On the afternoon of April 17, 2013 a fire broke out at the West Fertilizer Company in West, Texas, a town located a little more than an hour’s drive south of Dallas and Fort Worth on Interstate 35. The first responders to the fire included 10 members of the West Volunteer Fire Department, along with 2 other people who pitched in to help. At 7:50 that evening, an explosion rocked the West Fertilizer Company killing 15 people including the 12 people who responded to the fire and injuring about 200 people in town.
The force of the explosion obliterated the plant, tore through a 3 foot slab foundation, and created a crater 93 feet across and 13 feet deep. Damage to the town included destruction of 60 to 80 homes and a 50 unit apartment complex with additional damage to about 75 homes and the West Middle School. Total property damages topped $100 million.
The West Fertilizer Company carried a commercial insurance policy with $1 million in liability coverage. News organizations, including the Dallas Morning News, had a field day over two issues:
- The amount coverage that West Fertilizer Company carried on their insurance policy.
- The lack of a minimum required limit imposed by the Texas Legislature for Texas fertilizer plants storing explosive ammonium nitrate.
Obviously the amount of commercial liability coverage West Fertilizer Company carried was not enough to cover the catastrophic property losses incurred from the plant’s explosion, let alone the loss of life or injuries.  One of the questions any business owner should ask in light of the West Fertilizer Company explosion is how much general liability coverage should they carry? Answering that question will be framed by how the following 4 questions are answered:
- What type of business are you in?
- What level of minimal level of coverage does your state require?
- What level of risk do you insure to?
- What level of coverage is affordable?
Business type: The type of business you operate will help determine the amount of coverage you carry. Do you operate a clothing store, restaurant, or delivery service? Does your business utilize chemicals, solvents, or material that can pollute ground water and drinking supplies? Or do you produce a potentially explosive product such as ammonium nitrate? Each of these business types, whether a service, manufacturing operation, or something that can cause people to get sick carries different levels of risk. The type of operation helps determine the underwriting risk factor and impact the cost for the liability insurance.
State requirement: Texas law mandates certain businesses carry specific minimum limits of insurance. For instance:
|
 Business Type |
Minimum Coverage Amount |
| Amusement ride operators |
$1.5 million |
| Elevator / escalator contractors |
$1.5 million |
| Electricians |
$600,000 |
| Residential appliance installers |
$600,000 |
| Emergency medical services providers |
$500,000 |
| Tow trucks (non-accident work) |
$300,000 |
Other states may have similar requirements. Check with your insurance agent and appropriate state agencies to determine what minimum level of coverage is required. In the case of fertilizer plants located in Texas, there is no required minimum level of coverage.
Risk level: Based on your business type and state requirements, do you carry a minimum level of commercial liability insurance and pray nothing goes wrong, or do you carry a higher level and insure for a larger event? Is it better to insure against the more likely claim types that may occur or do you carry a level of coverage to protect against a catastrophic claim? Most businesses insure up to a level that addresses the claim types they are most likely to experience rather than carrying a level of coverage for the unusual catastrophic event.
Insurance cost: One of the questions I’m asked by business owners is how much will the policy cost? These people tend to look at commercial liability insurance as an expense item rather than as a tool designed to protect the financial viability of their business when something goes wrong. They don’t want to pay more than they have to any more than they want to pay a claim out of their own pocket.
In the example of West Fertilizer Company, they had estimated annual revenues of between $5 million and $10 million. Had they carried a larger general liability policy and backed it with a commercial umbrella that would have paid the $100 million in damages, their annual premium would have cost approximately $100,000 a year. Would that have been a good use of their money? In retrospect, the answer may be yes, however I don’t know too many business owners that are gifted with the 20/20 vision hindsight provides us.  In this instance, that would have gone a long way toward mitigating the losses their friends and neighbors incurred when the plant blew up.
What do you think? How much coverage do you carry and should you carry more? Share your answers, questions, and comments with me in the comments section of our blog or on our Google + and Facebook pages. I’d love to hear from you!
