The typical small or mid-sized business has liability limits of between $500,000 and $2 million on either a business owner policy (BOP) or commercial general liability policy.In addition to your BOP, you might also have liability coverage under other policies. Typical, these would be an automobile liability policy or employers liability policy.
So why do you need umbrella liability insurance? Sometimes, a liability claim will exceed the limits of these “primary” or “underlying” policies. When that occurs, you’ll have to pay any amount over the limit out of reserves or cash flow — unless you have an umbrella insurance liability policy. These policies provide coverage when you exhaust the limits of äny underlying liability policy.
Umbrella insurance can be attached to commercial liability, employers liability and automobile liability policies. It has three main functions:
- to provide excess coverage for underlying liability policies (for example, increasing the maximum your policy will pay from $1 million to $5 million)
- to “drop down” and make payments when underlying policy limits have been totally or partially exhausted (such as when maximum aggregate limits have been reached before the end of a policy term or when liability awards consume limits of other layered policies)
- to provide broader scope of coverage than primary policies offer. Sometimes, umbrella liability policies will cover claims that your primary policies exclude. An example would be covering damage to property belonging to other parties but in the care, custody and control of the insured.
Although you might hear the terms “umbrella” and “excess” used interchangeably, these two types of policies differ significantly. Excess insurance simply provides higher limits than your underlying policy. An umbrella policy not only increases your limits, it increases the scope of your coverage as well. In other words, an umbrella policy can protect you from some losses excluded by your primary policy. Policy terms vary, but umbrellas can cover claims filed outside the U.S. or Canada; claims of contractual liability (for both written and oral contracts); liability for items in your care, custody and control; and watercraft or aircraft liability—all excluded by the standard commercial liability policy. Before your umbrella activates this “drop down” coverage, an insured must pay a self-insured retention (SIR—usually $10,000 or $20,000) that acts as a deductible.
What to Look for in Umbrella Policies
Most umbrellas furnish broader coverage and fewer restrictions than general liability policies. But if yours doesn’t, consider adding “broad as primary” or a “following form” clause in the contract. This will indicate that your underlying policy’s conditions will automatically be included in the umbrella coverage. When possible, amend the language to go beyond the underlying policy’s conditions, by agreeing that exposures not covered by the underlying policy will be picked up by the umbrella after your claim costs exceed the SIR. Anniversary dates of all underlying and umbrella coverages should coincide, to avoid potentially damaging coverage gaps or overlaps.
When your organization has several layers of insurance, be certain that covered losses and “drop down” language are identical. Some policies have separate limits for legal defense costs. If your umbrella includes defense costs within its policy limits, you might want to purchase higher limits. If the policy covers more than one company, be certain to insert a “severability of interests” clause; this will treat each company as a separate insured if an employee of one company makes a claim against another insured company.
Umbrella insurance can save the day when a major claim puts your company’s finances at risk.