Most businesses carry liability insurance against litigation from a customer hurt by or at their business, or even bystanders hurt nearby. Although people don't always think of it as such, drivers in the United States carry liability insurance on their cars by law. In many cases, basic liability insurance is sufficient. When it's not, reports Virginia-based insurance agent Courtney Rogers, a liability insurance supplement may be the answer.
Identification
Liability insurance is a contract between and individual or business and an insurance company. The individual agrees to pay a certain amount of money each month, called a premium. In exchange for that premium, the insurance company agrees to pay out money if the insured is sued, or threatened with a lawsuit. In many cases, this payment is negotiated with and paid to the person suing the policyholder, rather than directly to him. This is one way liability insurance differs from other types of insurance, such as homeowner's or theft.
Liability Insurance Ratings
According to Rogers, insurance is a game of risk management. Insurance companies hire mathematicians who use computer models to analyze how risky a particular insurance contract is. The more likely a policy is to have to pay out before the premium payments make a profit, the more the company charges for the policy. This is why your car insurance rates go up if you get a ticket or have an accident.
Liability Insurance Limits
If a policy seems like too high a risk, but not so high the company chooses to deny the policy outright, the company might set limits on the policy. Rogers reports that insurance companies frequently limit either the coverage or an activity. For example, a company might set a 1 million dollar limit on an individual, refusing to sell that person a larger policy because of the level of risk; or the company might allow the individual to buy as much insurance as he likes, provided he signs a waiver saying the company doesn't have to pay if the damage is caused by a specifically named risky behavior, such as flying an airplane.
Liability Insurance Supplements
Liability insurance supplements are separate liability insurance policies that can help protect somebody who has a limited policy. Rogers says that supplemental policies are usually written by a company other than the company that issued the original policy. This helps spread the risk around, so that no one entity takes all the responsibility for a major loss.
Expert Insight
Rogers recommends supplemental insurance for any business with a policy that has been limited by the issuing company. If your insurance isn't enough to cover the damage you're likely to suffer in a lawsuit, then you might as well not have coverage. On the other side of the argument, financial guru Dave Ramsey recommends only buying as much insurance as you need. If you have cash reserves on hand to cover the difference, supplemental insurance is a waste of money. Better to have reserves earning interest than be paying out money every month.
References
- Courtney Rogers; Insurance Executive; American Income Life, Richmond, VA
- "Exam Cram: Property and Casualty"; Bisys Education; 2009
- "Total Money Makeover"; Dave Ramsey; 2008
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