Umbrella policies and what they cover can be somewhat of an enigma. This article explains exactly what a commercial umbrella policy covers.
Many people in the insurance industry will agree that umbrella policies are some of the most misunderstood lines of insurance coverage in existence. Of course, it's easy to understand why when you look up the definition of “umbrella" and get explanations that include: “something which covers or embraces a broad range of elements or factors," “something which provides protection," or “a thing that includes or contains many different elements or parts."
I've had clients and prospects over the years who thought that umbrella policies provide some sort of blanket property protection over their business property, equipment, and cars. I've had others think it provided some sort of personal liability protection for individuals who are business owners and may get sued—either personally or professionally—for pretty much anything.
So what exactly does a commercial umbrella policy cover?
The short version defines commercial umbrella policies as excess liability insurance policies that provide an additional layer of liability protection in the event a large claim exhausts the limits of insurance on an underlying policy.
The longer version includes a more detailed definition. As a business owner, you most likely have several forms of liability coverage. You probably have general liability insurance, which protects your business against claims alleging bodily injury, property damage, personal and advertising injury, and product liability. You might also have auto liability insurance that covers you and your drivers while they are using vehicles for your business. In addition, you may have other liability coverages, such as professional liability, which addresses professional exposures that aren't covered by general liability insurance, or employer's liability, which covers work-related injuries that aren't covered by workers' compensation insurance.
Let's say you have a large claim, such as an auto accident that results in multiple injuries or even a death. If you have an auto insurance liability limit of $1 million but the total damages amount to $1.5 million, what happens? Answer: your business is responsible for the $500,000 difference once the insurance runs out.
This is where a commercial umbrella policy comes into play. For a relatively small premium, you can purchase an umbrella policy that will cover the damages that are in excess of any underlying policy's limit of insurance. Any underlying policy that is specifically listed in the umbrella policy will be covered. If the underlying policy isn't listed on the umbrella policy declarations, then the umbrella policy will not apply.
Umbrella policies have limits starting at $1 million, and increase in million-dollar increments from there, so you may want to consider a $2 million, $5 million, or even higher umbrella depending on the liability exposures your business faces.
Marc McNulty is a guest blogger for Central Insurance Companies. This article originally appeared on the Central Insurance Blog.