Imagine your business is hit with a lawsuit that exceeds the limits of your general liability insurance. Suddenly, you’re facing the prospect of paying the difference out-of-pocket, putting years of work and investment at risk.
That’s where excess insurance comes in. It’s not just an add-on, but rather a vital safety net that extends the limits of your existing liability policies.
Whether you’re running a small company or scaling a growing enterprise, it’s important to know when and why to invest in excess insurance. That decision can be the difference between financial resilience and vulnerability.
So, what factors should you consider before choosing excess insurance? Let’s take a closer look.
Understanding Your Risk Exposure
The first step in evaluating the need for excess insurance is to understand the risk profile of your specific industry. Some sectors, like construction, manufacturing, and healthcare, are inherently exposed to larger or more frequent liability claims. But even businesses in traditionally lower-risk fields are not immune to high-cost incidents.
It’s a problem more widespread than most people realize. According to The Business Journal, 75% of small businesses are underinsured. This is often due to outdated valuations that no longer reflect their current size or value. This gap can leave owners dangerously exposed if a major claim occurs.
It is especially relevant in the current legal climate, where large jury verdicts have become more common. According to Insurance Journal, liability claims in the U.S. have surged by 57% over the past decade. This spike is largely due to social inflation, as juries increasingly focus on fairness, justice, and corporate accountability.
Examine the nature and frequency of potential claims in your line of work. Then factor in the trend of rising legal awards to see if your base policies offer enough protection.
Evaluating Your Existing Coverage
Many business owners assume their current insurance is enough until it isn’t. General liability policies often have set limits that seem adequate on paper. However, they often fall short in real-world scenarios involving legal fees, settlements, or damages.
This gap becomes even more dangerous in the face of rising “nuclear” verdicts- jury awards of $10 million or more. According to the U.S. Chamber of Commerce, between 2013 and 2022, the median nuclear verdict reached $21 million. In 2022, product liability verdicts alone peaked at a median of $36 million.
Before opting for excess insurance, take the time to review the terms, limits, and exclusions in your existing policies. Consider whether those limits would truly hold up if your business were hit with a major claim. If your current coverage feels like it’s just meeting the minimum requirements, adding an excess layer can provide much-needed breathing room.
Claims History and Industry Trends
Your past claims record can offer critical insight into the level of risk your business may face moving forward. If you’ve previously encountered high-cost claims, it’s a clear warning sign. Settlements that have nearly reached the limits of your primary insurance also suggest your current coverage may not be enough.
In such cases, excess insurance can serve as a crucial financial buffer, stepping in when primary policies are exhausted. However, even businesses with a clean claims history shouldn’t become complacent.
To learn more and navigate this changing landscape, it’s wise to consult an experienced insurer. They can help analyze your historical claims data and compare current risks to industry benchmarks. This makes it easier to identify where your existing coverage may fall short.
Prescient National notes that partnering with your insurer to create tailored solutions can lead to greater long-term benefits. With their expertise, you can build a more resilient insurance strategy- one that anticipates potential threats instead of merely reacting to them.
Cost vs. Value
Of course, cost is always a factor. Excess insurance usually comes with lower premiums than primary coverage, since it only applies in rare, high-severity situations. What makes it especially effective is the way it functions.
It doesn’t pay out unless your underlying policy has been fully used. That underlying policy is typically your primary insurance, but not always. In some cases, it could be another excess policy.
Regardless of which type it is, the rule remains the same. The underlying policy pays first, and only then does the excess policy step in. This layered structure helps manage large-scale risks efficiently, giving you a vital financial cushion when it matters most.
Rather than viewing excess insurance as just another line item, it should be seen as a smart investment in your company’s long-term stability.
FAQs
Is excess insurance useful for businesses that rely heavily on contracts or vendor relationships?
Absolutely. Some contracts, especially in construction, government, and corporate sectors, require businesses to maintain insurance coverage above a certain threshold. Excess insurance can help you meet these requirements and stay competitive for larger or more complex projects.
How does excess insurance interact with policy exclusions in the primary coverage?
Excess insurance typically mirrors the exclusions in your underlying policy. If something is excluded in the primary coverage, it’s usually excluded in the excess policy as well. That’s why it’s essential to review your primary policy’s fine print before assuming excess insurance fills every gap.
Does excess insurance apply to multiple underlying policies or just one?
It depends. Some excess policies are designed to sit above a single policy, while others can stack over multiple policies. However, in complex setups, a true umbrella policy may be more appropriate if you need broader multi-policy protection.
Overall, excess insurance isn’t just for large corporations or high-risk ventures. Any business that could be financially strained by a large liability claim should consider it as part of a comprehensive risk management plan.
By carefully evaluating the discussed factors, you can make a more informed decision about whether excess insurance is a smart move for your organization.
A single lawsuit can put your entire business at risk. Adding that extra layer of protection could be the key to maintaining financial security.