Commercial umbrella insurance: What you need to know

What is commercial umbrella insurance?

Commercial umbrella insurance offers additional liability protection beyond the maximum limits of your commercial insurance policies, such as general liability and commercial auto insurance. 

Without an umbrella policy, if someone were to file a claim or lawsuit against your business and won an award or judgment greater than your policy limits, you would be financially responsible for paying the remaining out-of-pocket costs, which could include:

• Legal expenses
• Medical bills
• Property damage costs
• Settlement or judgment award

How does commercial umbrella insurance work?

Commercial umbrella insurance works “exactly like it is named,” says Diane Gannon, a senior sales producer for small business insurance broker Insureon. “It covers you like an umbrella when you have exhausted the underlying limits of your covered policies,” she says.

Let’s say your employee is driving to a job site and hits another vehicle. The other driver has serious injuries that require surgery, a lengthy hospital stay and rehabilitation. They’re unable to work for months and won’t be able to do the same job they did before due to their injuries. They also had a passenger whose injuries weren’t as severe, and they could return to work within a month. They sue you and win a judgment. Here are the damages:

• Driver injuries, medical bills and lost wages: $150,000
• Passenger injuries, medical bills and lost wages: $75,000
• Attorney and court fees to represent you: $100,000
• Judgment award for driver: $1 million
• Judgment award for passenger: $150,000

Even if you have a $1 million commercial auto insurance policy, it wouldn’t be enough to cover the judgment the driver was awarded. A commercial umbrella policy would pay the remaining $475,000, so you don’t have to pay out of pocket, take out a loan or risk your company’s financial solvency.

Who should get commercial umbrella insurance?

Previously, only large businesses purchased commercial umbrella insurance. But now, “more small businesses are purchasing commercial umbrella insurance due to the rising costs of lawsuits and medical expenses,” Insureon’s Gannon says.

Here are some questions to help determine if getting umbrella liability insurance for your business makes sense.

Does your business have a lot of public exposure? Whether it’s foot traffic into your retail business or your staff going out on sales calls to potential clients, the more you’re exposed to the public, the more likely someone could get injured and sue you.

For instance, let’s say a customer trips over a clothing rack in your store and sustains a head injury, which causes chronic health issues. They could sue you for $2 million to recoup their medical costs, lost wages and health impacts.

If your retail store’s business liability policy only has a $1 million per occurrence limit, an umbrella policy could pay for the additional $1 million judgment and legal fees.

Insureon also cites fleet owners, general contractors and HVAC (heating, ventilation and air conditioner) installers as businesses that could benefit from umbrella insurance.

Health-focused businesses also could benefit. 

“Gyms that host activities such as local competitions, open-water swims, trail runs or other high-risk events should strongly consider umbrella liability Insurance,” NEXO’s Reingen says. “Many gyms inherently expose clients to risks such as heart attacks, strokes, or other severe medical conditions. When such incidents occur, even if the gym is not at fault, the resulting defense costs and potential settlements can be substantial.”

Do you own commercial vehicles? The more miles your employees drive, the more likely they are to be involved in an accident. Businesses with a fleet of vehicles or that involve driving to job sites, clients’ homes or other businesses to complete projects can protect their company against a serious accident or lawsuit with commercial umbrella insurance.

As discussed above, a single accident with severe injuries or a pile-up with multiple injured drivers and totaled vehicles could easily wipe out your underlying business auto limits. An umbrella policy could cover medical expenses, legal fees and a judgment if they sue you.

Do you want to win a large contract? General contractors often have to go through the bidding process to win contracts. If you want to land a big client, contract requirements may exceed your general liability policy limits. “Those small business owners who purchase commercial umbrella insurance typically do so as it might be necessary to fulfill a contract that requests higher than standard policy limits,” Gannon says.

For example, a client contract requires a $5 million per occurrence limit to be considered for the project. If your general liability policy only has a $2 million per occurrence limit, you can get a $3 million commercial umbrella policy to meet the requirements.

Do you work in a hazardous industry? Employee and client injuries or deaths are more common in hazardous industries like construction, agriculture, warehousing and transportation.

If an employee picks up heavy equipment and injures their back or a pallet of goods falls off your truck and kills one of your client’s employees, you could face a multi-million dollar lawsuit.

Adding umbrella insurance to your employer's liability insurance can provide additional coverage for employee claims and offer more protection in case of general liability claims like the pallet accident.

What does commercial umbrella insurance cover?

Business umbrella insurance coverage covers three key areas:

• Bodily injury if someone gets hurt at your business or on a job site.
• Property damage that you or your employees cause to your client’s business.
• Attorney fees, damages and other expenses you could incur from a lawsuit.

Commercial umbrella insurance only provides liability protection for existing, underlying policies. So, an umbrella policy wouldn't cover auto accident claims if you only have general liability and not commercial auto insurance.

What isn't covered by a commercial umbrella insurance policy?

Commercial umbrella insurance doesn’t cover all claims. Exclusions include:

• Personal property damage
• Commercial property damage
• Contractual liability
• Intentional damage
• Professional errors
• Employee theft
• Armed conflicts and war

How much does a commercial umbrella insurance policy cost?

Commercial umbrella costs vary by state, coverage amount, type and size of your business and amount of underlying coverage.

Commercial umbrella insurance coverage costs $75 per month, on average, or around $900 per year, according to Insureon data. 

