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When it comes to liability insurance, providers face a challenge. Though it may be easy for them to estimate how much they will need to pay if there is damage to your property, the total cost of a lawsuit against you is unpredictable. Injuries to your customers or innocent bystanders can range from a sprained ankle to multiple fatalities. This degree of unpredictability means that insurance companies must be extremely thorough when it comes to setting the terms of commercial liability insurance.
Insurance providers don’t want to take too much risk on by providing insurance to a business that is likely to lose a major liability lawsuit. If your business has lost liability lawsuits in the past, or you work in an especially litigious industry, you may have trouble obtaining adequate insurance coverage. For example, automobile accidents are notorious for resulting in expensive lawsuits if one of the victims is injured. For this reason, a national limousine company that needs $30 million dollars worth of insurance coverage may only be able to obtain $15 or $20 million.
You can work around this shortcoming by supplementing your primary coverage with excess insurance policies, but you still might face a gap in coverage. Though your insurance policies may cover the majority of your legal fees, a gap in coverage can still be enough to bankrupt you if the suit is large enough. For many businesses facing large risks that are difficult to insure, Buffer Liability Insurance can help cover any gaps in coverage between policies.
What is Buffer Liability Insurance?
Buffer Liability Insurance provides coverage between the maximum policy limit of your primary insurance and the minimum attachment point of your excess or umbrella coverage. This “buffer layer” between policies is liability that a company can be exposed to and held responsible for in the event of a loss unless covered by Buffer Liability Insurance.
When you purchase insurance from an insurance carrier, your policy comes with a maximum financial cap or liability limit. For example, suppose you are sued for $5 million in a car accident, but your insurance policy has a liability limit of $3 million. Your insurer is only responsible for covering up to $3 million, and the additional $2 million owed will be your responsibility.
Luckily, you can purchase additional coverage for your business. Add-on or ancillary policies handle your excess costs and can save you thousands, if not millions, of dollars. However, these additional policies do not always start exactly where your primary insurance ends. Trouble comes into play if the ancillary insurance policy you buy has an attachment point that is greater than the limit of your primary policy. Addressing this gap in coverage is the main reason to purchase Buffer Liability Insurance.
- Your aquatic rental business owns a large fleet of paddle boats, canoes, and kayaks. Your general liability insurance policy has a liability limit of $2 million, and because you’ve seen an increase in consumer lawsuits in the area, you purchase an excess insurance policy to cover up to $3 million. However, the excess policy begins coverage at $2.5 million. If you are faced with a $3 million lawsuit when a customer is injured in a paddle boat crash due to faulty boat maintenance, you are financially responsible for the $500,000 difference between your primary insurance policy limit and the attachment point of your excess coverage.
Why purchase additional insurance policies?
Buffer Liability Insurance cannot be purchased as a standalone insurance policy. You only need Buffer Liability Insurance if you have purchased a primary and add-on or ancillary policy. The most common types of ancillary policies are excess insurance and umbrella insurance. Both excess and umbrella policies can provide you with the safety net you need if your primary insurance coverage isn’t enough. However, like all ancillary policies, neither of these insurance types guarantee total coverage. This is where Buffer Liability Insurance comes into play.
Excess Liability Insurance Vs. Umbrella Insurance
The most common forms of ancillary insurance are excess and umbrella. The key difference between the two is that excess insurance policies are limited to offering more financial reimbursement with the same terms as your primary policy, while umbrella policies can offer you coverage for new perils that were not stated in your primary policy. Umbrella policies can extend and broaden coverage across multiple policies, hence the term “umbrella.” When an insurer agrees to cover a new peril under your umbrella insurance that was not included in the original policy, this is known as “drop-down” coverage, as the umbrella policy drops down to provide coverage from the first dollar of loss.
Who should buy Buffer Liability Insurance?
Buffer Liability Insurance is especially useful to businesses with large risks that would be difficult to cover under one primary policy. While an insurance company’s appetite for risk may depend on a number of factors, including macroeconomic conditions and incidence of catastrophic events, insurers will always pay close attention to a company’s industry and unique risk profile. When there is high risk for the insurer, there is greater likelihood that the insurer will limit the amount of coverage that they offer. If your business operates in a high-risk area like construction, real estate, or transportation, or your company has a record of lawsuits against you, you may face a gap in coverage and benefit from having Buffer Liability Insurance.
Examples of business owners that may benefit from a Buffer Liability Insurance policy include:
- Commercial residential property owners – condo and apartment owners are more likely to be sued and therefore often receive more limited coverage offerings from insurers. Buffer Liability Insurance can be used to cover any gaps left by your habitational insurance.
- Businesses with a poor loss history – if you have collected a high number of insurance claims over a short span of time, you may seek out additional layers of liability coverage. Buffer Liability Insurance can address any gaps in coverage.
- Companies with large automobile fleets – truckers, limousine services, and other large-scale automotive businesses with 500 cars or more.
- Companies that self-insure workers’ comp – many states require companies that self-insure workers’ compensation to also purchase excess insurance coverage to protect against large, catastrophic claims. Buffer Liability Insurance can bridge any gap between your self-insurance and excess policy.
- You own a construction company that has liability insurance with a maximum capped payout of $400,000. Last year, you had an accident that cost you $1 million, and it’s not uncommon for construction companies in your area to be sued. Though you have worked to improve safety measures, due to the dangerous nature of your work, you believe another suit is likely. You are able to secure excess liability insurance up to $1 million, but the attachment point is at $700,000. Any costs between $400,000 and $700,000 are not covered. You purchase Buffer Liability Insurance for $300,000 to cover the gap between your primary and excess policies.
Buffer Liability Insurance in a Hard vs. Soft Market
The importance of Buffer Liability Insurance can depend on the state of the insurance market, which can be either “soft” or “hard.” When a market is “soft,” it means that it is easy for consumers to purchase insurance. Premiums and deductibles are lower, and coverage is widely available. During this type of market, insurance companies compete with one another to attract customers. You can have a higher cap on your primary insurance policy, and underwriters will even be willing to negotiate the terms of your policy with you. In these markets, there is less need for Buffer Liability Insurance. For the last decade, the market has been “soft,” but in recessionary times or periods of numerous catastrophic events, the market may turn “hard.”
In a “hard” market, insurance companies are no longer willing to underwrite as much coverage. They cannot afford to take a risk by agreeing to pay out more costly claims than they can afford. “Hard” markets are where Buffer Liability Insurance shines. Because insurance providers are less flexible during these times, you are more likely to receive a lower cap on your primary insurance or a higher attachment point for excess insurance.
Buffer Liability Insurance offers you the opportunity to cover any gaps in coverage between your primary insurance policy and your excess or umbrella policy. Businesses and industries that are known for having large risks that would be difficult to insure may not be able to purchase as much coverage from their primary insurance provider as they need. While excess insurance is a viable option to extend coverage, insurers may impose a high attachment point, leaving a gap in coverage that the business ends up being on the hook for. Buffer Liability Insurance can address this by providing coverage for the layer in between a primary policy’s limit and an excess policy’s attachment point.