Legacy Digest

What Is Commercial Umbrella Insurance?

As a businessowner, you likely have a number of different liability policies that provide protection against liability for the business. But what happens when the liability for an incident exceeds the coverage limit you have available on your base policy? A commercial umbrella policy can provide extra liability protection over a number of different insurance policies to help make sure the business doesn’t pay large claims out of pocket.

Our team at Legacy Partners is committed to helping businessowners understand their insurance so they know what risks they face and how insurance can help protect against those risks. Here’s a detailed look at commercial umbrella insurance, and how it helps protect your business.

Understanding Commercial Umbrella Insurance

It’s very important that businesses maintain adequate liability limits to help make sure that a large lawsuit doesn’t cripple the company. Liability coverage in general steps in to pay for damages incurred by a third-party. This typically includes things like:

• Medical Bills
• Repair To Damaged Property
• Settlements or Jury Awards for Damages
• Legal Costs and Attorneys’ Fees

In other words, liability insurance covers payments to third-parties who are injured in some way and for the expenses associated with the claim.

An umbrella insurance policy can sit over the top of various specific liability policies, usually following the underlying coverage forms, and provide an extra layer of protection. Most often, we see umbrella policies going over specific types of policies, including:

• General Liability
• Auto Liability (incl. hired and non-owned auto)
• Employers’ Liability (a part of Workers’ Compensation coverage)

By purchasing a single commercial umbrella policy, you can get higher liability limits over all of these policies to make sure large claims in these areas don’t mean a substantial out-of-pocket cost to the company.

How Does Commercial Umbrella Insurance Work?

Commercial umbrella insurance extends the limits of the set of liability policies which appear on the schedule of underlying policies. But how does that really work?

Let’s say you have a standard commercial insurance policy with a general liability limit of $1,000,000 per occurrence and $2,000,000 in the aggregate. If you have a customer come into your store and they slip and fall while in the store, suffering a serious injury, you could wind up facing a wide range of different costs from a lawsuit brought by the customer. This could include the costs of paying legal fees, medical bills, rehabilitation costs, and more. Let’s say that ultimately your attorneys reach a settlement for $1,500,000, you have another $250,000 in attorneys’ fees for which the business is responsible, and the claims handling expenses are $25,000. In this scenario:

• You have $1,000,000 of coverage for this occurrence on your general liability policy. If the slip and fall is covered, you’ll have $1,000,000 to pay off some of these expenses.
• If you applied $25,000 to claims handling expenses and the rest of the $1,000,000 to the settlement, your business could still face out of pocket expenses for:
  • $525,000 of settlement costs
  • $250,000 of attorneys’ fees

  That means your business is responsible for a total of $775,000 of expenses, which could easily put you out of business.

By obtaining a commercial umbrella insurance policy for $1,000,000 per occurrence and $1,000,000 in the aggregate, you would have $2,000,000 of coverage for the single general liability claim example above, and the full $775,000 of additional expenses would be covered.

What’s the Difference Between Commercial Umbrella Insurance and Excess Liability Insurance?

You may also have heard of “excess liability insurance” policies. While conceptually very similar, commercial umbrella insurance policies and excess liability insurance policies are slightly different. While a commercial umbrella insurance policy is designed to go over multiple underlying policies, an excess liability policy is designed to extend the limits of a single, specific liability policy. This means that instead of giving you broader coverage across a variety of lines of coverage, with an excess policy you’re really pushing the limits higher on a single policy instead.

Typically, you’ll see excess policies in place over specific policy types an umbrella is not designed to pick up coverage on. For example, if you needed higher limits for a professional liability policy or a pollution liability policy, these may be picked up on an excess liability insurance policy instead of a commercial umbrella insurance policy.

Are there other ways to increase liability limits on one line of coverage?

If you are only looking to increase liability limits on one particular line of coverage, you may be able to simply request higher limits on the base policy instead. For example, instead of purchasing a $1,000,000 per occurrence and $2,000,000 aggregate general liability policy, you could price out a $2,000,000 per occurrence and $4,000,000 aggregate general liability policy.

One benefit to this approach is that sometimes, if you’re only looking to add protection for a single line of business, it can be cheaper to enhance the coverage on the underlying policy versus trying to add an umbrella. This is most often the case where minimum premium on the umbrella is less than the limits increase on the underlying policy, resulting in a net savings for your insurance coverages.

What Businesses Need Commercial Umbrella Insurance?

While $1,000,000 of liability coverage used to go a long way, the reality is that the cost of claims continues to rise at an almost unsustainable rate.

Not only are attorneys’ fees and claims handling expenses going up due to overall inflation, but jury awards continue to skyrocket, with massive awards for seemingly small injuries designed to “send a message” to businesses.

This means that almost every business could potentially benefit from a commercial umbrella insurance policy. It’s very hard to predict what types and amounts of damages you could be found responsible for as a business, and this extra protection usually comes at a fairly reasonable price.

Nonetheless, certain factors can increase your risk for large damage lawsuits. For example, commercial umbrella insurance may be more important for businesses that:

• Are open to the public or frequently interact with customers face-to-face
  • Businesses that have people in their stores and work with customers have higher exposure to slip and falls and other injuries which can lead to big claims.
• Work with Heavy Equipment or Dangerous Machinery
  • Heavy equipment and dangerous machinery increase the risk of significant damage and bodily injury, leading to higher potential claims.
• Have large automotive or fleet exposures
  • The more vehicles you have on the road, the more miles your employees log, and the greater the risk of causing a significant accident. If you’re responsible for a large pile-up, the damages can quickly escalate.
• Have contracts with other businesses that require higher liability limits
  • We frequently see businesses that require their subcontractors or other businesses they work with to carry liability limits to match their own, which often means an umbrella is necessary to meet those requirements.

How Much Commercial Umbrella Coverage Do You Need?

Commercial umbrella insurance is typically available only in$1,000,000 increments, and the coverage typically applies the same level per occurrence and in the aggregate.

This means that if you want to add an umbrella, you’d be looking at the options of adding $1,000,000 per occurrence / aggregate, or $2,000,000 per occurrence / aggregate, and so on. You typically won’t find smaller incremental coverage than this, so you should think of this coverage in terms of how many millions do you require.

Even then, the answer is going to be highly dependent on the type of business you operate and the risk factors set forth above. Riskier businesses should typically carrier greater amounts of insurance. However, it can also wind up being based heavily on contracts you may have with other businesses that require you to carry certain insurance limits. If you agreed to carry a $3,000,000 umbrella, then you should look to carry at least that amount of insurance or you risk breaching your contract.

Conclusion

Commercial umbrella insurance policies can protect any business from the effects of large claims on their underlying general liability, commercial auto liability, and even employers’ liability policies. The frequency and severity of large claims and big jury awards has created a risk for almost every business.

If something goes wrong, a commercial umbrella insurance policy can step in to help your business avoid a massive expense you may not be able to pay. We recommend every business consider a commercial umbrella policy to protect against this risk.

For personalized advice and comprehensive coverage options, contact Legacy Partners Insurance. As an independent agency serving our customers in Michigan and all over the United States, our licensed professionals are ready to assist you with all your insurance needs. Call us today to ensure your business is properly protected.