How Does Umbrella Insurance Work for Commercial Businesses?

Whether a lawsuit, natural disaster, or workplace accident threatens your small business, insurance may be the one thing that keeps the company afloat when times get rough. But what happens when your standard insurance policies can’t cover all the expenses that arise from the situation? That’s where umbrella coverage comes in.

What Is Umbrella Insurance and What Does it Cover?

Commercial umbrella insurance is essentially the backup plan for your backup plan. It’s a policy that extends other liability insurance policies when you hit their limits. Instead of raising limits on various individual plans, you can purchase umbrella insurance, which covers the expenses (such as legal defense costs, medical bills, and adequate reimbursements for damages) that exceed the limits of any of your covered policies. Commercial umbrella insurance policies are often sought to extend the coverage of:

  • General liability insurance
  • Workers’ compensation insurance
  • Commercial auto insurance
  • Employer liability insurance

It’s important to note that umbrella insurance policies cannot extend limits for all forms of liability insurance coverage and do not cover property damage insurance.

What Doesn’t Umbrella Insurance Cover?

It’s also essential to understand that umbrella coverage isn’t a cure-all and doesn’t cover all types of claims and situations. It only builds on your existing insurance policies by extending their financial limit. Unless you add endorsements, umbrella insurance doesn’t cover areas that your underlying individual insurance policies don’t cover.

As with individual insurance policies, there may also be specific safety standards that your business has to meet to qualify for umbrella coverage from a private insurer.

Individual Policy Limits vs. Umbrella Aggregate Limits

Companies in high-risk industries or those that experience a lot of foot traffic on their property often need high limits on their liability policies. But increasing the limit on these individual policies can be costly, and you may not even use the extended coverage on each plan during your policy period.

Having a commercial umbrella insurance policy is a more flexible way to extend all the same policies. By aggregating and extending coverage on numerous policies with one umbrella policy, it reduces the risk of paying for coverage that you don’t end up needing.

How can you determine if your business needs umbrella insurance? Start by calculating the average frequency and cost of insurance claims against businesses in your industry and region for each liability insurance policy you have. If multiplying the average cost by the average frequency of claims exceeds your limits for numerous policies, it’s a good indication that umbrella coverage is worth the cost.

How Are Umbrella Insurance Costs Calculated?

The cost of an umbrella insurance policy is largely dependent on the likelihood of claims being made against your business and how much those claims typically cost. That means businesses in high-risk industries that are vulnerable to accidents or lawsuits pay more for umbrella insurance than their low-risk counterparts.

However, even businesses within the same industry can pay varying umbrella insurance rates because of their claims history. It’s recommended that you sit down with your insurance agent to work out the aggregate policy limit details that suit your business’s current situation. Then, figure out what you can do to make your workspace safer and less costly to your insurance provider in case of a claim.

Weathering the Storm with Umbrella Insurance

Umbrella insurance coverage may sound costly and unnecessary—and for some businesses, that may be true. When purchasing insurance policies and deciding whether or not to add umbrella coverage, you need to weigh the risks against the costs.

Ask yourself, what would hurt your business more, overpaying for insurance or having to pay out of pocket for a portion of your legal fees and settlements? What would happen if your business faced numerous claims in the same area within your policy period?

When it comes to answering these questions and making insurance purchasing decisions, don’t rely on guesses, estimates, or luck. Look at the data to weigh the expenses associated with liability claims against the cost of an umbrella policy.

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