By Tyler Kirkegaard, Risk Advisor

There comes a point in every business where, if catastrophe hits, closing the doors just isn’t an option. You have employees relying on you, your retirement is tied to the success of the business, and you have a family at home you need to provide for.  

While a standard commercial insurance policy provides essential protection, it may not be sufficient in certain situations. That's where a commercial insurance umbrella policy comes into play. But before you start getting quotes, it’s important to understand what commercial insurance umbrellas are, what they do and don’t cover, which types of businesses should consider them, and where they fit in your overall risk management strategy.

Table of Contents

– What is a commercial insurance umbrella?  

– What’s covered by a commercial insurance umbrella?  

– What’s not covered by a commercial insurance umbrella?  

– What types of businesses should consider an umbrella policy?  

– How much umbrella insurance do I need?  

– How do I get an umbrella policy for my business?  

– The Bottom Line

What is a commercial insurance umbrella?

A commercial insurance umbrella is an additional layer of protection that goes beyond the limits of your primary commercial insurance policies, such as general liability, professional liability, and commercial auto insurance.  

Where your primary insurance policy will cover property damage, accidents and injuries, legal liabilities and a few other risks, the claims amount is capped at certain thresholds. Because of that cap, a commercial insurance umbrella provides an extra safety net, providing coverage for claims that exceed the limits of your underlying policies.  

You usually buy commercial umbrella policies in increments of millions of dollars, because you’re covering against catastrophic events that would need to reach that dollar amount in financial losses for the policy to kick in.

As an example, let’s say one of your employees wrecks a $120,000 truck. Your commercial auto policy should cover the losses of the vehicle. But, let’s say that truck crashed into a restaurant with a full dining room and caused multiple serious injuries. Now you may be facing a lawsuit and fines that could reach millions of dollars. Sure, your auto policy covered the vehicle and potentially some of the building damage, but if your policy is limited to $500,000, your business may not be able to survive.  

Having the umbrella policy protects you from a (hopefully) once-in-a-lifetime incident that could put you out of business.  

What's covered by a commercial insurance umbrella?

Commercial insurance umbrellas typically provide coverage for a wide range of liability risks, which allows you to use the umbrella coverage across multiple primary policies, including property damage, injuries to individuals at your workplace or those visiting your workplace, accidents caused by your employees, and much more.  

It's important to understand the versatility with umbrella policies, which often includes coverage for:  

• Bodily injury: If someone is injured on your premises or because of your business operations, an umbrella policy can provide coverage for medical expenses, rehabilitation costs, and potential legal fees associated with the bodily injury claim.
  
• Property Damage: In the event that your business causes damage to someone else's property, an umbrella policy can cover the costs of repairs or replacement. This can include damage caused by accidents, negligence, or other covered incidents.
  
• Privacy: Commercial insurance umbrellas often extend coverage for privacy claims, such as libel, slander, false arrest, defamation, invasion of privacy or copyright infringement. If your business activities result in harm to someone's reputation or privacy, an umbrella policy can help protect you against the financial consequences of those claims.
  
• Advertising injury: Umbrella policies typically provide coverage for advertising injury claims. This includes instances where your business's advertising activities, such as misleading statements, copyright infringement, or false advertising, cause financial harm to another party. The umbrella policy can help cover legal costs and potential damages associated with these claims.
  

• Legal defense expenses: In addition to covering damages awarded to claimants, a commercial insurance umbrella policy often includes coverage for legal defense costs. This can encompass attorney fees, court costs, expert witness fees, and other expenses incurred while defending against a covered claim.

It’s important to fully understand the commercial insurance umbrella policy you’re considering. While you should be receiving broad coverage, policy language matters and it’s important to have a trusted risk advisor who can help you get the language you need in the policy, particularly a professional who can look at your overall risk management portfolio to ensure any gaps are filled by the umbrella or other strategies.  

What's not covered by a commercial insurance umbrella?

Commercial insurance umbrellas do not cover every risk associated with your business. Umbrellas are a type of liability coverage – meaning they only cover the damage done to someone else, not your business or its property. Make sure your general insurance policies are able to cover your property and people.

In addition, many or all policies will exclude:

• Intentional damage: If you or your business purposefully causes damage, you’re not covered. This is also true of any primary coverage.  
• Criminal intent: Much like intentional damage, if you or someone at your business is intending to commit a crime when the damage occurs, you likely are not covered.  
• Regular business activities or product damage: There are separate liability coverages for the products you produce or everyday business activities that may not be covered under your umbrella. Check the policy language carefully and ask your risk advisor if certain situations in your business are covered.  
• War damages: Almost every type of policy will exclude war damages, including commercial insurance umbrellas.

