Most businesses carry different types of liability insurance. In particular, businesses need general liability insurance and workers' compensation policies. When you have multiple policies and feel your business is at greater risk of a lawsuit, you can get more coverage for less money by purchasing a commercial umbrella insurance policy. An umbrella policy covers several underlying liability policies to make sure you have the protection you need.
Here's a deeper look at commercial umbrella insurance, what it covers and how to decide if you need it.
What is commercial umbrella insurance?
An umbrella policy adds coverage to other insurance policies. A commercial umbrella insurance policy is designed to add coverage to the liability limits of specific policies.
These are the main types of business insurance policies to which commercial umbrella insurance adds coverage:
- General liability insurance
- Workers' compensation insurance
- Employment practices liability insurance (EPLI)
- Commercial auto insurance
The commercial umbrella insurance policy could add anywhere from $1 million to $15 million or more in coverage to an existing policy. For example, if a general liability policy had a $1 million per-occurrence limit, and the umbrella policy had a $5 million limit, the business would have a total of $6 million in liability coverage.
How does commercial umbrella insurance work?
Umbrella coverage is additional coverage for liability policies. The underlying policy's limit will be utilized first. When it hits the max or cap, then the umbrella policy will kick in. The umbrella coverage is used until it hits its cap.
When it comes to umbrella insurance, the per-occurrence limit is the same as the aggregate limit. A company can have several claims, but the annual aggregate limit caps the total amount the insurance company will pay in a claim.
Don't get umbrella insurance confused with excess liability insurance. Both add coverage, but the excess liability insurance will add coverage to one policy only, usually general liability. Umbrella insurance covers multiple policies.
Example of commercial umbrella insurance claims
Say a company has a general liability per-occurrence limit of $500,000 and an aggregate limit of $1 million. Assume the commercial auto insurance limits are $250,000 per person and $500,000 per accident, and the commercial umbrella policy's limit is $10 million.
Let's further assume that a company had a particularly bad claim year. It has a person who slips on the floor, falls, and hits their neck on a display, becoming paralyzed. If this claim were for $5 million, the general liability policy would pay $500,000, with the umbrella paying another $4.5 million. There is still $5.5 million in the aggregate limit for the umbrella.
Assume they had a commercial auto accident later in the year with a liability claim of $300,000. The commercial auto insurance would pay the first $250,000. The umbrella would then kick in the additional $50,000.
Who needs commercial umbrella insurance?
A business with big liability risks and multiple types of business insurance policies should get a commercial umbrella policy. Adding umbrella insurance is generally a more cost-effective way of adding overall coverage rather than increasing each liability policy's limits.
Since liability claims can become quite expensive, and you never know when a massive claim can hit, it's a good idea for all business owners to look at a policy's costs and determine if it's worth it.
Some businesses, such as contractors, may be asked for proof of insurance with specific limits when working with certain clients or on government contracts. In cases like this, the contractor would get an umbrella policy to add additional coverage to its other policies without affecting those limits.
In general, these are some parties that need commercial umbrella insurance the most:
- Businesses with a lot of public exposure
- Businesses with many commercial vehicles
- Contractors requiring it from clients
- Those engaged in hazardous industries
What happens if I don't opt for umbrella insurance?
Commercial umbrella insurance isn't a requirement, and you'll never be asked to prove that you have an umbrella policy. With that said, if you don't have a policy, you could be grossly underinsured in a serious claim.
Someone could make a claim that exceeds your policy limits, and you'd have no additional coverage or protection. Your business could then be held liable for the difference between what your policy paid and the ultimate claim value.
What does commercial umbrella insurance cover?
As explained earlier, commercial umbrella insurance adds a layer of additional liability coverage for certain policies a business owner may already have. This includes coverage for general liability, workers' compensation, commercial auto and EPLI.
Umbrella coverage covers more than a claim's settlement; it also pays for investigation and defense costs if the claim results in a lawsuit. Depending on the insurance carrier, some aggregate limits do not include the cost of investigation and defense.
This aspect of commercial umbrella insurance is a major plus for a business because lawsuits can easily run into tens of thousands – if not hundreds of thousands – of dollars and would eat into the capped coverage.
What does commercial umbrella insurance not cover?
Your commercial umbrella insurance policy will not add coverage to your professional liability policy. This means that malpractice and errors and omissions policies do not benefit from an added layer of liability coverage.
|What umbrella insurance covers||What umbrella insurance doesn't cover|
|Customer injury||Professional errors|
|Libel||Your commercial property|
|Reputational damage||Your personal property|
|Auto accident liability||Employee discrimination|
|Product liability||Intentional damage on your part|
|Employee injury||Liability you willingly assumed under contract|
|Wrongful termination lawsuits||Liability for criminal activity|
How much does commercial umbrella insurance cost?
The cost of your commercial liability insurance policy depends on how much coverage you want, your claims history and industry risk. You can get a policy for as little as $30 per month for up to $1 million in additional umbrella coverage.
In most instances, getting an umbrella policy will be less expensive than adding additional liability coverage to your underlying policies. Ask your insurance representative to run a quote both ways to see what's most cost-effective while getting your liability coverage set up.
Shopping for commercial umbrella insurance
When shopping for commercial umbrella insurance, keep in mind that you don't have to purchase this policy from the same insurance carrier you used for other policies. However, considering your current insurance carrier is wise; your carrier may offer discounts or policy credits to existing customers.
It's also ideal to shop for umbrella insurance, general liability and workers' compensation insurance at the same time with new carriers to see what type of package deal you can get.
What happens when claims exceed the coverage amount?
Insurance will cover you only for the policy's aggregate limits. If you exceed these limits, you're responsible for the value in excess of the insurance cap. For example, if the aggregate limit is $5 million and you have a claim for $6 million, you would be responsible for the extra $1 million.
This is why it's so important to increase coverage where you can afford to. You are not absolved of responsibility just because you have an insurance policy. Claimants can still sue you for damages and losses, taking profits and assets from your business.
While you can't insure your business for every scenario, you don't want to be underinsured based on industry standards. Talk to your insurance representative about the right amount of liability coverage.
Does a commercial umbrella insurance policy cover policies held at other carriers?
You don't need to have all your insurance policies with the same insurance carrier to reap the benefits of an umbrella policy. You can have your general liability policy with Company A, commercial auto with Company B and umbrella with Company C. As long as the underlying policies have the minimum liability coverage required by the umbrella policy, they are covered.
However, having all your policies with the same carrier is one way to save money on business insurance. You may get discounts or credits by having all policies with the same carrier. This is because the insurance company is better able to underwrite the risk together than separately.