How much liability coverage does a business need? $1M vs $2M vs $5M limits

Choose your liability limit in three steps: first meet the highest limit any lease, client contract, permit or regulator requires, then ask how badly someone could realistically be hurt or how much property could be damaged by your work, and finally compare the price of each extra million against that risk. In Canada, $2 million per occurrence is a common starting point for small businesses that deal with the public, many contracts and commercial leases ask for $2 million or $5 million, and an umbrella policy can add higher limits above the base policy. Price at least two limits before deciding, because the extra cost is usually smaller than people expect.

This guide is part of the business liability insurance cost overview. Premium figures are illustrative.

The limits on a CGL declarations page

A commercial general liability (CGL) policy usually shows several limits. They are not interchangeable:

The aggregate is the easiest to overlook. If your policy has a $2 million each-occurrence limit and a $2 million aggregate, two $1.5 million claims in the same year share $2 million between them. For contractors and product sellers, the products-completed operations aggregate is often where the real exposure lies.

Step 1: what your contracts require

Pull the insurance clause from each lease and contract. Look for:

• the minimum limit per occurrence and whether it must be "each occurrence" or "aggregate"
• whether an umbrella can be used to reach the limit
• additional insured status for the landlord or client
• a requirement that your policy be primary and non-contributory
• notice of cancellation, often 30 days

The highest requirement sets your floor. The certificate of insurance guide explains how to show compliance.

Step 2: your realistic worst case

Ask what one bad event could cost. Factors that push the answer higher:

• Serious bodily injury is possible: work at heights, vehicles, heavy equipment, food, alcohol, children, crowds.
• Your work or products end up in other people's buildings: plumbing, electrical, roofing, HVAC, installed products.
• You work on high-value property: commercial buildings, data centres, luxury homes.
• Your business has assets a plaintiff could pursue if a judgment exceeds the limit.

Canadian courts cap non-pecuniary damages for pain and suffering under the Supreme Court of Canada's 1978 trilogy, adjusted for inflation, but the largest awards come from lost income and future care for a seriously injured person, which are not capped and can run well past $2 million. The guide to lawsuits that exceed the limit shows what happens if they do.

Step 3: the cost per extra million

An illustrative Winnipeg landscaping company with $900,000 revenue gets these CGL quotes from one insurer:

Moving from $1 million to $2 million costs $480, or 20% more. Moving from $2 million to $5 million through an umbrella costs $900, or $300 for each added million. The higher layers cost less per million because they are reached less often. That pattern is typical, but always ask for real quotes at each level rather than estimating. The rating factors guide explains how insurers apply increased-limit factors to the base premium.

To see the effect on a severe claim, enter a $1,600,000 judgment in the liability quote comparison tool with each limit: at $1 million you would face $600,000 yourself, at $2 million or more you would pay only the deductible, if any.

When an umbrella or excess policy makes sense

An umbrella sits above your CGL, employer's liability and automobile liability policies and pays once their limits are used up. An excess policy usually follows only one underlying policy's terms. Points to check:

1. The umbrella insurer will require minimum underlying limits, often $1 million or $2 million on the CGL and auto policies.
2. The umbrella follows the underlying policy's exclusions in most respects; it does not fix a gap.
3. If the base CGL aggregate is exhausted, a well-drafted umbrella drops down to respond, but check the wording.
4. In British Columbia, Saskatchewan and Manitoba, the basic auto policy comes from the public insurer, and optional extra auto liability is bought separately; an umbrella may require a stated amount of auto liability below it.

Limits for professional liability

Professional liability, or E&O, limits follow the same logic, with two differences. First, many policies outside Quebec pay defence costs inside the limit, so a $1 million policy may have much less available for a settlement after a long defence. Second, aggregates are often equal to the per-claim limit, so one large claim can exhaust the year. See CGL vs professional liability.

A decision checklist

• Highest contractual or regulatory requirement identified
• Aggregate limits checked, not only each occurrence
• Products-completed operations aggregate adequate for your work
• Tenants' legal liability compared with your lease obligations
• Quotes obtained at two or three limit levels
• Umbrella underlying requirements met
• Defence costs inside or outside the limit confirmed

Frequently asked questions

Is $1 million enough for a small business?

It can be for a low-risk office business with no contract requiring more. For businesses with public traffic, site work or products, many brokers start the conversation at $2 million. Compare the price difference before deciding.

Does a higher limit increase my chance of being sued?

There is no reliable evidence that it does in a way you can plan around. Plaintiffs' lawyers learn the limit during litigation in any case. Choose the limit that matches your exposure.

Can my landlord demand $5 million?

A landlord can make it a lease condition. If the cost is a problem, ask whether a $2 million CGL plus a $3 million umbrella satisfies the clause, which is often accepted.

What if a claim is bigger than my limit?

You are personally or corporately responsible for the excess, subject to how the judgment is enforced. If a claim could exceed the limit, the insurer will often send an "excess letter" telling you so; that is the moment to involve your own lawyer.

Sources

• Insurance Bureau of Canada — explanations of liability limits and umbrella coverage
• Supreme Court of Canada — the court whose 1978 decisions set the non-pecuniary damages cap
• Insurance Corporation of British Columbia — basic and optional auto coverage in BC
• Manitoba Public Insurance — basic and extension auto coverage in Manitoba