompanying claims illustrations underscore the tradeoffbetween the nightmare outcomes taking calculated risks through"self-insurance" and sound financial planning strategies thatappropriately shift risks to an insurance company, offering peaceof mind.

Considering the potential consequences of an accident--injuredparties and related high costs of medical treatment, lost wages,possible physical and mental therapy, and legal proceedings thatmay eventually end up in court--inadequate insurance limits are arecipe for financial disaster.

A likely cure is a measured and carefully formulated coverageprogram that includes additional limits protection over and abovethe major primary underlying policies.

Ken Laderoute CPCU, is vice president of theDomestic Special Risk Division of Burns & Wilcox. He may bereached at [email protected].