NFIB

Liability Insurance Could Save Your Business From Financial Disaster
05/ 03/ 2004

by Jeffrey Moses

Although many frivolous suits are dismissed before they advance to the point of becoming costly, courts are often reluctant to dismiss suits until all evidence is heard. This means that attorney fees may mount once a suit is established--even if the suit has no merit or if the company being sued is ultimately determined not at fault. Bottom line: being sued can cost your company a bundle, even if you win.

To counter this possibility (some would say eventuality), most companies should have some form of liability insurance in place. Liability insurance pays not only the damages that may result from a lawsuit, but also the costs of legal defense, which in some cases can be substantially more than the actual damages.

While there are few benchmarks to establish limits of liability, businesses should look at the legal and settlement costs of similar businesses in the industry that have been recently sued. Figures can often be obtained at industry associations, in the newspaper or by contacting attorneys within firms that have been sued. When recent costs have been determined, liability limits and corresponding premium costs can be worked out with insurance representatives.

When analyzing recent suits in your industry, consult with attorneys and insurance professionals about establishing operational procedures and policies to minimize exposure in the particular areas of the suits. However, safeguards cannot eliminate exposure and do not mean that liability insurance should not be purchased.

Certain types of suits normally are not covered by liability insurance. These include, among others: racially or gender-based discrimination suits; sexual harassment, violation of contract or non-performance suits; and intentional theft of intellectual property suits.

When considering the defense of potential lawsuits, a time element is always present. That means, did the alleged offense occur before liability insurance was in place, during that period or after?

"Claims-made" liability insurance (and claims-made insurance in general) covers the insured company for all claims made during the period the insurance is in force. Coverage of incidents occurring prior to the insurance being in place is usually called "Prior Acts Coverage," and normally is either "full prior acts" (meaning there is no limit to how far in the past an incident occurred) or names a specific date the coverage begins.

"Occurrence" liability insurance (and occurrence insurance in general) covers the insured company for claims arising only for incidents that occurred while the insurance was in place--even if a claim is not filed until some future time. Clearly, occurrence liability presents substantially greater risks for an insurance company, because claims may not be made for years after an incident. The section of an occurrence liability policy that specifically refers to future coverage is often called "Tail Coverage." This provides coverage for future claims made about incidents that occurred during the period insurance was in place, often even if the company eventually merges with another company, is sold or goes out of business.

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