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What is an Umbrella Policy and Why do You Need One?

March is “National Umbrella Month” — These handy tools can do much more than protect you from spring showers — They can also be incredibly essential to protecting your business.

What is an Umbrella Policy?

You’re likely familiar with the concept of protecting yourself when you go out in the rain — Maybe you wear just a jacket. Maybe you add on a hood or hat to protect your head and hair. However, even with that protection, rain can still get around collars, sleeves and rims. An umbrella is a true physical barrier above and beyond a coat that provides an additional level of protection.

The same is true with a commercial umbrella policy. While you likely have a comprehensive business insurance policy that may cover things like loss due to fire, theft or other damage and liability claims, your policy only goes so far, specifically when it comes to liability. That’s where an umbrella policy comes in — It covers your needs beyond what you already have in place in the all-important area of liability.

Why do You Need One?

Liability (being responsible for harm or error to another), can be one of the most dangerous and expensive parts of running your business. If you are subject to lawsuits relating to a liability claim, it can cost your company millions of dollars.

Your existing liability levels in your overall commercial policy have an upper limit — a maximum payout. In many cases, if you are subject to litigation, plaintiff’s attorneys will attempt to secure a number above that maximum payout. Having an additional umbrella policy provides you an additional level of coverage, further minimizing your out of pocket costs.

What Does it Cover?

Traditionally, basic commercial umbrella insurance will cover many of the same categories as your existing business liability insurance such as attorney fees/costs and damages if you are sued and medical expenses from plaintiffs. Your umbrella policy ups the amount your liability policy will pay out in these circumstances.

You may find that your business has needs for additional coverage, specific to your industry or situation. These are traditionally called “Endorsements” and are add-ons to your policy. Examples include:

  • Liquor Liability Insurance: Specifically necessary when your establishment or event serves alcohol
  • “Hired and Non-Owned” Auto Liability Insurance: This gives your company additional liability protection if employees are using their own car (or a rental car, not a company-owned car) for company business.
  • Fire Liability: This is different than your commercial policy that provides costs for rebuilding if fire damages your business — This is specifically to cover your business if you are responsible for a fire in a place you lease or a shared space
  • Directors and Officers Insurance: This specific endorsement is put in place if charges are leveled against an executive/officer of your company and you need to pay legal defense costs or pay for eventual damages.
  • Employment Practices Insurance: While your HR team or consultant is doing everything possible to minimize your exposure to employee claims, they are a fact of life for most business owners. Selecting this additional endorsement gives you coverage to pay for legal defense of employee lawsuits.

What Else do you Need to Know?

An important note, even an umbrella policy does not protect your business from liability relating to illegal activities. For example, if you start a fire in your space because you were manufacturing an illegal substance, and that fire then spreads to neighboring spaces causing excessive damage and you are charged criminally, your umbrella policy will be voided.

How do You Set Up the Right Policy?

Almost more than any other part of your business insurance coverages, a well-placed umbrella policy can be a key difference maker when it comes to a potential cost that could bankrupt your business. Work with your insurance broker to sit down and review the levels of coverage in your existing policies and pinpoint specific areas where these bonus endorsements can really help shore up exposure. For example, paying for an additional policy specifically targeted at alcohol liability might make more sense than paying to up your overall liability coverages on your main policy where you liability is relatively low in other areas of operation. Work with your broker to run the numbers for all options to determine the ideal combination of coverage and cost.

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