Umbrella Insurance

Despite the introduction of new legislation to help small business owners, crippling lawsuits are still a real concern. Learn how a good umbrella insurance plan can protect your assets.

DC Dry Cleaners closesfollowing $54-million pants lawsuit. Lawsuit forces Basketball Town to close. We see headlines like these in the news every day and yet many small business owners still don't understand how important it is to have adequate insurance coverage for their business until they get hit with a lawsuit. An average civil case can cost $50,000 to $100,000 to litigate through to a trial according to a recent study conducted by the Klemm Analysis Group for the Small Business Administration, a price tag that could prove fatal for many small businesses. While insurance industry estimates have placed the cost of tort litigation at $315 billion a year as of 2007, little precise information is known about either the number of torts or other types of cases filed against small businesses in particular or the expenses or effects of such litigation.

In the face of such facts, having a business umbrella liability insurance policy is something all small business owners should consider, according to Tim Streck, vice president of product development for commercial lines at Nationwide Insurance. Business umbrella liability insurance extends the insured coverage beyond the limits of their basic and business insurance and provides them additional liability coverage after the limits of their underlying policies are reached. Umbrella policies are available with a variety of limits but typically sold in increments of a million.

"Let's say someone has a $1 million limit on their general liability policy and they are successfully sued for $1.5 million," Streck said. "If they have an umbrella with a $1 million limit, they would exhaust the $1 million covered on their basic policy and have that umbrella to cover the additional $500,000."

Streck added that home-based businesses should really check their policies carefully. Many home businesses that move equipment from job to job—such as ladders for house painters and lawn mowers or other gardening equipment for landscapers—may not be protected under a personal auto insurance or personal umbrella liability policy. "I would suggest they talk to an agent and make sure they have an understanding of what's covered under their personal lines," he said.

Randy Baumgarten and his brother Rick are partners in Lee Lumber and Building Materials in Chicago. When their father started the business in 1952, he never dreamed they would get hit with a lawsuit. Unfortunately, however, Lee Lumber has been hit with a growing number of seemingly frivolous lawsuits in recent years. In one instance, a contractor bought a portable table saw from Lee Lumber and a carpenter used it on a job site. The carpenter removed the saw’s safety guard, because it was in the way of what he was working on, and he ended up slicing off two of his fingers. The customer sued both the manufacturer and Lee Lumber, alleging that the dealer should have told him in advance that there was a brake mechanism for the saw.

"It's hard enough to compete against all of the big-box stores out there and now you have to deal with the possibility of lawsuits," Baumgarten said. "It's an epidemic and I don’t know what the cure is for it."

The government is obviously aware that cases like the Baumgartens' are a severe problem, but efforts to eliminate it have been stalled in the legislative process. In February of 2007, a bill known as H.R. 989, or the Innocent Sellers Fairness Act (ISFA), was introduced as an attempt to protect businesses against just such lawsuits. The bill was intended "to prevent undue disruption of interstate commerce by limiting civil actions brought against persons whose only role with regard to a product in the stream of commerce is as a lawful seller of the product." Under this bill, the only way that a seller could be held liable for an injury or monetary loss resulting from a product is if the prosecutor proves one or more of the following conditions: the seller was the manufacturer of the product; the seller participated in the design of the product; the seller participated in the installation of the product; or the seller altered, modified, or expressly warranted the product in a manner not authorized by the manufacturer. Despite support from both parties and the general public, the bill was lost in committee debate. Until acts such as the ISFA are passed, it is imperative that small business owners have adequate business insurance to protect themselves in a worst case scenario.