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Is Umbrella Insurance Right for Your Business?

Author: Jason Morrison | June 1, 2023

Edited by: Jason Morrison and Reviewed: Jason Morrison

As a business owner, it is important that you protect yourself from financial loss arising from unexpected circumstances and legal complications. Unfortunately, adhering to prescribed workplace standards and taking reasonable precautions cannot completely prevent accidents from occurring on your premises. Should such an incident result in serious injury or property damage, you could find yourself on the wrong end of an expensive lawsuit. Commercial umbrella insurance offers the safety net of excess liability coverage should the claim’s cost exceed your existing general liability insurance limit. 

If you or your organization is found responsible for damages, you may be liable to financially compensate the aggrieved party. This compensation might cover medical expenses, damaged property, lost income, legal fees, and more, and could amount to hundreds of thousands of dollars. Commercial umbrella insurance complements your primary insurance policy. It adds a supplemental layer of liability protection beyond the limits of your general coverage.

What Is an Umbrella Policy?

An umbrella policy is a specialized policy that augments your existing business insurance. It is specifically designed to step in when the limits of your general coverage are exhausted. This occurs in the event of a lawsuit resulting from an accident or tragedy on your property.

Once your primary coverage reaches its limit, the umbrella policy becomes active, bridging the gap and providing additional liability protection. This means that if you face a substantial claim that exceeds the limits of your underlying policies, the commercial umbrella policy kicks in to make up for the financial shortfall.

Moreover, the policy offers more than just monetary coverage. It also works in tandem with your commercial insurance provider, collaborating to navigate legal proceedings and diligently protect your business assets. They employ all necessary means, including legal representation, to defend your business’s interests in court.

By securing it, you demonstrate a proactive approach to safeguarding your business’s financial well-being and reputation. It acts as a vital safety net, shielding your assets from potentially devastating lawsuits that could disrupt your operations and drain your resources.

Ultimately, evaluating the need for an umbrella insurance policy requires careful consideration of the nature of your business, its level of exposure to risks, and the potential financial consequences of a significant lawsuit. Consulting with insurance professionals can help you determine the appropriate time to acquire this additional layer of protection. It ensures peace of mind and resilience against unforeseen challenges. As per a report, in Q1 2021, premium prices rose by 19.7% which was the highest among all lines of business.

Determining When Your Business Requires Umbrella Insurance

An umbrella insurance policy is not needed when you are just starting out and setting up your business. Once you have built a significant amount of wealth and your net worth exceeds your general coverage’s maximum liability limit, it’s time to have a commercial umbrella insurance policy in place to effectively protect your assets. 

What Does Commercial Umbrella Insurance Cover?

Commercial umbrella insurance covers the same costs your general business liability insurance policy covers. These include medical expenses, legal fees, third-party property damage, financial losses, and more. Your umbrella policy provides coverage in excess of what is covered by your general policy. 

When considering umbrella insurance, it’s important to note that most providers typically require the underlying liability coverage to be at least $1 million. This requirement applies to various insurance policies such as general liability, commercial auto, and workers’ compensation. The umbrella policy acts as an extra layer of liability protection, extending coverage beyond the limits of the underlying policies. Umbrella providers stipulate a minimum underlying coverage requirement. This ensures a solid foundation of liability protection is in place before offering additional coverage. This safeguards businesses against potentially significant financial liabilities that may arise from lawsuits or other claims.

If your business liability insurance offers $750,000 coverage and you face a $2 million lawsuit, your general insurance pays $750,000 in damages. Commercial umbrella insurance covers the remaining $1.25 million within the coverage limits. Umbrella policies typically provide $1 million to $5 million of additional coverage, expandable if needed.

How Does Commercial Umbrella Insurance Work?

It acts as secondary coverage triggered when your primary policy reaches its limit. It becomes applicable when an organization faces a substantial lawsuit resulting from a major mishap. The umbrella insurance company works with general insurance providers to face the lawsuit in court.

What Does It Cost?

Premiums for umbrella insurance are considerably less than those of general business insurance policies. This is because businesses rarely use umbrella policies. Expect to pay just a few hundred dollars per year for every million dollars of commercial umbrella insurance coverage. Remember, though, your umbrella insurance policy works in conjunction with other general business insurance coverage, which will be more expensive.

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