• Policy-specific language: You may have negotiated certain liabilities not be covered at the time you signed the umbrella policy. Make sure you or someone else in your business did not take on unnecessary risk when developing the policy.  

When considering what’s not covered by an umbrella policy, it’s vital to consult a risk advisor and think through important scenarios, including those specific to your industry or business. To an extent, a risk advisor can help you negotiate with carriers to make sure you're covered or find other solutions to alleviate your risks.  

What types of businesses should consider an umbrella policy?

While nearly every business can benefit from an extra layer of liability protection, certain types of businesses face higher risks and should seriously consider obtaining a commercial insurance umbrella. There are a few factors to consider:

First, how big is the business? If you are a one-person business with no family, it’s a lot different than having 20 employees relying on you for their wellbeing. At the end of the day, ask yourself if you had to close shop, how many lives would be affected?

Next, consider the industry you’re in. Obviously, highly physical jobs like construction and manufacturing come with a higher risk for accidents. Other industries, like healthcare, see a high number of lawsuits and need added protection. Then there are the industries with high interaction with the public, like restaurants, brick-and-mortar stores and hospitality.  

Finally, consider how much risk you can afford to take on yourself. Note: This is not the same as having a credit line. In the event of a claim, your up-front commercial insurance umbrella costs are generally much cheaper than the interest you’d accrue through a business line of credit.

It can be complex, but assessing your business's risk profile with the help of a risk advisor can help determine whether an umbrella policy is appropriate for your specific circumstances.

How much umbrella insurance do I need?

Determining the appropriate coverage amount for a commercial insurance umbrella requires a careful evaluation of your business's risk exposure.  

Several factors should be considered in this process, and your risk advisor will help you develop a plan.  

First, assess the value of your business assets, including property, equipment, and inventory. Next, your advisor will help you evaluate the potential for large claims based on your industry and the nature of your business operations. The history of lawsuits within your industry and the average settlement amounts or court judgments should be taken into account in this assessment. Finally, take into account the limits of your underlying primary policies. A general rule of thumb is to obtain enough umbrella coverage to protect your business assets adequately.

Consulting with a risk professional who specializes in commercial insurance will help you determine the appropriate coverage amount. They can conduct a thorough risk assessment of your business, taking into account the specific industry risks, the size of your operation, and your risk tolerance. Based on this evaluation, they should provide recommendations on the ideal coverage amount that aligns with your business's needs.  

Keep in mind that it's important to regularly review and reassess your coverage as your business evolves and grows.

How do I get an umbrella policy for my business?

Obtaining a commercial insurance umbrella policy typically involves several steps. Begin by assessing your existing insurance coverage and policy limits to determine if an umbrella policy is necessary. You’ll need a risk advisor who can do a holistic risk evaluation to see if a commercial insurance umbrella is the appropriate and cost-effective tool.

Alongside your risk advisor, you’ll review your primary policies, such as general liability, professional liability, and commercial auto insurance, to understand their limits and coverage areas. If you find that the limits may be insufficient to protect your business adequately, it's a good indication that an umbrella policy may be necessary.

Next, your risk advisor will bid out your commercial insurance umbrella to multiple insurance carriers to ensure the policy you receive is a fair price, adequately covers your risks, and fits into your overall risk evaluation.  

When reviewing quotes, pay attention to the policy details. Understand the coverage limits, exclusions, deductibles, and any additional endorsements that may be available. Your risk advisor will assist you in completing the necessary application forms and provide guidance throughout the underwriting process. Be prepared to provide detailed information about your business operations, assets, and any existing claims history.

The bottom line

Commercial insurance umbrella policies offer an extra layer of liability protection for businesses that may face substantial risks and potential lawsuits.  

By extending the coverage beyond the limits of primary policies, they help safeguard your business's assets and mitigate financial risks associated with large claims. Understanding the coverage provided, assessing your business's specific risks, and consulting with a trusted risk advisor are essential steps in determining if an umbrella policy is right for your business. Remember, proactive risk management and adequate insurance coverage are crucial for the long-term success and protection of your business.

By taking the time to assess your risk profile, evaluate your existing coverage, and secure a commercial insurance umbrella policy tailored to your needs, you can rest assured that your business is well-protected against unforeseen liabilities.  

Don't wait until it's too late – start exploring your options and securing the right coverage for your business today.

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