This is a commonly asked question that unfortunately has no good answer. This topic was recently discussed by the Big I Virtual University faculty with varying answers.
Clients often want to know if they need limits of $300,000, $500,000, $1,000,000, $2,000,000, $5,000,000 or more under both their personal (ex: Personal Auto Policy, Homeowners Liability, Personal Umbrella) or commercial (ex: General Liability, Auto Liability, Umbrella / Excess Liability) insurance programs. Some believe that they need limits high enough to: cover their assets, cover the average claim, or cover the largest possible claim. Others don?t want to carry high limits because they don?t want to get the attention of hungry plaintiffs? attorneys looking for the next big payday.
The Big I faculty refuted the theories about carrying enough to cover the assets at risk or the average claim. My favorite faculty answer was to ?carry a dollar more than you?ll be sued for?. Of course, there is no way to get a crystal ball to answer this question. Clients typically don?t want to carry higher limits due to the expenses; however, they are quick to sue insurance agents for negligence if they were not offered higher limits. For this reason, insurance agents are advised by their errors & omissions liability carriers to not make a specific recommendation but to instead be able to prove that they offered higher limits to their clients.
My advice is to purchase limits as high as you can afford to cover the largest reasonably foreseeable loss which is much, much higher than the average loss. The largest reasonably foreseeable losses usually involve situations where multiple persons are seriously injured or killed in once accident. Examples include auto accidents, fires, and structural failures. Of course, such accidents are rare, but they could happen and if they do happen liability can easily exceed $5,000,000. ?Additional $1,000,000 limits of Personal Umbrella coverage are typically cheap whereas additional $1,000,000 limits for commercial coverages are a bit more expensive due to Umbrella / Excess Liability minimum premiums. The per $1,000,000 minimum premium for commercial Umbrella / Excess policies is often in the $1,000 to $2,500 range for medium to higher risk businesses. It really does come back to how much can you afford, how much do you have to lose, and what type of accident is reasonably foreseeable?
Source: ?Big I Virtual University, What Limits Do I Need?, September, 2012
Source: http://www.fastbusinessinsurance.com/blog/2012/09/how-much-liability-insurance-is-enough/
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