Umbrella and Excess Liability: More than rainy day coverage

Most all commercial businesses, as well as individuals with substantial assets, should carry additional insurance coverage in the form of an umbrella policy. The fact is, most businesses do not have the capital to recover from a major lawsuit. And for wealthy individuals, an umbrella policy is a stop-gap coverage to protect personal assets from an array of losses that are hard to conceive of until they happen.

Commercial umbrella policies extend liability coverage for an additional layer of insurance to further protect your business assets. This coverage is designed to offer additional limits over commercial general liability, automobile, workers compensation/employers’ liability, and employee benefits liability.

For individuals, determining how much coverage to purchase under an umbrella policy is a simple calculation involving your net worth, home equity, retirement plan value, and the limit of liability coverage on your primary residence.  For businesses, the calculation is a bit trickier. A number of factors come into play, including the type of business, the risks faced, the coverages your business already has in place, as well as the assets of the business.

Sentinel recommends that most small businesses carry additional limits through an umbrella policy of at least $1 million. For middle market enterprises, the question becomes two-fold: how much additional coverage is needed to offset potential losses, but also, how much insurance is needed to adequately protect company assets. To do both, most middle market companies will require excess liability coverage in addition to an umbrella policy.

On the surface, umbrella and excess look a lot alike. But in reality, they couldn’t be more different.

Where umbrella coverage extends to multiple underlying policies, excess liability coverage provides higher limits to just one underlying policy. Excess does nothing to broaden a business’s overall risk and insurance portfolio against losses, but it is a very effective tool in certain scenarios, such as satisfying the terms of a contract, accessing particular insurance carriers, and buying down the cost of an insurance package; a particularly attractive option for small and mid-size companies.

Umbrella policies, by contrast, kill many birds with one stone: they broaden and strengthen the company’s overall risk and insurance program; provide coverage for claims not covered by any of the disparate policies; and close any gaps found in the primary lines of coverage.

Smart, savvy umbrella policies are designed to grow with your business, effectively becoming part of a middle-market company’s growth and development strategy. That’s why it’s important to work with your risk manager and advisor to ensure your umbrella policy has enough capacity to protect a large swath of the company’s risks and assets.

The cost of an umbrella policy is most often calculated based on the premiums of the underlying policies. On average, you can anticipate spending 10-15 percent of your business’s primary premium on umbrella policies. If you are contractually obligated to list parties as additional insureds, they more than likely carry over to the umbrella A policy.

It’s interesting to note that auto accidents are the leading cause of umbrella claims, both for businesses and individuals.

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