Costs increase by approximately $40 per month for every $1 million more you buy, making the average $2 million umbrella policy around $115 per month and $3 million, $155 per month.

Which companies offer commercial umbrella insurance policies?

Many commercial insurance companies offer small business umbrella insurance, including:

• Builders, which specializes in the construction industry. 
• Farmers provides up to $10 million in commercial umbrella insurance.
• Nationwide bills itself as a leader in solutions for small business insurance with over 90 years of business experience.
• Next offers up to $4 million in business umbrella insurance.
• State Farm insures more than 300 small business professions.
• The Hartford, which has more than 1.5 million small business customers and more than 200 years of commercial insurance experience.
• Travelers offers commercial umbrella and excess liability insurance.

How much coverage does commercial umbrella insurance provide?

A business umbrella insurance policy starts at $1 million in coverage. You can buy more coverage in $1 million increments. However, the maximum depends on your industry, risk level, the insurance company you choose and the amount of lawsuit protection you need.

It’s common for contractors to bid on projects with contract requirements of $5 million or more in liability insurance. If you only have $2 million in general liability insurance, you can get a commercial umbrella insurance policy for $3 million to meet the requirement to bid on the project. 

What’s the difference between commercial umbrella insurance and excess liability insurance?

Small business owners may wonder how commercial umbrella insurance differs from excess liability coverage.

A commercial umbrella insurance policy increases your liability coverage limits if you exceed the liability limit on an underlying policy. It can also broaden the coverage beyond the underlying policy territory. For example, if your commercial auto policy only covers accidents within a specific region, your commercial umbrella policy may extend the coverage territory beyond that region. 

Excess liability insurance only extends the limits of a single liability policy. Some insurers may offer excess liability that covers several liability policies, similar to an umbrella policy. But an excess liability policy doesn’t broaden the coverage beyond the underlying policy's conditions, terms and exclusions. 

An umbrella policy’s broader protection offers more benefits than an excess liability policy. If someone files a claim that’s not covered by your general liability policy but is under the commercial umbrella, you can pay a self-insured retention amount for the umbrella policy to cover the claim that your general liability insurer denied. It may also provide coverage for newly acquired businesses and international operations.

The increasing need for commercial umbrella insurance 

Umbrella coverage may be more important than ever due to nuclear verdicts or large jury awards of $10 million or more. The U.S. Chamber of Commerce Institute for Legal Reform recently released its findings on a 10-year period from 2013 to 2022. 

Around half of the verdicts fell between $10 million and $20 million in awards. Over one-third were up to $50 million, with the remaining 19% awarded over $50 million. The median nuclear verdict award was $21 million, though product liability cases were much higher, with a median award of $36 million. 

Just four states made up half of the country’s nuclear verdicts:

• California
• Florida
• New York
• Texas

Nuclear verdicts don’t just affect the business that was sued; they also have negative effects on society. It can cause a necessary business or product to no longer be viable or make an entire industry uninsurable.

Truckers and motor carriers especially find it challenging to find insurance. When they do, it can be cost-prohibitive because it is one of the leading industries for nuclear verdicts. Massive verdict awards rose by almost 52% annually from 2010 to 2018, according to a 2020 study by the American Transportation Research Institute (ATRI). 

How to get commercial umbrella insurance coverage

You can get commercial umbrella insurance coverage in just a few steps:

1. Determine your risk tolerance. A $1 million umbrella policy may be all you need if you're a risk taker. But if you’re risk averse, have a lot of business assets, or are worried about a nuclear jury verdict, consider a policy with limits of $5 million or more.
2. Contact your current insurance company. Contact your current insurer first to get a quote for umbrella coverage. You might get a discount for bundling all your policies with the same company.
3. Compare commercial umbrella insurance quotes. Gathering several quotes can help you compare coverage terms, conditions, exclusions and premiums to see which company offers the broadest umbrella liability protection for the best price. Be sure to ask if the company will write umbrella insurance even if it doesn’t carry the underlying policy; some won’t.
4. Purchase umbrella liability insurance for your business. Once you select a policy, make your down payment or pay it in full to secure your umbrella coverage. Remember to ask for a certificate of insurance for any contract bids or to provide to your underlying insurance company.

FAQs 

Can commercial umbrella insurance be customized?

Yes. Some endorsements you can add to your commercial umbrella insurance policy include coverage for hired and non-owned auto liability, employment practices liability, directors and officers liability, liquor liability and fire legal liability insurance.

How do I determine how much umbrella coverage my business needs?

You should consider a few factors to determine your umbrella insurance needs. Commercial umbrella insurance protects your business assets, so ensure you have enough coverage to protect your finances. You should also consider any contracts or bid requirements you need to fulfill to win a project or land a new client, your business’s risk level, size and the financial impact a lawsuit could have. The less risk-tolerant you are, the more umbrella coverage can protect you. 

What industries are most likely to need commercial umbrella insurance?

High-risk industries are most likely to need commercial umbrella insurance. Contractors, fleet business owners, businesses with a lot of public exposure and hazardous industries can benefit the most from a business umbrella policy.

What our expert says

Q: Should gyms consider umbrella insurance?

Eric Reingen Chief operating officer, NEXO Insurance.

"Gyms that host activities such as local competitions, open-water swims, trail runs or other high-risk events should strongly consider umbrella liability Insurance."