What Is Commercial Umbrella Insurance?

What is commercial umbrella insurance?

A commercial umbrella insurance policy is designed to add coverage to the liability limits of specific policies.

These are the primary 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.

What does commercial umbrella insurance cover?

Commercial umbrella insurance adds a layer of additional liability coverage for specific policies a business owner may already have. It 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 significant plus for a business because lawsuits can quickly 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.

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.

How does commercial umbrella insurance work?

Umbrella coverage is additional coverage for liability policies. The underlying policy’s limit will be utilized first. The umbrella policy will kick in when it hits the max or cap. 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 confuse umbrella insurance with excess liability insurance. Both add coverage, but the excess liability insurance will add coverage to only one policy, usually general liability. Umbrella insurance covers multiple policies.

Who needs commercial umbrella insurance?

A business with significant 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, as opposed to 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

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 you’re ready to look for commercial umbrella insurance, follow these steps: 

1. Decide on your desired level of coverage.

Your desired level of coverage will depend on your company’s net worth, your risk level and your budget. Once you decide the coverage level you want, start getting quotes from multiple insurance carriers to compare them.

2. Contact your current insurance carrier.

When shopping for commercial umbrella insurance, remember that you don’t have to purchase this policy from the carrier you used for other policies. However, your current insurance carrier may offer discounts or policy credits to existing customers. Getting a quote from your current carrier can give you a benchmark against which to evaluate quotes from other companies. 

3. If you have an independent insurance broker, reach out.

Since you have a working relationship with your broker, you may get faster service than going to a new broker. But if you don’t already use an independent insurance broker (one who works with multiple insurance carriers), find one and ask for at least three quotes. Independent agents can give you insight into which carriers have a better reputation for speedy claims processing and satisfactory claims resolution. 

4. Consider consolidating insurance policies with one carrier.

It’s ideal to shop for umbrella insurance, general liability insurance and workers’ compensation insurance at the same time with new carriers to see what type of package deal you can get. If you are unhappy with one or more of your current carriers, this is a good opportunity to make a move. Conversely, if one of your carriers has given you particularly good service, you should explore moving other policies to that carrier. 

In addition to the quote for commercial umbrella insurance, get a quote for all your insurance policies. Do this for all companies you consider. Some might have a higher price on umbrella coverage but offer a much bigger discount if you bundle your policies.

5. Evaluate your quotes on price, rating and coverage.

When comparing your quotes, the price will be a crucial factor. However, you should also evaluate and compare the proposed coverages in detail. Some companies might exclude something you want or give you lower coverage amounts. For example, Farmers Insurance offers umbrella coverage up to $10 million, while American Family goes up to only $2 million. 

Five agencies rate insurance companies on their financial strength: 

• A.M. Best Company
• Fitch Ratings
• Kroll Bond Rating Agency
• Moody’s Investor Services
• Standard & Poor’s Insurance Ratings Services

Look up insurance carriers on your shortlist on multiple rating agencies to get an accurate picture of their financial strength. More stable insurance companies – those with higher ratings – typically cost more but are less at risk of going out of business and leaving you high and dry in the event of a claim. 

Kimberlee Leonard contributed to this article.