Commercial Umbrella Insurance: How Does It Work?

commercial umbrella insurance how does it work

Commercial umbrella insurance will protect your business from liability claims that are over-and-above your regular liability coverage limits. Umbrella insurance is a crucial product for sole-proprietors and partners, those who have many personal assets at stake, and anyone who operates a brick-and-mortar location which caters to walk-in business.

This article will explore everything you need to know about commercial umbrella insurance. In this unbiased discussion, we’ll cover:

We’ll start with some definitions and examples.

Commercial Umbrella Insurance Explained

Two key words we use in the insurance industry are liability and indemnity. Liability is your responsibility to pay for damages. Indemnity means to make someone financially whole again after a loss.

  • Umbrella insurance — whether you buy it for your business or yourself as an individual — is extra liability coverage.
  • It exists to indemnify others when your current limit of liability is not enough to pay for damages.

Do I Need to Purchase a Commercial Umbrella Policy from My Business Insurance Provider?

No. While commercial umbrella insurance can be bought from any provider that offers it, they usually request proof that you already carry the highest limits of liability on your business owner’s policy (BOP).

For instance, if you have commercial insurance through Farmers, you can buy a commercial umbrella policy through The Hartford. But The Hartford will likely ask to see your current declarations page from Farmers, to be sure you’re already buying the highest limit of liability.

Insurance topics are complicated. Often the best way to explain them is through a story.

Commercial Umbrella Insurance in Action

Imagine you’re a realtor. You have a small office and two employees. One is another real estate agent; the other is an administrative assistant.

You are the sole proprietor of this business, and you like to invest in low-cost properties, to rehab and flip them. While you are “cash-poor” on paper, you’re still a high-net-worth individual, with a handful of homes currently being remodeled. We’ll say that between your own home, the business, and three project properties, your net worth is $2 million.

A customer drops into your office one stormy day. They meet with you regarding a property, it goes well. And as she’s getting in her Mercedes Benz to leave, a gust of wind knocks a huge tree limb onto them, crushing her person, and her vehicle. You call 911, she’s clearly very hurt.

Firetrucks and ambulances arrive with sirens blaring. They carefully remove the fallen tree, stop the bleeding, and put the unconscious customer onto a gurney.

You‘re worried about your client, but you know they’re in good hands now. As the ambulance flies away with your customer in it, you start to tally up the damages. Your question quickly becomes: Will my liability coverage cover all of this?

If you have a commercial umbrella insurance policy, you’ll rest easy tonight knowing that your home, business, and assets are protected, even if the cost of medical bills and auto replacement are higher than the limit of liability on your commercial policy. Your umbrella policy will also cover punitive damages, and we’ll talk about those more in a moment.

Your Commercial Policy Comes into Play First

Your customer is in the hospital, in stable condition. You’ve called your insurer, who happens to carry both your regular commercial policy (with a $1 million limit of liability), and your commercial umbrella policy (with a $10 million limit.)

The insurance agent assures you that you currently have $1 million in personal injury coverage, $1 million in property damage coverage, and they’ll even cover the cost of removing the crushed Mercedes from your parking lot. But if her hospital bills start to get higher than $1 million, and if she chooses to sue you (she does), your umbrella policy will come into play.

What is Covered by Business Liability and a Commercial Umbrella Policy?

Six weeks have passed since the incident. Your customer is home from the hospital but she’s wearing a neck brace and moving around in a wheelchair. She’s starting to tally up her losses and send them to your insurer.

So far, they include:

  • Five weeks in the hospital: $200,000
  • Surgeries and the Operating Room (OR): $180,000
  • Anesthetic and anesthesiologist: $10,000
  • Ambulance ride: $9,000
  • Missed wages: $7,000, and counting
  • X-rays and tons of diagnostic tests: $30,000
  • Physical therapy: $20,000, and counting
  • Medical devices: $10,000
  • Medications, both prescription and over the counter: $8,000, and counting
  • Care for her children: $6,000 and counting
  • In-home nursing care: $8,000 and counting
  • Housekeeping and yard care: $2,000 and counting

Plus, her new Mercedes will need to be replaced, to the tune of $100,000.

So far, it looks like your business insurance policy with $1 million might barely cover it, for now. But her expenses continue to rise, and she’s experienced a lot of pain and suffering.

Types of Damages Covered by Commercial Liability Insurance and Umbrella Policies

In a civil court, there are generally two types of damages an injured person can sue for: compensatory and punitive.The expenses listed above are considered compensatory, they’re easy to prove with paperwork and bills. Your insurance company will continue to pay for these costs as they are proven. Again, the point of liability insurance is to indemnify her after a loss.

Now, if she chooses to sue you for punitive damages, that covers issues which are more difficult to prove on paper. These include:

  • Pain and suffering
  • Psychological damage to herself and her family

Your insurance company will hire an attorney to fight these sorts of claims. And should your customer win a lawsuit for punitive damages, like $5 million dollars for pain and suffering, your liability coverage will fulfill it up to the limits of the policy. Then your commercial umbrella policy will kick in to pay what’s left, up to policy limits.

The Final Score

A year passes. Your customer is still in physical therapy. She’s still missing work and paying for childcare. Her career, marriage, and family life are damaged. She easily wins the $5 million dollar lawsuit for pain and suffering.

