You have many options when purchasing a business insurance policy to help protect your company or profession from the financial implications you may face if something goes wrong. One of them is your policy’s coverage limits.

A policy limit is the maximum amount of money your insurance provider will pay for an insurable loss during the policy’s term, typically a one-year period. As your overall insurance policy consists of a collection of coverages, like commercial general liability insurance, commercial property insurance, and professional liability insurance, you may have individual coverage limits for each.

You can find out your coverage limits by reading your policy’s declarations page or asking one of our insurance experts for help reviewing the policy.

Reading about an insurance policy limit

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What Policy Limit Options Do You Have?

Most coverages have a predetermined policy limit. For instance, most professional liability insurance policies for contractors offer a coverage limit of up to $1 million. That means if you file a claim with your insurance provider for damage or loss, your provider will pay up to $1 million to cover the claim. Anything above and beyond that sum is your responsibility to cover. 

Also, there may be a deductible you have to pay before your insurance provider pays out. For example, if you file a claim for $5,000, and there’s a deductible of $1,000 on your policy, you must pay $1,000 before your insurance provider pays the balance of $4,000. Of note, the higher your deductible, the lower your annual premium may be.

You can increase the amount of coverage your insurance provides as well. While there may be a $1 million limit on your professional liability insurance, in many circumstances, that coverage limit can be increased to either $2 million or $5 million. In some professions and industries, you may be legally required to carry a minimum amount of coverage in your policy. 

How to Choose the Policy Limit Coverage You Need

Just as you would weigh various factors when choosing the types of coverage your overall policy needs, you should do the same when selecting your coverage limits. Sticking with the example of buying a professional liability policy, here are some of the factors that you should consider:

Your industry and the services you offer

Third-party lawsuits can happen to any business owner in any industry, but lawsuits are more common in some industries. Take a look at your industry’s general risks and the services you provide to get an idea of how much coverage you might need. So, if lawsuits are frequent and common in your industry, you might want to opt for a $2 million or $5 million coverage limit (and include legal expense insurance to your overall policy to cover the cost of hiring and retaining an experienced lawyer, which isn’t cheap).

Your contractual obligations

What are you obliged to provide your customers per your contracts with them? What is the value of those contracts? Do you offer specialized services that are inherently risky?

Who your customers are

Look at how many customers you have, the size of those organizations, and the industry they’re in should also come into focus. For example, choosing a higher coverage limit may be wise if your customers are large corporations.

The potential cost of a claim

What’s the average cost of an insurance claim for your industry? That can be difficult to determine, but a Zensurance broker can help you find out.

After completing an online application for a free business insurance quote, a Zensurance licensed broker can advise you on what coverage limits your policy ought to have to ensure maximum protection.

How Coverage Limits for Commercial Property Insurance Comes Into Play

Let’s use another example to show how coverage limits may vary by looking at how they apply to commercial property insurance.

Buying commercial property coverage helps protect your place of business, its contents (furniture, office equipment and computers, fixtures, exterior signage, etc.), and inventory or merchandise from loss or damage resulting from fires, floods, extreme weather, theft, and vandalism. In the event of an insured loss, like a fire at your office or warehouse, commercial property insurance is designed to pay to repair or replace what was damaged or destroyed by that fire, less a deductible that you would pay first.

One of the things you should do to determine how much coverage you need is to conduct a business contents inventory of everything inside your place of business and the items on the property’s exterior (like your store’s or office’s signage). 

It’s necessary because it provides you with an accurate account of all the items in your workspace and their value. Therefore, when you submit a claim to your insurance provider to cover damages you incurred from a fire, your provider will want to know what contents were damaged or destroyed and what those contents are worth.

Insurance providers break down the coverage for your property and assets into two categories: replacement cost coverage and actual cash value coverage. 

Suppose your contents and assets coverage is based on their replacement costs. In that case, your provider will pay to restore the damaged items to their original condition or replace them with new ones of equal value up to the policy limit. In this instance, if your $5,000 laptop was ruined in the fire, and your coverage limit is $1 million with a $1,000 deductible, your provider may pay $4,000 to replace the laptop after you pay the deductible.

If your contents and assets coverage is based on their actual cash value, depreciation of those items or assets comes into play. Let’s stick with the same example: your $5,000 laptop was destroyed in the fire. However, that laptop is three years old. If a comparable three-year-old laptop is worth $3,000, your insurance provider may pay $2,000 to replace it after you pay your deductible.

Which option is best for you – replacement cost or actual cash value coverage – depends on your level of risk. Also, know that a commercial property policy based on actual cash value coverage tends to be cheaper than one based on replacement cost coverage.

Get the Protection and Expert Advice You Need

Having a customized business insurance policy that addresses your business’s or profession’s risk management requirements is not something to be left to chance or overlooked.

Fill out an online application for a free quote from Zensurance for your small business insurance needs. With over 50 Canadian insurance providers in our partner network, we can get the policy you need at a competitive price and ensure your coverage limits are suitable for your potential challenges.

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About the Author: Joe Sarraino

Joe Sarraino is a Team Lead, Contractors, at Zensurance.