Adequate Insurance Limits; A Foundation for Your Risk Management Policy

Risk Management is defined as "reducing the chances of injury, damage, or loss by taking steps to identify, measure, and control risks". This article will not go into detail about the best practices for risk management for your business. Every business is different, and requires an ongoing review of their risk management policies. Risk management is a logical step-by-step process to protect, and consequently minimize risks to, your company’s property, interest, employees, and customers. Risk includes the chance of damage to or loss of company or employee property, and the chance of incurring liability to third parties.
A good risk management policy includes input from your employees, your insurer, and your legal team. But no matter how effective your risk management policy is, human conduct is not entirely predictable, or preventable. People including staff, forget about the rules, or break the rules. "Accidents" happen (actually, most accidents are entirely preventable…hence risk management). Property may be destroyed. Individuals may get injured. Customers and third parties may be entitled to compensation from you or your company as a result of the conduct of one of your employees, agents or subcontractors. Then what happens?
You first look to your insurance policies to see whether you are covered. (You should already know whether you are covered or not, if you have conducted an effective risk management program).
If you are covered, you submit a notice of claim to your insurer, and cross your fingers.
Will your insurance coverage be enough to pay out the injured party for their loss?
If your risk management policy fails for some reason, and your company or employees are negligent and cause someone an injury, your last line of defense is your insurance policy. Will your insurance policies protect you from a catastrophic injury to a third party? Is your insurance coverage adequate, for your business, your home, your recreational property, and for all your vehicles, including your recreation vehicles and boats? Or will you be at risk of losing your entire business, and assets, if there is a serious injury? Are you playing Russian Roulette right now with your entire business, and personal assets, by having insufficient coverage?

The foundation of every risk management policy should be adequate third party insurance limits.
This article deals with this important issue. The time to review this issue is now, before there is an injury or loss. Once there is an injury, it is too late to review your coverage.

HOW MUCH COVERAGE IS ENOUGH?
Several recent BC cases have highlighted the extreme danger of having low third party liability limits on your insurance policies. Third Party Liability (TPL) is the amount that the insurance company will pay out on your behalf should you be at fault and cause an injury to someone else (the "third party"). The amount of your TPL coverage is chosen by you when you take out or renew your insurance policy.  Of course $ 1 million TPL is cheaper than $2 million, or $5 million, but is it wise to chose inexpensive insurance?

Many people make the mistake of thinking $1,000,000 third party limits is sufficient coverage for them personally, and for their business. If you have no assets, do not own a house, or a business, do not have a good income, and have absolutely no hope of ever owning any assets, then $1 million is enough. 
If you own a house, a business, have a reasonable income, or have any assets, then $1 million, or even $2 million, is definitely not enough.

Two recent cases in BC point out the short term folly of saving money by having insufficient insurance coverage. Both cases involved an individual who was brain injured in a car accident, and both cases resulted in an award of over $5 million in damages, and they were not that unusual. And these cases were both in BC, not the United States.
If you only have $1 million TPL limits, and cause someone serious injuries, you are personally responsible for the excess judgment over the $1 million coverage. If your business policy only has $1 million coverage, then the entire assets of the business would be at risk for the amount of the damages over $1 million.  Unless you can cover the $4 million difference, can you spell bankruptcy?
You could lose everything you have, including your house, your cars, your RRSPs.... and your business.
If you have substantial assets, you have substantially more to lose.
The extra costs for increased limits are not that high.

If you want to protect you and your family, and your employees, from possible financial ruin, run - dont walk - to your insurance broker, and increase your TPL coverage for both your business policies, and your personal policies. It could be the best insurance, and investment, you ever make. The amount of coverage necessary would vary with the amount of assets, and risk. Many carry $10 million in coverage. The amount depends on your capacity for taking risks, the extent of your assets at risk, and the types of activities of your family and business.

REVIEW YOUR INSURANCE POLICIES FOR ACTIVITIES COVERED
Make sure you conduct a thorough review of all your insurance policies to make sure that all activities by your staff and contractors which may give rise to potential liability are in fact covered by your insurance policy. Most policies have specific exclusions. Make sure you review all the policies in detail. Are all the possible activities of your company, agents, and contractors, and you individually, covered? There is no sense in having large limits to an insurance policy, and then find out when it is too late that the particular activity that caused the injury is not covered…then you have no limits whatsoever. There are many case on an insurers "duty to defend" in certain situations. You will be sure the insurance company will deny coverage if they can under the policy.
There are other ways of minimizing the risk of potential financial ruin from large judgments. 

REVIEW YOUR CORPORATE STRUCTURE
Make sure you also review the structure of your corporate enterprise. Should you incorporate to reduce risk, if you are presently operating as a partnership, or a proprietorship? Should you form a limited partnership?

REVIEW CONTRACTS
 You should also ensure contracts with those who you do business with, either by way of landlord and tenant, or sub-contractor, or partnerships, have provisions to ensure that risk is properly dealt with. You should be satisfied that if someone you are doing business with causes an injury to a third party through their conduct, the contract you have with them has a proper indemnity clause, and that they have adequate insurance limits themselves. This is often spelled out as a requirement in contracts. Do your contracts require sufficient limits with those you do business, or do they only require $1 million limits? If more limits are required, which they should be, have you followed up to ensure these policies are actually in place? Follow up to make sure they have in fact obtained the coverage they are required to have, and ensure you do so every year.

CONSIDER AN UMBRELLA INSURANCE POLICY
Consider an umbrella policy of insurance. This type of coverage covers you personally for all activities you may be involved in, and does not just attach to your home, business premises, or vehicle. It covers you for just about any activity you may be involved in. If you injure someone, and you are partially at fault, the insurer under the umbrella policy pays the legal fees and the damages that result from your negligence. Consult your broker about this type of policy, as conditions and terms vary. It is usually secondary coverage only; that is, it provides excess liability coverage over several of the insured's primary liability policies. Most umbrella policies provide coverage that is broader than the insured's primary policies.
Umbrella policies have three functions;
1) to provide additional limits above the each occurrence limit of the insured's primary policies;
2) to take the place of primary insurance when primary aggregate limits are reduced or exhausted; and
3) to provide broader coverage for some claims that would not be covered by the insured's primary insurance policies.
I would strongly recommend an umbrella policy for everyone with a business, or anyone with a reasonable amount of assets.

CONSIDER A FAMILY TRUST
Another mechanism to avoid the potential risk of financial ruin from a large judgment is through the use of a trust. Assets held in a trust are generally creditor proof.  Consult a tax and trusts lawyer to discuss whether a family trust is appropriate for you. Risk management and asset protection are just a few of the many reasons why family trusts are gaining in popularity.

Risk management is never perfect, nor are human beings. There is an increased awareness of risk management in business. Every business practices risk management to varying degrees. To be effective, a risk management plan must be a continuous process, and requires a sustained commitment from management, and all of your staff. Make sure your business has a detailed and ongoing risk management plan to identify and minimize risk.
But also make sure the most important component of that plan, adequate insurance limits, is in place, on all your liability policies. Make sure you have coverage for all situations.
If you or your staff cause someone to be injured, make sure your last line of defense, your insurance policy, is sufficient to ensure you do not suffer financial ruin.

This article was written by Paul Mitchell, of Pushor Mitchell LLP.
Contact Paul at 250-869-1115, or at mitchell@pushormitchell.com.