Commercial Umbrella Insurance

When discussing commercial umbrella coverage, it is crucial to know both its potential advantages and disadvantages. Yes, we provide you both sides of the coin.

Below are a few key benefits of this type of policy:

Benefit #1 – Affordability: One significant benefit of commercial umbrella coverage is that it is relatively inexpensive when compared to other insurance policies. The extra protection offered by an umbrella policy comes at a minimal cost compared to the primary policy’s overall cost.

Let us take an example where your company has purchased general liability insurance with a limit of $1 million. A commercial umbrella policy with an additional $2 million in coverage would typically cost only a small percentage more than the general liability insurance policy’s cost alone yet give you a total coverage limit of $3 million.

Benefit #2 – Protection: As discussed above, the primary goal of commercial umbrella coverage is risk mitigation. This policy offers businesses a safety net to protect from catastrophic events such as lawsuits or accidents that could result in significant financial loss beyond what the primary insurance policies can provide.

For instance, imagine if your company manufactures equipment that requires experienced operators. While using one of your machines, an employee causes injury to others and then decides to sue your company. Now, suppose the damages resulting from the lawsuit exceed the general liability policy limits – at this point, without umbrella insurance, your business may have to bear these added costs. However, if your business has acquired commercial umbrella insurance, excess legal expenses and claims beyond general liability policy limits would be covered by the umbrella insurance.

Despite its several benefits, there are also some potential drawbacks of commercial umbrella coverage that should be taken into account before purchasing this type of policy:

Drawback #1 – Over-purchasing Policy Limits: One major drawback of commercial umbrella coverage is that businesses may feel inclined to over-purchase insurance coverage limits. This can result in companies paying a higher premium than necessary. Investing in an excessive amount of coverage limits may diminish the return on investment if the actual risks are far lower than what was perceived.

Drawback #2 – Limited Applicability: Another point to consider is that commercial umbrella coverage applies only if the covered expenses exceed the primary policy limits. Businesses may not receive any additional benefits if their liability insurance policy behaves well under unexpected circumstances and nothing goes past its maximum limit.

Commercial umbrella insurance should be regarded as a safety net, like a backup plan that provides extra protection when required, but should not be looked upon as a replacement for other policies such as general liability or workers comp.

To maximize commercial umbrella insurance’s effectiveness, your business should have an adequate insurance limit on your underlying policy to ensure there are enough resources available in case of an unfortunate event.

The next section will cover who should consider getting commercial umbrella coverage and why specific business types and situations require it.

But before we jump there, here are some key stats to check out:

• According to the Insurance Journal, firms with $1 million to $5 million in annual revenues account for over 65% of the market for umbrella and excess insurance policies as of 2021.
• Allied Market Research reported that the umbrella insurance market is projected to grow at a compound annual growth rate (CAGR) of approximately 9.2% from 2022 to 2031.
• Data from The Hartford Insurance Company reveals that legal costs alone from liability claims can deplete a small business’s standard policy limits – with the median cost of a slip and fall claim reaching approximately $20,000.

No matter the size of your business or industry niche, commercial umbrella coverage can serve as a safety net for your company. Small businesses and large corporations alike benefit from this added layer of protection.

One example is a small retail store that sells consumer goods. Let’s say a customer slips on some water that was spilled in one of the aisles. The customer sues the store for medical bills, lost wages, and pain and suffering. If the general liability coverage limit is $500k per occurrence, but the claim exceeds that amount, the commercial umbrella insurance policy covers the remaining costs.

Even though all companies face different risk exposures, it is important to consider how much coverage you currently have versus how much you might need in the future. A catastrophic claim could ruin a company without adequate coverage.

Think of umbrella insurance as wearing a raincoat during a storm. You never know when it will start raining or how severe it might become, but having an extra layer of protection can help ensure that you stay dry no matter what.

Certain industries and businesses inherently carry more risks than others. Here are some examples of specific types of businesses that may require commercial umbrella insurance policy:

1. Construction Companies – With their reliance on heavy equipment, construction companies face greater risks for employee accidents and third-party claims than other businesses.

2. Property Management Companies – If someone is injured while on property managed by your company, you may be held liable.

3. Healthcare Facilities – Providing healthcare services opens up healthcare facilities to liability risks due to malpractice suits.

4. Food and Beverage – Injuries caused by slip-and-fall accidents are common causes of liability claims against restaurants.

5. Manufacturing Companies – The use of machinery and tools exposes manufacturing companies to risks such as product liability, worker injury, and property damage.

Let’s say you own a construction company with a standard liability insurance policy limit of $1 million. One day, one of your employees gets into an accident while operating a piece of heavy machinery, causing severe injuries to the employee and third-party damages totaling $2 million in claims. If you do not have commercial umbrella coverage, then your business is responsible for the remaining $1 million in costs beyond the general liability policy.

This kind of scenario can be devastating for any small business that does not have coverage.

Different types of companies take on different types of risk, but all are at risk of experiencing catastrophic losses due to unforeseen circumstances and accidents.

While some businesses may feel justified in taking the risk and going without commercial umbrella coverage because they want to save money on premiums, it’s important to consider the potential long-term cost savings versus short-term cost savings.