Ultimately, it boils down to $1.2 million in compensatory damages, and the $5 million for pain and suffering, for a total claim of $6.2 million.

Your commercial insurance, with a limit of $1 million, pays up to policy limits. The rest ($5.2 million) is covered by your business umbrella policy.

Thankfully, you have that commercial umbrella insurance policy! Otherwise, you’d need to sell off your assets, including your home, business, and investment properties.

Will My Price for Commercial Insurance / Umbrella Insurance Go Up After a Claim Like This?

Almost certainly, yes. A major claim like this can cause our insurance premiums to increase significantly when It’s time to renew your contract.

Know that your insurance company cannot simply cancel your contract after a claim, even if it’s a big one. They can, however, choose to increase your premium when it’s time to renew your policy. They can also choose to “non-renew” this contract, meaning they will refuse to insure you in the future. Whether they increase your premium to a ridiculous price, or non-renew your contract, you find yourself shopping for insurance, so let’s talk about that.

How to Shop for Commercial Umbrella Insurance

It’s easier than ever to shop for commercial umbrella insurance, and you‘ll treat the process just like shopping for any type of insurance product. There are two main ways to go about this:

  1. Talk to an insurance agent you trust, in-person or on the phone.
  2. Take your search to the internet. You can use our free online quote service as well. Just enter your zip code to get a quote.

First, gather your documents.

Documents You’ll Need When Shopping for Commercial Umbrella Insurance

Gather up all your business insurance policies. You’ll need to prove that you’re already buying the highest limit of liability on your commercial policy. If your business owns vehicles, you’ll need to carry the highest limit of liability available on all your business autos, too.

Pro Tip: You won’t need to send an entire policy when getting a quote for commercial umbrella insurance. The declarations page, or “dec page” (the first page of a policy), has all the information needed.

You’ll need:

  • Your commercial insurance policy dec page
  • Business auto policy dec pages
  • Any stand-alone liability policies you may have
  • And possibly your homeowner’s insurance policy and personal auto dec pages, if you’re a sole-proprietor or partner
  • If your organization is a partnership, you may need similar paperwork from your partner(s)

Small businesses may also be asked for:

  • Business licenses
  • Specific industry licenses
  • Proof of payroll
  • Proof of quarterly sales or income

If you’re missing one of these documents, don’t let it hold up your search for a quote. You can get the process started while you find that missing paperwork.

Now, start contacting insurance companies.

Contacting Insurers

Your first place to look for a commercial umbrella insurance policy should be the insurer who already carries your business insurance. You might get a better price for “bundling” policies together, and it makes the paperwork easier to manage. They already have all your paperwork and numbers handy, just contact them and ask for a commercial umbrella insurance quote. It might take a few days to get a response from them.

Can My Insurer Offer Commercial Umbrella Policies but Refuse to Insure My Business?

Some insurers don’t offer commercial umbrella policies at all, though the number of them is dwindling. Others might not wish to insure a company like yours, due to the risks associated with your industry or location.

In the insurance world, we call this “risk appetite“. If an insurer has no appetite for your sort of business, they can choose not to insure you. Types of businesses that usually struggle with these issues could include:

  • Construction contractors
  • Alcohol retailers
  • Dangerous operations, like mining or extraction
  • Commercial trucking, logistics, transport
  • Gyms or fitness centers
  • Medical clinics
  • Equestrian facilities
  • Farm and ag
  • Doctors and medical professionals

Ultimately, it’s up to each insurance company to select the type of businesses with which they’ll work. The good news is that the internet makes it easy to search for commercial umbrella policies for your specific business. Just visit your favorite search engine and enter “commercial umbrella insurance for [industry],” and start getting some quotes. Just be sure you’re comparing “apples to apples,” to be sure you get the best commercial umbrella policy for your needs.

How to Compare Commercial Umbrella Insurance Quotes

Unlike more complicated insurance policies, commercial umbrella quotes are easy to compare. For most small businesses, you’ll only need to know the limit of liability and the premium costs. That’s it! If your bottom line is your biggest concern, choose the most affordable policy with a limit of liability that makes you comfortable.

Now, you should still read the quote carefully and have a discussion with the agent who is offering the policy. Here are some questions you should ask, if they apply to your business:

  • How many business autos are covered by this umbrella policy?
  • Do I need to contact you every time I add or delete an auto to my business?
  • I have more than one location, does this policy cover them all?
  • Is there any way to reduce the premium?

Know that your insurer might offer you a better price if you jump through certain hoops. For instance, if you can prove all your drivers have excellent records, or provide them with training or drug tests, you might be eligible for a discount.

Finally, ask them how much coverage they would recommend for a business like yours.

How Much Commercial Umbrella Coverage Should I Buy?

There is no easy answer to this question. The point of a commercial umbrella policy is to protect all your assets from a significant lawsuit like the one we shared earlier. So, add up all your company assets (including your home and personal accounts if your organization isn’t incorporated.) That total amount is a good starting point. If you run a particularly dangerous business, do some research on injury lawsuits in your state and their awards. In our litigious society, with the costs of medical help and real property skyrocketing, you might sleep better with $10 million in coverage, or more.


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