Mike McLean June 10, 2024 12 min read

How Policy Limits Work – May 2024 Embroker Newsletter

A person is standing, holding their index finger up, with a megaphone, hopefully talking about Embroker's May Newsletter.

Let’s be honest. Shopping for and buying insurance can be confusing, especially if you’re just starting a business. What policies do you need? How much do you want to pay in premiums? What’s the right deductible to get? What do these words even mean?

While all of those are important considerations, there’s another critical component that doesn’t get as much attention: insurance policy limits.

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Knowing about insurance limits can make all the difference in ensuring your business is adequately protected from risks so that you don’t have to cover unexpected costs. And when you’re running a business, the last thing you want is another unexpected cost.

So, we thought this would be the perfect opportunity to explain what insurance limits are all about to help you purchase policies like a boss, and ensure your business is protected from the ever-increasing list of risks.

Let’s get into it.

  • What’s Going On?
  • What Are Insurance Limits?
  • How Do I Know How Much Insurance Coverage I Need?
  • What’s New from Embroker

What’s Going On?

Small businesses are having cash-flow problems – and big business is to blameYahoo Finance

The U.S. economy might be strong right now, but things aren’t so positive for many small businesses, with optimism at an 11-year low. Research shows that one pain point for small businesses is that they are waiting longer to get paid by those who use their services.

How Hotter Weather Stresses US Small BusinessesBloomberg

Many of us are thinking about the hot summer days ahead. But those days could bring an underappreciated risk to businesses. As this piece points out, small businesses are finding it increasingly difficult to cope with hotter and longer summers.

Visa Stresses Education as Small Business Confront Fraud VulnerabilitiesPYMNTS

The ongoing evolution of AI brings the risk of increasing fraud schemes and scams for businesses. While larger companies may have the tools to prevent fraud and scams, most businesses aren’t so fortunate. 

Small Businesses Think Cyberattacks Are Biggest Threat, Survey Shows  — U.S. Chamber of Commerce

According to a recent survey, cyberattacks are the threat that most concerns U.S. small business owners. But concerns about supply chain disruptions and another pandemic (please, no) follow closely in the second and third spots for perceived threats. This article looks into how small businesses perceive and prepare for threats.

What Are Insurance Limits?

Not sure why Lionel Richie and Meghan Trainor are talking, but okay?

We can all agree that the whole point of getting insurance is to protect your business from having to cover damages and losses when the unexpected happens. Those costs can quickly fall into the “I will never financially recover from this” (courtesy of the Tiger King) and “I am once again asking for your financial support” (courtesy of Bernie Sanders) categories, especially when cyberattacks are involved. That’s where insurance policy limits come in and why knowing about them is essential for protecting your business.

Insurance policy limits are the maximum amount that an insurance provider will pay for covered damages or losses under an insurance policy

Each policy, even within a packaged insurance program, will have its own limit. Depending on the types of coverage you choose, you may be able to adjust each policy limit separately.

For example, policy limits can be written as a single or split limits. Split limits are insurance limits that have both total and per-claim coverages. This typically means that a single claim may have a certain limit ($500,000, for example), while the total coverage will have a larger one ($2M, for example). These kinds of limits generally protect the insurance carrier from shock losses of million dollar claims.

Suppose you have a $5,000 deductible on your general liability insurance policy. You would first pay that amount, and your insurance provider would cover the remaining costs up to the policy limit. If the damages or losses exceed your policy limit, then you would pay the difference.

Most small businesses set their policy limits at $1 million, but if your company’s risk exposure is higher than average, you may want to consider increasing or considering higher limits. 

For example, let’s say you run a software company, and there has been an uptick in cyberattacks targeting businesses like yours. In that case, having higher policy limits can protect you from paying more out-of-pocket when and if a cyberattack hits your business.

Additionally, you may have client contracts that require you to carry a certain limit that’s higher than that $1M average. To meet those contract obligations, you would need to adjust your policy limits accordingly.

The bottom line is that insurance policy limits are a crucial consideration when purchasing business insurance. You want to ensure that your policy limits provide the right protection for your business’s needs. Speaking of that…

How Do I Know How Much Insurance Coverage I Need?

Covered? Get it? That’s TWO Lions defenders watching Dez Bryant catch the ball. TWO.

So, how do you figure out how much insurance coverage you need? After all, setting policy limits too low means being responsible for more expenses when a claim happens and potentially being unable to cover the costs. At the same time, too much insurance can mean overpaying for coverage you don’t really need

When purchasing any insurance, you need to decide what policy limits are right for your business. That means carefully weighing various factors such as:

  • Your industry
  • The value of your assets
  • The size of your business
  • Your potential risk exposure(s)
  • The level of risk you’re willing to take
  • Who you do business with
  • Regulatory requirements (depending on location and industry)

No two businesses are alike, so it’s no surprise that there is no one-size-fits-all solution for insurance limits. Some businesses can have lower policy limits, while others will need higher ones. 

If you’re concerned about the possibility of a large claim that could exceed your policy limits, there is the option to purchase an umbrella policy, which kicks in with additional liability protection when your regular policy limits are exhausted.

As with any business, your needs will likely change over time, which means that your insurance limits may need to be adjusted. For example, suppose your business has shifted to online only, and you no longer have brick-and-mortar locations. In that situation, you may want to decrease the policy limit for your commercial property coverage and increase the limit for your cyber liability insurance. 

The best time to handle a change to your policy limits is during renewal. If you need to increase an insurance limit during a policy term (i.e. the period under which you are covered), your insurance provider will likely request more information to validate the reason for the change. This is because your insurance provider may need to verify that the request for a limit increase doesn’t stem from an incident that has already occurred that could have a pending claim. If you want to increase or decrease your policy limits, reach out to your insurance provider.

Figuring out the proper insurance policy limits for your needs can be daunting and confusing. Whether you’re working with an experienced broker or a digital insurance company, you need to ensure that you understand the needs of and risks facing your business.

What’s New from Embroker?

Upcoming Events, Stories, and More

Embroker Introduces Insurance Program for Consultants

Have you heard? We have a new insurance program that’s built exclusively for consultants. Our industry-tailored coverage addresses the specific risks consultants face, including cyber threats, mistakes, and general business exposures.

How Embroker is Transforming the Digital Insurance-Buying Experience

In an exclusive interview with Pulse 2.0, our CEO, Ben Jennings, shares insights on Embroker’s journey and vision. Learn how Embroker is leading the insurance industry’s digital transformation by continually adapting to new technologies and centering on customer needs. 

How to Conduct a Law Firm Risk Assessment

Say goodbye to legal uncertainties and hello to a future filled with confidence. Check out our recent blog on conducting a law firm risk assessment to learn the crucial steps to identify, evaluate, and manage risks that could impact your law practice.

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