• Different types of businesses inherently carry different levels of risk, with some facing greater liability risks than others. Construction companies, property management companies, healthcare facilities, restaurants, and manufacturing companies are some examples of businesses that may require commercial umbrella insurance policies to cover unforeseen circumstances and accidents. Without this coverage, catastrophic losses can be devastating for any small business. While short-term cost savings may justify going without commercial umbrella coverage, it’s important to consider potential long-term cost savings versus short-term cost savings.

Commercial umbrella coverage extends beyond just adding an extra layer of protection to businesses. It comes in handy when an underlying insurance policy is not enough to cover a claim. As you assess your business’s risks and insurance needs, it’s essential to understand how commercial umbrella coverage relates to other insurance policies.

First, let’s start with what business insurance entails. A typical business insurance policy includes a general liability policy, which covers claims such as lawsuits arising from bodily injury or property damage that occurred on your premises. Another policy may include commercial auto insurance to cover damages caused by company-owned vehicles or physical injuries that drivers sustain while driving these cars.

Many companies opt for workers’ compensation policies, which help those who are injured on the job to pay their medical bills and lost wages. Finally, professional liability policies protect businesses against claims alleging negligent acts related to providing professional services like legal advice or accounting services.

Despite multiple policies protecting a business, sometimes they don’t offer a high enough amount of protection. That’s where commercial umbrella coverage comes in handy. It enhances the liability limits of general liability insurance and other primary insurance policies. As such, it provides additional protection against catastrophic losses.

For instance, let’s say your company faces a $2 million dollar lawsuit related to customer injuries at your store. Your primary general liability coverage offers $1 million in coverage, so the extra $1 million would have to come from somewhere else within the organization’s budget – unless you have a commercial umbrella policy in place.

Additionally, a commercial umbrella policy can also provide additional defense coverage for legal costs if the business owner is sued for something under the scope of their policy – even when they aren’t found liable.

With that said, we will now compare and contrast umbrella coverage with general liability insurance.

While general liability insurance provides protection against third-party claims that arise out of bodily injury, property damage, or advertising injury lawsuits, it has a coverage limit. After the policy limit is exhausted, businesses will have to pay out of pocket.

On the other hand, commercial umbrella insurance extends the primary coverage limits. Hence, businesses don’t have to cover expenses out of pocket once the primary policy’s limits have been exhausted.

Consider a construction company whose employee negligently causes an accident that significantly injures third parties. The general liability coverage limit maybe $1 million, but the settlement could cost $2 million, which would leave the construction firm responsible for handling the excess $1 million payment. However, if they had commercial umbrella coverage in place with a $2 million limit, then it would protect them from such liabilities.

Some business owners assume that since their general liability policy offers “enough coverage,” they don’t need commercial umbrella insurance. However, that assumption is often incorrect. Consider this example: a small business owner faces an influx of customers on their opening day and unfortunately forgets to clean up a spill, leading to a customer slipping and breaking their hip. The injured customer sues the store owner for lost wages due to being off work and medical bills amounting to $900,000.

The owner’s general liability policy only covers $500,000; thus, they will have to pay the remaining $400,000 out of pocket unless they have complementary coverage like commercial umbrella insurance in place.

Commercial umbrella insurance can be viewed as a necessary extension cord in your house’s outlets when you need extra plugs beyond what your traditional outlet can accommodate.

It’s essential to note that while both policies are distinct from each other regarding coverage and length, they are both imperative in protecting your business.

As a business owner, it is understandable that you would want to make decisions that do not overburden your finances. Evaluating the cost of commercial umbrella coverage may help you determine if it is an option worth pursuing.

The cost of commercial umbrella coverage varies depending on several factors, including the type of business, business size, location, industry risk level, and coverage limits. As such, it is essential to understand how each of these factors can affect the cost of commercial umbrella coverage.

For instance, businesses in high-risk industries such as construction and manufacturing may be subject to higher premiums due to their increased exposure to risks. Similarly, companies with many employees or vehicles may pay more for commercial umbrella coverage than those with fewer assets.

Evaluating the cost of commercial umbrella coverage is like premising home insurance with varying levels of deductibles. Higher deductibles provide less upfront costs than lower ones but lead to higher expenditures in case something goes wrong. In contrast, lower deductibles incur higher monthly premiums but fewer additional charges later.

Some business owners may argue that they have never faced a claim exceeding their standard policy limits and, therefore, do not require additional coverage. However, this factor should not be taken lightly since a significant claim can easily bankrupt a business without proper liability protection from adequate insurance policies.

Ultimately, while the cost of commercial umbrella coverage may seem steep at first glance, securing added coverage could prove invaluable in times of need by preventing unnecessarily high claims’ out-of-pocket expenses.

For example, a small construction company that hires subcontractors for various projects, partway through a project contracted by one party falls from two stories due to shoddy work by the subcontractor, resulting in extreme physical damage. Given that an average general liability policy’s limit usually covers up to $1 million per occurrence, the business owner would have to bear any additional expenses over that amount as out-of-pocket costs. If the total claim amounted to $5 million, the business owner would pay up to $4 million in damages not covered by their general liability policy unless supplemented with commercial umbrella coverage.

Evaluating the cost of commercial umbrella coverage is essential in determining whether your business requires added liability coverage. By assessing factors such as industry risk level, business size, location, and coverage limits, business owners can decide if commercial umbrella policies are suitable for their operations and budget.