What Are Your Umbrella’s Features? Are There Risks Your Umbrella Won’t Cover?

You’ve made the important decision to further protect your business with a commercial umbrella insurance policy. But before you purchase, you need to determine the functionality of the policy you’re considering — because the features of umbrellas can vary widely. 

Defense Costs: In or Out?

The cost to provide defense for an allegation of liability could be crippling to your business’s bottom line. For this reason, many business owners agree that payment of defense costs is a primary factor in determining the value of any liability insurance policy.

Your commercial umbrella policy can contribute to the costly expense of defending the policyholder in an allegation of liability, even if the allegation is proven groundless. When determining the extent to which the umbrella will pay the cost of defense, consider this question: Are defense costs in or out?

Defense Costs IN. Any costs for defense contributed by the policy will reduce your policy’s limit of insurance available to pay damages for which your business is found liable. For example, if the cost of defense is $250,000, and the limit of insurance is $1 million, the amount available to pay damages is $750,000. If the damages owed exceed $750,000, you, the policyholder, are on the hook for the remainder.

Defense Costs OUT. Any costs for defense contributed by your policy will NOT reduce the policy’s limit of insurance available to pay damages for which your business is found liable. For example, if the cost of your defense is $250,000, and the limit of insurance is $1 million, the amount available to pay damages is $1 million. By allowing the policy to pay up to its entire limit in damages, the likelihood of your having to pay anything out-of-pocket is reduced.

Watch Those Limits & Conditions

Review your umbrella policy for information on how it will (or won’t) respond if the limits in the underlying policies are inadequate at the time of the loss.

For example, say your business’s CGL policy has an annual aggregate limit of $1 million and its term begins on January 1. This limit satisfies your umbrella policy’s required limits condition and that policy is issued effective January 1. Midway through the policy term, you reduce the CGL limit to $500,000 and don’t inform the umbrella insurance company of this reduction. Say you

then suffer a loss of $1 million. Due to the condition in the umbrella policy, it won’t contribute any dollars to this loss unless you fund another $500,000 of the loss.

Umbrella policies may include other conditions that could limit coverage based on whether or not your start/end dates of the underlying policies are concurrent (i.e., exactly the same) with those of the umbrella. To avoid such limiting conditions, your umbrella and underlying policies should be arranged to begin and expire on the same dates (e.g., all policies begin on January 1 and expire on December 31).

Policies an Umbrella Usually Will Not Cover

“Underlying” is a term used to describe the type of insurance policy that your commercial umbrella policy may cover. For example, in most cases, your business’s commercial general liability (CGL) insurance policy, employer’s liability insurance (typically included in a workers’ compensation policy), and commercial auto insurance policy would be covered by the umbrella. If so, these policies would be considered as “underlying” the umbrella policy.

However, your business may have purchased other types of liability insurance that are not covered by the commercial umbrella policy and thus would not be underlying. A few common types of liability insurance not normally covered by a commercial umbrella policy include:

• Professional liability insurance (such as errors and omissions or E&O).
• Directors and officers (D&O) and/or executive management liability insurance.
• Employment practices liability insurance.
• Cyber liability insurance.
• To determine methods to increase the coverage available for these and other liability insurance policies that are not underlying, consult with an INSURENEX Agent.
• Know the Features of Your Umbrella
• Understanding potential concerns with your commercial umbrella insurance policy is as important as understanding its limits and coverage. For more information, contact your Trusted INSURENEX associate today.