The Basics of Commercial Umbrella Policies
A commercial umbrella policy protects your business against large liability losses by providing an added layer of coverage over your primary insurance. It affords extra coverage to help pay for costs that exceed the liability limits on your general liability, commercial auto liability, and other underlying policies. An umbrella safeguards your firm against unexpected claims that could devastate your business and force it to shut down.
What Is Umbrella Insurance?
Umbrella insurance provides an added layer of liability coverage that applies when the limits on your underlying policies have been used up in the payment of damages. A personal umbrella applies after the liability limits on the insured's homeowners, personal auto, and boat policies have been reduced or exhausted. A commercial umbrella pays claims after the limits on the insured's general liability, business auto, and employers liability insurance have been reduced or depleted.
Umbrella insurance serves three basic purposes:
- It provides extra limits over those contained in the primary coverage.
- It pays for certain types of losses that aren't covered by the underlying policies.
- An umbrella drops down to provide coverage when an aggregate limit in a primary policy has been reduced or exhausted by claim payments.
While a standard Insurance Services Office (ISO) commercial umbrella policy form is available, few insurers use it. Most insurers that offer commercial umbrella coverage issue their policies on proprietary forms.
Reasons to Purchase An Umbrella Policy
Many businesses purchase a commercial umbrella because they need more protection against large losses than their primary policies can provide. While any firm can be hit with a large claim, some businesses are more vulnerable to catastrophic losses than others. Examples are construction contractors, tree trimmers, and crane operators.
Some businesses obtain an umbrella to fulfill limits requirements in a contract. For example, suppose that Premier Paving has contracted with Busy Builders to construct a parking lot at a new shopping center. The contract requires Premier to maintain a $3 million per occurrence limit for general liability and a $3 million per accident limit for auto liability insurance. If Premier's primary liability and auto policies have limits of only $1 million, the company can satisfy the contract by purchasing an umbrella policy with a $2 million limit.
The $2 million umbrella will "sit on top of" Premier's $1 million general liability and auto liability policies, resulting in a total limit of $3 million.
How Does Commercial Umbrella Insurance Work?
A commercial umbrella covers damages or settlements that result from claims against your firm for bodily injury, property damage, or personal and advertising injury. It also pays the cost of defending your business against lawsuits covered by the policy. The umbrella will apply if a claim covered by the policy generates damages or a settlement that exceeds the limits on your primary insurance.
The following example demonstrates how an umbrella works. Premier Paving is working on the parking lot project outlined above. A Premier employee is operating an asphalt paving machine when he accidentally injures two bystanders. Each sues Premier for $750,000. The claims arose from the same occurrence so Premier's general liability policy pays only $1 million for both claims. Premier's umbrella policy will pay the remaining $250,000.
An umbrella may cover some risks not insured by underlying policies. An example is claims brought outside the United States. Most general liability policies limit coverage to claims brought in the U.S.A. or Canada, but many umbrellas cover claims brought anywhere in the world.
Umbrella Coverage Limits
Commercial umbrellas are sold in $1 million increments. Some businesses may need an umbrella with a $1 million limit while others may require a $5 million, $10 million, or even a $100 million policy. Like primary liability policies, an umbrella includes a per occurrence limit and an aggregate limit. The two limits are the same. That is, if the per occurrence limit is $1 million, the aggregate limit will be $1 million as well.
An umbrella provides excess coverage over the policies listed in the schedule of underlying insurance. It won't provide any excess coverage over policies not listed in the schedule.
Commercial Umbrella Insurance Cost
The cost of an umbrella policy depends on the limits you purchase, the nature of your business, and your claims history. A policy with a $5 million limit will cost more than a policy with a $1 million limit. Businesses in riskier occupations like transportation or construction will pay more for an umbrella than those in low-risk occupations. For most small businesses, umbrella coverage is relatively inexpensive. The online agency Insureon reports that its customers pay a median of $75 per month, or $900 annually, for an umbrella policy.
Things to Watch Out For
There are a few things to keep in mind when shopping for an umbrella. First, most commercial umbrellas are written on forms drafted by insurers so policies can vary widely. Some insurers call their policy an umbrella when it's really an excess policy. The terms aren't synonymous. An umbrella provides both extra limits and broader coverage than the underlying insurance. An excess policy provides extra limits but no broader coverage than the primary insurance. If the policy you are buying is truly an umbrella, it should afford broader coverage than your primary policy.
Secondly, some umbrellas include a self-insured retention (SIR), a specified amount your firm must pay before your umbrella will make any payment. An SIR applies to claims covered by the umbrella but not by underlying policies. For example, suppose your umbrella includes a $5,000 SIR. Your umbrella (but not your primary policy) covers claims arising from discrimination not related to employment. A customer sues your firm, claiming your company discriminated against him based on his religion. If the claim is settled for $20,000, you will pay $5,000 and your umbrella will pay the remaining $15,000.
Finally, your umbrella policy and all of your primary policies should have the same inception and expiration dates. Coverage gaps can occur if your umbrella doesn't run concurrently with your underlying policies.