Commercial umbrella insurance

A commercial umbrella policy adds liability limits above your underlying policies, usually the commercial general liability policy, commercial auto and employers' liability. When a covered claim uses up the underlying limit, the umbrella pays the next layer, in million-dollar increments. Some umbrellas also drop down to cover certain claims the underlying policies do not, after you pay a self-insured retention. It does not replace the underlying policies, and it does not insure your own property, your workers' compensation obligations or your professional errors.

How the layers work

Picture the program as floors. The first floor is the primary policy: say a $1 million per occurrence general liability limit, a $1 million combined single limit on commercial auto, and employers' liability of $500,000 or $1 million. The umbrella sits on top. A covered loss goes to the primary policy first. When the primary limit is paid out, the umbrella responds up to its own limit.

The ISO umbrella form, CU 00 01 (the 04 13 edition, per one forms reference), is a stand-alone form with its own terms, conditions and exclusions, written to sit above the CGL, business auto and employers' liability. Many carriers use their own umbrella forms. Whatever the form, three mechanics matter.

• Exhaustion. The umbrella pays "ultimate net loss" above the underlying limits. Most policies require the underlying limit to be paid, by the underlying insurer or by you, before the umbrella pays. If the underlying insurer is insolvent or disputes coverage, a gap can open that you fund.
• Drop-down. If an underlying aggregate has been used up, for example by several earlier claims eating the CGL general aggregate, the umbrella typically takes over as primary for later claims in the same year. It can also respond to a covered claim that the underlying policies do not cover, once you pay a self-insured retention. The SIR does not apply when the umbrella sits on exhausted underlying limits.
• Defense. The umbrella insurer usually has no obligation to defend while the primary policy defends. If the umbrella covers a claim the underlying does not, or the primary limit is gone, it may have the right and duty to defend, which can end when the umbrella limit is exhausted by paying judgments or settlements. Whether defense costs erode the umbrella limit differs by form; see defense costs inside vs outside policy limits: why it matters.

What an umbrella usually does not cover

The ISO form lists several exclusions, and carrier forms add more. Aircraft and watercraft, liquor liability (unless underlying liquor cover exists), pollution (often more restrictive than the underlying policy), product recall, and workers' compensation and employers' liability obligations are excluded in the ISO form; the umbrella typically sits excess of employers' liability rather than covering workers' compensation itself. Carrier umbrellas commonly add exclusions for professional services, employment practices, cyber, ERISA, abuse and molestation, and a rotating list of contaminant and bodily-injury exclusions. Read the specimen policy, not the quote summary.

Because the umbrella generally follows the underlying coverage where it applies, exclusions in the CGL, such as those covered in general liability insurance: what it covers and what it does not, mostly carry upward. A claim excluded below is rarely covered above unless the umbrella grants it expressly.

Who needs one

• Contractors whose contracts require $2 million, $5 million or more. See General contractor insurance and how to review the insurance requirements in a contract.
• Fleet owners. Auto liability produces the largest severity of any line for many businesses. See Trucking company insurance and commercial auto insurance: what it covers and what it leaves out.
• Businesses with public traffic: restaurants, retailers, property owners and event venues, where a catastrophic injury or multiple claimants are possible. See Restaurant insurance and Landlord insurance.
• Manufacturers and sellers, whose one defect can injure many people.
• Any business with assets to protect, since a judgment above the limits is collected from the company, and for sole proprietors and partners, from their personal assets.

How big a limit to buy is a judgment about severity, not a formula. A workable process:

1. List the worst realistic losses: a bus-sized vehicle crash with several claimants, a catastrophic injury, a fire that damages neighbors, a defective lot.
2. Add contract requirements from leases, customers and lenders; see how much liability insurance does a business need? and the How much umbrella coverage do I need?.
3. Consider your venue. Courts and juries in some places award far more than others.
4. Compare to what peers in your trade carry, which your broker can tell you from experience.
5. Price the next million, then the next. The marginal cost of additional limit usually falls, which is why many businesses buy more than the minimum.

For a business that needs more than one carrier will give, the higher limits are stacked as excess layers above the lead umbrella. The distinction is covered in umbrella vs excess liability.

How an umbrella is priced and underwritten

Umbrella premium depends on the underlying exposures (vehicle count and radius, payroll, sales, square footage), the class of business, the limit and layer, loss history across all underlying lines, location and the quality of risk controls. Carriers often require minimum underlying limits (commonly $1 million per occurrence and $2 million aggregate for the CGL, $1 million for auto, and employers' liability limits of $500,000 or $1 million) and may require that the underlying be placed with the same insurer or with an insurer of acceptable financial strength. Umbrella limits have become harder to buy for litigation-heavy classes, and many insurers now put less limit on one layer for the same exposure; the reasons are in nuclear verdicts and social inflation: why liability costs keep rising. We don't quote premiums because there isn't a typical price.

Ask the underwriter how the umbrella reads the underlying "schedule of underlying insurance." If a listed underlying policy lapses, is canceled or is replaced with narrower coverage, many umbrellas treat you as self-insuring the gap.

A hypothetical example

Say a landscaping company has $1 million CGL, $1 million combined single limit auto, $1 million employers' liability and a $4 million umbrella, so $5 million of total auto liability protection. The amounts are invented.

The first row shows why the umbrella costs less than primary: it pays only after the primary limit. The second shows where its limit ends. The third shows drop-down coverage when an aggregate is gone.

Notice and conditions

• Report early. Umbrella policies require notice of any occurrence likely to involve the umbrella. Do not wait for the primary limit to be paid. A serious injury such as a spinal injury, brain injury, amputation or death warrants immediate notice to the primary and umbrella insurers. See notice of claim and late notice: why timing matters.
• Maintain underlying cover with the required limits for the whole policy period.
• Cooperate with both insurers. The primary insurer defends and controls the early stage; the umbrella insurer will monitor and may take part in settlement discussions when a demand approaches the primary limit.
• Match the named insureds. Subsidiaries, joint ventures and additional insureds must be on both policies if the contract requires umbrella status. See additional insured endorsements explained.

Renewal checklist

1. Compare the underlying schedule with what you carry.
2. Read the exclusions in the specimen form, and look for ones that were not in last year's.
3. Confirm limits against current contracts.
4. Check whether the umbrella is follow-form and where it is not.
5. Review aggregate treatment: one annual aggregate, or per-location or per-project.
6. Ask what is excluded that the CGL covers.

Key takeaways

• An umbrella adds liability limits above the CGL, auto and employers' liability, and may drop down when an underlying aggregate is used up.
• It rarely covers anything the underlying policies exclude, and it adds its own exclusions.
• Size it to the worst realistic severity and your contract requirements, not to a rule of thumb.
• Keep the underlying policies in force at the required limits, and give notice of serious claims early.
• Compare it with excess liability before you decide on structure.