What Is Commercial Umbrella Insurance?

What is commercial umbrella insurance?

Commercial umbrella insurance is an insurance policy designed to extend the liability limits of specific underlying policies. “With the increased size of jury verdicts and litigation financing, commercial umbrella insurance has gained significant popularity among businesses, especially those looking to protect themselves from large-scale liability claims,” explained Chris Peterie of Tower Street Insurance. 

The best commercial insurance providers typically offer umbrella policies for the following coverage types: 

• General liability insurance
• Workers’ compensation insurance
• Employment practices liability insurance
• Commercial auto insurance

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.

Dennis Shirshikov, an adjunct professor of economics at City University of New York, provided a real-life use case: “A retail chain with several delivery vans [could] use business umbrella coverage as a safety net against catastrophic auto-related claims.”

What does commercial umbrella insurance cover (and not 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 may exclude 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.

“Commercial umbrella insurance typically applies on a per-occurrence and aggregate basis,” Peterie explained. In other words, the policy can cover multiple claims in a year up to the total or aggregate value. 

Notably, your commercial umbrella insurance policy will not add coverage to your professional liability policy. This means that malpractice and errors and omissions policies cannot benefit from an added layer of liability coverage.

Example of commercial umbrella insurance claims

Let’s say a company has the following insurance coverage:

• General liability policy: $500,000 per occurrence and $1 million aggregate limit
• Commercial auto insurance: $250,000 per person and $500,000 per accident limits
• Commercial umbrella policy: $10 million limit

Now, imagine the company experiences a challenging claims year:

1. Slip-and-fall injury: A customer slips on the floor, falls and hits their neck on a display, resulting in paralysis. This leads to a $5 million liability claim.

1. • The general liability policy pays $500,000 (its per-occurrence limit).
   • The umbrella policy covers the remaining $4.5 million.
   • After this claim, the umbrella policy’s aggregate limit is reduced to $5.5 million.
2. Commercial auto accident: Later that year, the company is involved in an auto accident that results in a liability claim of $300,000.
   • The commercial auto insurance pays the first $250,000 (its per-person limit).
   • The umbrella policy covers the remaining $50,000.

This example illustrates how an umbrella policy provides additional coverage beyond the limits of the underlying policies, protecting the business from catastrophic financial loss.

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 once the underlying policy reaches its maximum limit or cap. The umbrella coverage is used until it hits its cap.

When it comes to umbrella insurance, both the per-occurrence limit and the annual aggregate limit apply. A company can have several claims, but the annual aggregate limit caps the total amount the insurance company will pay for all claims in a year.

Don’t confuse umbrella insurance with excess liability insurance. Both add coverage, but excess liability insurance applies to only one policy, usually general liability while umbrella insurance covers multiple policies. “Excess liability might be used to increase solely general liability coverage, while an umbrella could augment car and other liability lines,” Shirshikov explained.

Who needs commercial umbrella insurance?

A business with significant liability risks and multiple types of business insurance policies should consider a commercial umbrella policy. Adding umbrella insurance is generally a more cost-effective way of adding overall liability coverage, as opposed to increasing each liability policy’s limits. It can reduce the price of higher coverage insurance, such as high-liability commercial auto insurance costs. 

Liability claims can be unpredictable and costly, so all business owners should evaluate the potential benefits of umbrella insurance against the policy’s costs to determine its value.

Some businesses, such as construction 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 extend coverage to its other policies without requiring direct modifications to their limits.

In general, the following parties need commercial umbrella insurance the most:

• Businesses with significant public exposure, such as restaurants, retail stores and event venues
• Businesses with commercial vehicle fleets
• Contractors working on government or high-liability projects
• Businesses in hazardous industries, such as construction or manufacturing

How much does commercial umbrella insurance cost?

The cost of your commercial umbrella liability insurance policy depends on the amount of coverage you need, your claims history and your business’s specific insurance risk profile. 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 choose this business insurance type, follow these steps.

1. Decide on your desired level of coverage.

Your desired coverage level will depend on your company’s net worth, risk profile and budget. Once you decide the coverage level you need, 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.

If you already have a working relationship with an independent insurance broker, reaching out to them may provide faster service than seeking out a new broker. If you don’t currently work with an independent insurance broker (one who partners 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. Be sure to do this with every company you’re considering. 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 quotes, 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 of up to $10 million, while American Family goes up to only $2 million. 

Five agencies rate insurance companies on their financial strength: 

1. A.M. Best Company
2. Fitch Ratings
3. Kroll Bond Rating Agency
4. Moody’s Investor Services
5. Standard & Poor’s Insurance Ratings Services

Research the 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.