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Liability Insurance: How Much Is Enough?

Business.com / Insurance / Last Modified: May 16, 2017

Liability coverage is a must for your construction business. Be sure to get enough of it and from the right agency.

If you own a construction business, you need liability insurance to protect your company. Liability insurance protects your company from being bankrupted by lawsuits and ensures that you meet state and industry regulations.

Though you know that you need liability insurance as a contractor, it is not always easy to pick the right insurance plan or coverage for your business. Read on to help you determine how much liability insurance is enough for your business. 

What does liability insurance cover?

Liability insurance protects your business’s property and resources. Without liability insurance, one lawsuit or claim against your business could bankrupt your entire company, burying it under mountains of inescapable debt.

Liability insurance covers many of the damages that might occur on a construction site and many of the circumstances that small businesses may find themselves in. Claims that are typically covered under liability insurance include injury and damage clams, to pay for medical expenses or damages done to a client’s property; product claims and copyright claims, to protect your company if a competitor sues for infringement; and legal fees, including expenses paid to attorneys. 

How risky is your business?

To determine how much liability insurance your company needs, you must determine the perceived risk of the work you are doing. Construction is a competitive industry with demanding tasks that frequently involve heavy machinery. Because of these factors, construction companies typically require higher levels of insurance than other industry averages.

However, the type of construction business you own still plays a role in determining your needed level of coverage. For example, a demolition business will require higher levels of liability coverage than a company that specializes in tile or carpet installation. 

How much coverage do you need?

Once you have determined how much risk your business is exposed to, you can calculate how much liability coverage your company needs. We recommend staying on the safe side when choosing coverage; if your business falls under the less risky category (carpet laying, etc.), then your liability coverage should be at least two times the total amount of the project you are working on. If you have a riskier business, like roofing or demolition, then aim for coverage that is three times the total amount of the project you are working on. 

It is also important to select a qualified agency. When selecting an insurance provider, make sure to ask how long each has been in business and what kind of cases it typically handles. Most importantly, ask the company about its rating to ensure it is a B or higher. You can verify ratings with a rating agency like A.M. Best or Standard & Poor’s. 

While liability coverage might seem like a hassle or an unnecessary business expense, it is important not to skimp on coverage. Many states require that you have liability coverage before beginning a project. However, if you have inadequate coverage, you risk losing your company in the event of someone making a claim against you. Choosing the best insurance for your company will protect your business and hard-earned assets against outside threats.

Image from nito/Shutterstock

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