Weathering the Storm: How would your business be affected if you were faced with a lawsuit that exceeded your insurance limits?
Steve and Lisa dreamed for years of running a pizzeria. After years of saving, researching business strategies and experimenting with recipes, they finally opened S&L’s Pizza Place.
Shortly after celebrating their fifth year in business, Steve and Lisa received a terrible call in the middle of the night informing them S&L’s Pizza Place was on fire. They arrived shortly after to discover their business engulfed in flames. An adjoining business had also started on fire and by morning both businesses were destroyed. The subsequent investigation revealed the cause of the fire to be faulty wiring in the pizzeria.
Because the fire destroyed a neighboring business, Steve and Lisa ended up in a legal battle with the other business owner, resulting in a $2 million settlement, attorney fees and court costs. These expenses exceeded the limits of their liability insurance policy.
This is an example of a situation where a commercial liability umbrella insurance policy could take effect and ease the financial burden of a lawsuit.
What is Commercial Umbrella Liability?
A commercial umbrella policy is an extra layer of liability insurance. This coverage protects a business when the cost of claims exceeds the limits of their primary liability insurance policies. Without this coverage, a business owner could be left paying legal fees, medical bills and damage expenses.
Do I Need Umbrella Insurance for My Business?
Lawsuits are an increasing risk for many business owners. While implementing safety measures is important, there is always a risk of something occurring beyond your control that could result in a lawsuit. Your business insurance provides some liability coverage, but a single lawsuit could easily exceed your policy limits.
Consider the implications of a lawsuit against your business. How would you pay attorney fees and court costs? If a judgment is rendered against your business that isn’t covered by your liability policy or exceeds the policy’s limits, what would happen? Your assets and future revenue will be on the line, putting yourself, your employees and your business at risk.
What Puts My Business at Risk?
Some factors that may increase your need for an umbrella policy include the following:
• Having a business that is open to the public.
• Doing business on property owned by someone else, such as your clients.
• Serving high-net-worth clients.
• Having employees who drive as part of their work responsibilities.
• Doing business with clients who require higher liability limits than what you have on your underlying policy. (Your underlying policy is the initial policy that will respond to a covered loss).
• The nature of your business makes employee injury more likely (i.e., construction or manufacturing).
• Engaging in business activities that have a greater chance of third-party liability and property damage.
How Does an Umbrella Policy Work?
An umbrella policy takes effect when your other liability coverage limits have been reached. This coverage increases and broadens liability coverage, filling in gaps left by the other coverages that you have. An umbrella policy can provide coverage for some liability exposures that are not covered by or that are excluded on the primary insurance policy.
A commercial umbrella policy protects your business from liability claims, including:
• Libel.
• Reputational damage.
• Vehicle accidents.
• Product liability.
• Customer injury (i.e., slip and fall injuries).
• Workers' compensation.
• Third-party property damage.
An umbrella covers the same types of costs as a business liability insurance policy when your company faces a lawsuit, including medical expenses, attorney fees, court costs and damages.
How Much Coverage Do I Need?
The amount of liability coverage you have should align with your risk exposure. Businesses that are especially vulnerable to certain risks will need more coverage than those with limited exposure to those same risks. For example, a business with a storefront has customers on their premises on a daily basis, which means more risk of someone getting hurt on their property. An online business without a storefront has a lower risk exposure in this area.
The cost will vary, depending on the amount of coverage you purchase and your risk exposures, including the type of work you do, your industry and the size of your business.
Industries that are deemed to be more high-risk, such as healthcare or construction, will pay more for a policy.
It is important to discuss your specific needs and risks with your insurance agent to ensure you have the right coverage for your business. You don’t want to waste money on coverage you don’t need, but it is important to have the right type and amount of coverage to protect your business. If you need higher liability limits, it can be more cost-effective to purchase an umbrella policy rather than increasing limits on your liability policies, though you do need to meet the minimum limits on your underlying coverage to qualify for an umbrella.
Other Things You Should Know
An umbrella policy is not offered as stand-alone coverage; it works in conjunction with your other liability coverages. Generally, you need to purchase primary insurance coverage before purchasing an umbrella policy, including general liability, auto liability, workers' compensation and employer’s liability. It is common to have a requirement for underlying liability limits of $1 million. Depending on your liability exposure, you may need a higher underlying limit.
Some common risks that are not covered by umbrella policies include:
• Liquor liability.
• Workers' compensation, employers liability, and employment-related practices.
• Pollution.
• Aircraft or watercraft.
• Racing activities.
• Recall of products, work or impaired property.
• Electronic data.
In addition, umbrella insurance will not cover property insurance claims or errors and omissions (E&O) claims. Coverage varies by policy and insurance company, so it is important to review your policy with your insurance agent to ensure you understand what is covered and excluded.
Contact your insurance advisor for a risk assessment to determine if an umbrella insurance policy is right for your business.
Jared Johnstone is the president of Mountain America Insurance Services, a full-service independent insurance agency and a subsidiary of Mountain America Credit Union.