These words would bring a chill to most people, whether in their private or business lives. As a business owner, the possibility that you may be sued at some point is very high. Responsible business owners who have purchased insurance in preparation for just such an event, while understandably upset, are also comforted by the belief that their insurance will “take care of it.” In many instances, that is the case.
Insureds often believe that a lawsuit against them is not valid and won’t go anywhere; they believe the claimant is just trying to get money and really hasn’t suffered any damages. While that may be the case, the lawsuit will require defense. Even if the final result is not payment to the claimant, the costs of investigating and defending the suit can be quite high. If your policy indicates that payment of these expenses is outside the policy limit, the costs are born by your insurance carrier, regardless of how high they go, and you are covered.
Tanning salon owners are in a unique position. The operation of tanning units is considered Professional Liability, which places the insurance in a special class. This special class may allow a carrier to attach a Defense within Limits endorsement to their policies. Simply speaking, any costs involved in defending a claim are applied against the total limit of your policy. When that limit is exhausted, there are no funds remaining to pay any further claims during that policy term. Once that happens, the insurance company’s duty to you is exhausted. In some cases, the cost to defend a lawsuit could actually use your entire coverage budget before a settlement is reached.
Take for example a Professional Liability policy for a term from January 1, 2012 to January 1, 2013, with limits of $300,000 per occurrence/$300,000 aggregate and the “Defense Within Limits” endorsement. A lawsuit has been brought against you for an event that occurred on March 1, 2012. The costs involved in defending the suit are already at $300,000 (it can happen quickly), and it is nowhere near resolution. The insurance company is no longer obligated to defend you or pay for any award on this claim; you are now responsible for further defense and payments. To make matters worse, you have just been presented with a claim for an event that occurred on September 1, 2012. Unfortunately, because your limit for the policy term in which this event occurred has already been reached, your insurance company will not respond to this claim at all.
Some policies that have the Defense Within Limits endorsement offer a buyback option where you can pay an additional premium to remove this provision. Every time you make a business decision you must weigh the risk/reward factor. This is one of those times where the lowest price might not be the best option, and you would want to pay the extra if it’s offered.
The most important thing is to be aware of the coverage you are purchasing, and decide based on your level of comfort with various risks. Always discuss with your specialized agent policies you don’t understand or with which you are not comfortable. An informed businessperson is in the best position to make smart decisions.
