If you’re a business owner, you’ll need to purchase primary coverage for liability related to just about every aspect of your organization. Your property, your employees and even your anticipated earnings can and should be insured to maintain peace of mind and protect from a devastating financial loss.
However, even the best policies have their limits. If a particularly serious liability suit befalls your company, the well of financial coverage to litigate those claims can dry up quickly. That’s where commercial umbrella coverage comes in, proving itself an invaluable asset to many businesses.
Just as you might don a rain jacket before heading out into a light drizzle, you will probably also bring along your umbrella in case the weather turns particularly nasty. Commercial umbrella policies operate under a similar principle – extra coverage that kicks in when you need it, without the cost burdens of even more specific coverages or pricier insurance plans.
“Umbrella policies add additional coverage layers at very low cost.”
According to the Insurance Information Institute, umbrella coverage can add a significant layer of protection on top of a primary policy at very reasonable prices – an additional $150 per year of umbrella liability coverage usually adds $1 million on top of the primary liability coverage amount. Additional layers typically come in million-dollar increments that get individually less expensive in terms of premiums, which could add up to multi-million dollar liability protection for a fraction of the nominal cost per year.
Umbrella vs. excess liability
A similar type of secondary liability coverage is known as excess liability. While it may read as almost identical to an umbrella policy, as explained in an article from the International Risk Management Institute, they are not typically one and the same, for several different reasons:
- Umbrella policies may offer broader coverage than the primary contract in place, while excess liability coverage will simply extend the value of a policy. For example, it’s common for umbrella policies to offer worldwide coverage, rather than location-specific protection.
- Excess liability coverages tend to follow their underlying primary policies to the letter, while umbrella contracts may add additional agreements.
- Umbrella policies may be written using nonstandard forms, allowing for greater flexibility in coverage, but also requiring greater diligence on the part of the insured.
What else to know
If your business chooses to add an umbrella policy, it’s important to understand a few key details that affect how the contract is carried out. Property Casualty 360 pointed out a few important points of consideration regarding most commercial umbrella policies:
- Umbrella coverage is usually only active as long as the underlying coverage is still in place, although the umbrella contract may “drop down” to replace the primary coverage if it is exhausted in some way, depending on the agreement.
- Umbrella policies can operate either as indemnity agreements or what’s known as a “pay-on-behalf-of” clause. An indemnity policy requires the insured to use their own money to pay for damages and legal fees upfront and then seek reimbursement from the insurer. A pay-on-behalf-of agreement requires the insurer to assume damages and related expenses from the beginning.
- Like any insurance policy, there are a number of exclusions that often come with commercial umbrella insurance. These commonly include coverage exceptions for damages related to liquor liability, workers’ compensation, pollution, product recall and electronic data loss or theft.
Commercial umbrella insurance can fit many different needs, but only when a policy is written with the business’s specific interests in mind. McGowan Program Administrators can craft umbrella coverage agreements that meet and exceed those needs, providing business owners with the confidence that they are protected against just about any form of liability.