Umbrella Policy

Here are a couple thoughts on the Commercial Umbrella Policy.  This is a policy that most businesses carry because some agent told them it was good to have and most of the businesses they communicate with have one as well.  But do you know what the purpose of it is?  Do you know how big it should be?  Do you know how it works?  Try to picture in your mind an actual umbrella that protects you from the rain and I think we might use this to paint a mental picture of how this policy functions.

First, you only use it when it rains.  When the sprinkles turn to rain drops, then to hail, it's time to pull out the umbrella and protect yourself.  When you find your business in the middle of a lawsuit that could settle for far more than your underlying insurance limits, this is where the umbrella policy kicks in.  It provides extra limits on top of your standard liability limits (Most commonly $1 million per occurence).

Second, how much do you need to protect?  Are you by yourself in the rain or do you have your family of 8 with you?  A Commercial Umbrella policy can be as large as you want it to be.  The good news is, the first million is always the most expensive.  Beyond that, it gets cheaper for each additional million $ in coverage you choose to add.  What it comes down to is:  What is at stake?  How much is the business worth?  Beyond what point are you willing to take on the risk?  Sometimes I refer to the Umbrella Policy as sleep insurance.  You can sleep well at night knowing that whatever claim may be brought against you will be sufficiently covered and settled by your insurance company.  Ideally, you would carry an umbrella big enough to protect the whole family.

Last and MOST IMPORTANT...Pay attention here...This is something that is frequently misunderstood.  The insurance company that writes the Umbrella policy first looks at what the underlying protection is and requires that the full limits of that underlying protection be in place at the inception of this policy.  So, as a business owner, the first thing you should do is have the same annual date on ALL of your commercial policies.  This is something that is frequently misunderstood because most agents don't take the time to explain the ramifications of moving an effective date to improve your pricing on one piece of the pie.  They just want the pie.  I won't go into all the examples of why this could be a problem but I am happy to explain individually in more detail.  The other thing is that all of your insurance policies should be with the same insurance carrier whenever possible.  One example:

X Insurance Company underwrites a Commercial Umbrella Policy.  They agree to write a $5 million umbrella policy over the underlying coverages already quoted by their own company.  These underlying coverages might include General Liability, Auto Liability, Employer Benefit Liability, Professional Liability, etc. They have agreed to write the Umbrella policy based on the fact that they know the terms & conditions of the underlying insurance because it is also written by their company.  The Umbrella policy is written under the assumption that these specific underlying coverages will be maintained throughout the policy period.  Local Business enters into an agreement with X insurance company to provide all this insurance.  6 months later, here comes Stud insurance agent.  Stud promises Local Business that he can save them 20% on their Commercial Auto insurance.  The owner decides that sounds pretty good and allows Stud to bring them some quotes.  The next day, Stud shows up with a quote for the Auto insurance and sure enough, he has lowered the price dramatically.  The owner decides it is his best option to cancel his current policy with X Insurance half way through the year and move this piece of the insurance business.  Stud is thrilled because he just picked up a piece of business and is walking away with his commission.

Here's what Stud never explained to the owner about moving this policy:  The limits may have been slightly modified to bring premiums down, the terms and conditions with his company are different than those written by X Insurance, the financial rating is slightly different, the deductibles have changed a little bit, etc.  So what happens when Local Business has a huge Auto claim 3 months later and tries to use the limits of their $5 million Umbrella Policy?  Remember the conditions under which the policy was originally written?  These additional limits of protection will no longer be available above the limits of the Auto policy.

Unfortunately, these are the types of things that all to often go unexplained to a business owner.  The owner gets sucked in by low rates without considering the drawbacks because they don't understand insurance contracts.  This is why you have an insurance agent that is a trusted advisor instead of a "Stud".  This is why you should look for an agent that will openly discuss and take time to explain these things to you.  This is one of the many, many examples of why you shouldn't make decisions about your business insurance solely based on price.