You probably haven’t created an action plan for how your business would handle a sudden $1 million bill, but you might want to. A major lawsuit could quickly exceed your liability limits and leave you on the hook for the remaining cost, whether that’s a few thousand dollars or a seven-figure sum. Luckily, InSource can offer a second safety net for your business: umbrella insurance.
What Does an Umbrella Policy Cover?
Umbrella insurance, sometimes referred to as excess liability coverage, doesn’t function in the same way that your other business policies do. Instead, it sits above your existing policies and only kicks in when you have an event that exceeds the liability limits on your “underlying policies,” hence the name “umbrella.” In some instances, your umbrella coverage may cover claims not covered in an underlying policy, but its primary function is to provide a second layer of protection.
Your underlying policies only cover claim amounts that fall under a specified limit, which is usually sufficient for many minor lawsuits. For example, if your general liability policy contains a $1 million per occurrence limit, a $250,000 settlement would fall well within your policy limits. You would only be responsible for covering costs excluded from your policy. An example of these uncovered costs could be punitive damages, depending on your policy. However, if you ended up getting slapped with $3 million in damages and settlement costs, this general liability policy would stop paying after the first million. That’s where umbrella coverage would come into play.
Commercial Umbrella policies typically sit over the following coverages:
- Commercial general liability: General liability insurance covers lawsuits resulting from personal injury or property damage to others. For example, if you own a construction company and one of your employees incorrectly installs a cabinet in a client’s home, it could fall hours later and damage the walls and floors. Because your company is responsible for the property damage, you might be held liable in court. Your general liability policy would likely respond to this resulting lawsuit.
- Employer’s liability: Your workers’ compensation policy pays an employee’s lost wages and medical expenses if they get injured at work. However, it doesn’t cover lawsuit costs if an employee alleges negligence and sues you for additional damages. In the event of a work injury-related lawsuit, your employer’s liability coverage kicks in.
- Commercial auto: Your commercial auto insurance policy contains coverage for various claim events, but umbrella coverage typically only sits over your liability limit. If your business is deemed responsible for causing bodily injury or property damage to a third party after an accident, your auto liability coverage will pay for related expenses, up to the policy limit. An Umbrella policy should respond to help cover any damages in excess of that limit.
Even if you don’t carry all three standard underlying policies, an umbrella policy may still be a prudent financial decision if you need extra limits. Our experts at InSource can help you determine whether purchasing a separate umbrella policy is a better choice than raising your primary limits.
Who Needs an Umbrella Policy?
Many business owners question if they truly need an umbrella policy. After all, the chances of a devastating lawsuit may be slim, and you could save money right now by not buying additional coverage. To determine if an umbrella policy is the right choice for your business, you need to weigh your risk, consider your current policies, and decide if saving some money now is worth potentially losing a lot of money in the future.
Businesses with substantial liability risks should strongly consider purchasing an umbrella policy. Liability risks include:
- Owning premises that are open to the public (e.g., a retail store, entertainment venue, or restaurant)
- Conducting work on another person’s property
- Frequently operating owned, borrowed, or rented vehicles on roadways
Even if you don’t have any of the above risk factors, a traditional umbrella policy may benefit you. Other businesses may also want to consider purchasing excess coverage for their errors and omissions, cyber liability, or director and officers policies. These policies are intended to lawsuits against your business or executives if a client alleges wrongdoing related to your work or professional services.
If you are a “High Net Worth” individual, you might want to consider a “Personal Umbrella Policy” to sit over your personal liability policies (for example: personal auto, homeowners, boat, ATV, etc) – Contact us today to learn more about Personal Umbrella Policy Options!
Questions To Ask Before Purchasing an Umbrella Policy
Before you buy umbrella insurance coverage for your company, you need to know your liability limit requirements and how much coverage you currently carry in your underlying policies. Then, you can decide how much umbrella or excess liability coverage makes the most sense for your business.
These two questions can help you pinpoint your umbrella coverage needs.
1. How Much Liability Insurance Do I Need?
Because umbrella coverage is an extension of your liability protection, it’s important to gauge how high your overall limits might need to be. For example, if your general liability limit maxes out at $3 million, but you could envision a claim resulting in damages up to $5 million, you need to find an additional source of coverage. On the other hand, if you have $3 million in general liability, $2 million in auto, and $1 million in employer’s liability, and you can’t imagine any claims exceeding those amounts, then you may have all the coverage you need without purchasing an umbrella policy.
2. How Much Umbrella Insurance Do I Need?
Once you decide how much business liability insurance you need, you can use simple subtraction to find your umbrella insurance limit. For example, let’s say you want $3 million limits across the board for all of your liability policies. All you have to do is subtract the lowest limit on your underlying policies from the $3 million desired limit to determine your desired umbrella limit.
Find the Right Financial Safety Net
As a business owner, you spent years building your team and achieving financial stability. Now that you’ve reached your goals, your focus is to preserve your company for the long term. There is no foolproof way to protect your employees or your bank account, even if you purchase every primary insurance coverage under the sun. However, an umbrella policy gets you one step closer to financial protection and gives you peace of mind that a drawn-out lawsuit won’t wipe your business off the map.
Buying an umbrella policy is no easy task. You have to estimate your financial risk, read through your existing policies, and decide which insurance company offers the best coverage for the price before choosing the policy that’s best for you. Additionally, if you own a business in a high-risk industry, you may end up spending hundreds of thousands of dollars on umbrella coverage.
You don’t have to make these significant coverage decisions on your own — the experienced team at InSource can help you find the best coverage options for your needs. Our team members have years of experience identifying coverage needs, and we routinely shop around for affordable policies for you from top insurance carriers.
Contact us today to learn more about umbrella insurance and start the process of becoming an InSource Insurance Group customer!
