Umbrella Liability Insurance Policies are an overlooked portion of a comprehensive insurance plan for small and large businesses alike.
Umbrella Liability Insurance provides an additional layer(s) of coverage over primary insurance policies and coverages.
For example, a company carrying General Liability Insurance with policy limits of $1,000,000 per occurrence may elect to purchase an Umbrella Liability Policy.
Doing so could provide an additional $1,000,000 of liability limit, which is layered on top of their underlying General Liability coverage.
If a third party suffered bodily injury or property damage, arising out of the company’s negligence and was awarded an amount exceeding the underlying General Liability Policy limit, the Umbrella policy can pay the claim amount that is in excess of the underlying policy limit; up to the limits of the Umbrella Policy itself.
Umbrella Liability policies are available in varying amounts and many standard insurance markets (companies) will offer umbrella limits up to $5,000,000, or more. If higher limits are required, Excess and Surplus Lines carriers may be able to provide additional layers of Umbrella Liability coverage.
Understanding that an Umbrella Policy provides increased limits of liability insurance over your general liability, products and completed operations, auto liability, etc. is the easy part. Determining if your small business is in need of this coverage requires a bit more reflection. Some qualifying questions you should be asking yourself are as follows:
1. What is the value of my business and its assets?
In the event of a liability claim, liquidating your business should not be a way of absolving your legal responsibility or paying damages. Regardless of whether your business is well established or a new start up, you have undoubtedly put a lot of blood, sweat and tears into turning it in to what it is today; and that’s not mentioning significant personal financial investments small business owners use to cash flow entrepreneurial pursuits during the early stages of operation.
If you have significant business assets that exceed your liability limits, you could be putting your business in a precarious situation if an injured party’s lawyer decides to sue for compensation above your insurance limits on the basis of your business’ asset value. For this reason, it is a prudent approach to purchase a high enough Umbrella Liability Insurance limit to cover the value of your business and its assets.
2. What are the potential risks or hazards arising from your products or operations?
Even if your business is relatively small, you may be involved in activities that pose significantly higher risk of bodily injury or property damage to a third party than activities conducted by businesses much larger than your own. A high propensity of risk is not solely reserved for large businesses and hazards vary greatly between industries.
For example, small companies involved in the manufacturing of transportation components may have a significantly higher Products Liability Exposure than a large retail company selling t-shirts online. If the work your company performs generates a higher probability for “catastrophic” claims, you are probably a good candidate for an Umbrella Liability policy.
Furthermore, depending on the size, scope and type of operations you engage in, you may want to discuss purchasing additional “layers” of Umbrella Liability to protect yourself from large claims and settlements that come about from aforementioned catastrophic occurrences of bodily injury or even death.
3. How much insurance do I need to have to get the job?
Many business owners find out that they need to buy additional limits of Liability Insurance in order to secure contracts and meet the requirements of the municipalities or large corporations they are contracted with. Many times, you will need to add these entities as an additional insured on your policy along with increased limits of Liability Insurance.
It is important to realize that in doing so, you allow your insurance policy to act as the additional insured’s primary form of coverage in the event of a claim arising out of your business’ negligence. As such, your liability limits are shared with them, meaning that a $1,000,000 General Liability Policy, with a $1,000,000 Umbrella Liability Policy siting over it, would pay only $1,000,000 for each you and the additional insured listed on the policy (if you are both named in a lawsuit).
While it is not advisable to ever voluntarily list another party on your policy as additional insured, you may find circumstances where it is the only way you will be able to get the contract. If you determine that sharing your Liability Insurance limit could potentially create a situation where you are left with an insufficient limit of liability protection, you may choose to purchase additional layers of coverage to more adequately protect your business in all possible scenarios.
4. Do I live in a litigious state or area?
It should come as no secret that certain states, or areas within them, are more litigious than others. This is evidenced both by higher Liability Insurance rates in these particular areas and the saturation of law firms in and around them. If you happen to operate your business within a highly litigious area, it is advisable to purchase increases to your Liability Insurance limits through and Umbrella Liability Policy.
Chances are, if you have asked yourself the above questions, you have come to the conclusion that purchasing an Umbrella Liability Policy is a necessary, or at the very least prudent, action for your small business. Obtaining an Umbrella Liability policy is not difficult and is not time consuming. Better yet, it is typically one of the least expensive of all your insurance coverages!
Here are some great places to start your search to obtain the appropriate liability limits to protect your business:
1. Call an Independent Agent
You may already be purchasing your insurance policies through an independent agent, and this is a great place to request an Umbrella Liability Policy. An independent agent will be able to evaluate your underlying insurance coverages to determine if there is a better company with which to place your policies and provide you with an Umbrella Liability quote. Most times, the company providing your other Liability Insurance coverage will offer to write your Umbrella Policy. This is the best way to purchase an Umbrella Liability Policy, and most often the cheapest.
Because the company providing the Umbrella is also providing the underlying coverage, the Umbrella policy will follow the same policy forms as your other coverage. This eliminates the possibility of a gap in coverage via hidden exclusions or other pitfalls, thus providing additional added value to your insurance package.
2. Ask your agent for a monoline Umbrella Policy.
Your independent agent will likely have access to monoline Umbrella Liability markets. This means that the company providing the Umbrella Liability Policy is not providing any of the underlying insurance coverages. Although a monoline Umbrella is often more expensive than buying an Umbrella from the company who holds your underlying policies, sometimes a business owner can benefit from a monoline policy as these policies may allow for more types of coverage or multiple policies across several different entities (having common ownership) to sit “beneath” them.
For example, consider a wedding caterer who has a separate LLC established for a dry cleaning business. A monoline Umbrella provider may be willing to write an Umbrella Policy that would sit over the liability for both businesses, eliminating the need for multiple umbrellas.
3. Go to a Brokerage
If you need liability limits in excess of what your standard carrier can provide, you may need to contact an Independent Agent who has access to Excess and Surplus lines policies through an insurance broker.
For instance, if a municipality requires you to carry $5,000,000 of liability limit per occurrence, and your insurer will only offer Umbrella limits up to $3,000,000, you may need to go to a surplus lines carrier to purchase an Umbrella policy which provides the 5th million in coverage. In this case, your standard market insurer’s Umbrella Policy will act as primary and the Surplus Lines Umbrella will be excess. Sometimes this is a necessary step to achieve the limits required, but it should be avoided if at all possible, due to the potential coverage gaps that arise when writing coverages with multiple companies.
Additionally, these policies can often be more expensive than comparable policies written through a standard carrier, and may be written with a non-admitted carrier, giving you less protection in the unlikely event the insurance company becomes insolvent. If purchasing an Umbrella Liability Policy through Surplus Lines, it is important to converse with your agent about the financial stability of the company that is providing the coverage.
Determining whether or not to add an Umbrella Liability policy to your insurance portfolio is a discussion you should be having with your business partners and your insurance agent. Umbrella policies are some of the easiest types of insurance to obtain, once you have evaluated your business and determined the need. The value of an umbrella policy should not be dismissed in these days of high profile lawsuits and ever increasing settlement amounts.
Protecting your business means guarding it against the unforeseen loss. While a maximum probable property loss can be definitively measured through a value determination of the insured asset, it is much harder to predict the amount your business may be sued for if it causes bodily injury or property damage to a third party.
It is for this reason that Umbrella Liability Policies should, at the very least, be on the radar of every small business.
Reuben Dourte is an account executive at Ruhl Insurance, specializing in farm and agribusiness insurance. Reuben joined Ruhl Insurance in 2012 and received certification for Accredited Advisor in Insurance (CAAI) in 2015.