Does Your Business Need Commercial Liability Umbrella Insurance?

Nearly every week, the news is filled with headlines announcing that some big company lost or was forced to settle a lawsuit for mega millions. While big-name corporations may be able to survive such litigation relatively unscathed, for small and medium-sized businesses, just a single lawsuit could sink your entire operation.

Even if your company has done nothing wrong, your legal defense fees (the cost of proving you did nothing wrong) can still be massive. Of course, these fees are nothing compared to what you’ll have to shell out if you’re actually found liable and must pay damages.

If your company is sued, your general liability insurance will offer you some protection, but if that policy maxes out, you could be facing a potentially disastrous gap in coverage. To this end, many businesses add additional protection by purchasing commercial liability umbrella insurance.

As the name implies, umbrella insurance is simply an extra layer of coverage that sits on top of your existing policies. Think of your general liability policy as your raincoat and this extra insurance as—you guessed it—an umbrella. If your underlying policy is unable to keep you completely covered, umbrella insurance can allow you to weather even the nastiest storms.

For example, if someone is injured at your place of business, they might sue you for their medical bills, lost wages, and even pain and suffering. Your general liability will cover you up to a certain dollar amount, but you’ll be on the hook for anything beyond that limit.

Once your underlying insurance maxes out, the umbrella policy will help pay for the resulting damages and legal expenses if you lose the case. If you win, it can help cover your lawyer’s fees.

Not all businesses need umbrella insurance. For example, if you work from home as a consultant, it’s unlikely you’d need it, unless you have clients who visit your house.

That said, in today’s litigious culture, it can be difficult to know if you face enough risk to justify such coverage. While we cannot offer definitive advice on your company’s need for coverage, you can get some idea of your risk level by considering a few questions:

• Is your business property open to the public? If you have people regularly visiting your place of business, you’re at a greater risk for accidents and premises liability lawsuits.
• Do your employees use vehicles for business? Whether it’s a company car or their own, if an employee gets into an accident while driving for work, your company could be sued.
• Is your workplace at high risk for employee injuries? While Workers’ Compensation Insurance should cover most on-the-job accidents, if your particular business operation leaves employees prone to injury, you could be sued by an employee alleging their injury was due to your negligence.

Commercial umbrella insurance is only applicable for certain types of business insurance, so it’s not something that will cover your company on its own—or even in all cases. Umbrella coverage typically applies to three primary types of underlying commercial policies: general liability, employer’s liability, as well as hired and non-owned auto liability.

In order for umbrella coverage to apply, you must first have an appropriate underlying policy in place, and that policy’s limits must be maxed out. In fact, you may not even be able to purchase umbrella insurance if your underlying policy doesn’t offer high-enough limits.

Note that for certain professional-service businesses, such as law firms or healthcare practices, umbrella coverage will not apply in cases involving malpractice or other professional liability policies.

Because each business has its own unique risks and assets, there’s no way to say exactly how much coverage your company might need without a full evaluation. But before you speak with an insurance agent, consult with us as your Creative Business Lawyer,® so we can support you in finding the right agent and evaluating your options.

We’ll evaluate your business assets, risks, and underlying coverage and then work with you and your insurance advisor to identify  the optimal levels of insurance you should have in place.

We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule. Or, schedule online.