I am often asked questions about how much insurance an installing and/or monitoring security company should carry. Is there a recommended formula for the amount of errors and omissions (E&O) insurance an alarm company should have? How much for each $1 million in annual recurring revenue? How much for each $1 million in total sales? Is $5 million enough, $15 million, or more?
There are a number of ways to approach this issue and no doubt you will get different opinions from different professionals. I do not know of a formula, though I wouldn’t be surprised if there was one. On one side, those proposing more rather than less insurance will probably be insurance brokers and lenders. The brokers want the business and lenders want to be sure their business loan is not jeopardized, even though the lender will be secured and come ahead of a creditor. On the other hand, an accountant may look at what premium you can afford, and a lawyer may suggest that claims against you are defendable so less rather than more insurance is appropriate.
Your alarm contracts, if you’re using a standard form, require subscribers to obtain enough insurance to cover insurable interests. That means enough to cover whatever potential loss may be incurred. That’s good advice for you as well, but unfortunately the risks you face and the potential loss you can suffer is not related to the value of your business. It’s on top of the insurance you carry. For example, if your business is worth $5 million and that is what you carry on your insurance, the first $5 million loss will be paid by your carrier. Any excess claim will have to be paid by you; your business assets are at risk at that point.
The more you have to lose the more insurance coverage you will want to be sure to obtain. An alarm business worth $300,000 needs the same level of protection as one valued at $3 million. It is true that the more the alarm company is worth the more business it does and that will increase the risks it faces, and thus higher premiums for more insurance.
Just like your subscribers are often constrained in the systems they agree to because of budget constraints, you may find that the insurance you’d like to carry is just beyond your budget. Operating with less insurance than you are comfortable with is just another risk that you’ll be taking, similar to providing alarm services without getting your alarm contract signed because the subscriber won’t sign it. You understand the risk and you accept it in order to do your business.
I think you should carry as much insurance as you can afford. I talk to many start-up operations and have often advised they obtain the minimum coverage available, which I believe is $1 million. This E&O policy will provide defense cost, which hopefully will be the only monetary damage the alarm company faces. You can’t help getting sued, but you can expect your alarm contract will provide protection against most suits and that your performance of your contractual duties will absolve you of exposure to damages.
For more established companies of significant value, more insurance coverage is affordable and advisable. Minimum would be $2 million; $5 million if you do commercial fire. If you can afford $15 million then at the end of the year I would say, luckily you didn’t need it or lucky you had it because of a claim you may face. There is never enough coverage, but you should be able to assess the potential risk by the type of subscribers you have, the type of systems you install and service, and the contracts you use with your subscribers.