Over the years as an insurance agent, when discussing potential coverage problems, I often hear people say things like, “That’s okay, we have umbrella coverage.” When asked further about their umbrella, they often state they have a personal umbrella or that another owner carries an umbrella. I’ve heard this more and more over the last few years as the insurance industry has hardened, reducing coverage and increasing premiums. By writing this blog, I hope to debunk a few common misconceptions and briefly review what an umbrella does and why it is important.

What is an Umbrella?

First, let’s clarify what an umbrella policy is. An umbrella is designed to primarily increase or extend liability limits for three underlying policies: general liability, auto liability and employers’ liability. An umbrella is usually written on a separate form from other policies with its own forms and declarations. Unique exclusions may apply or be removed when compared to the underlying policies, and limits can vary depending upon the requested amount.

Most people have a common understanding of this, but there are many misconceptions and areas of confusion.

Common Misconceptions

1. My umbrella offers blanket liability: This is false. For coverage to apply, the policy must be written under the legal name of the insured. If a business owner has multiple entities, each entity must be listed for coverage to apply. Additionally, underlying policies are not automatically included. Each policy that is to be covered under the umbrella must be scheduled on the umbrella’s declarations page.
2. My umbrella extends coverage to my property: This is false. Umbrella policies do not provide any property coverage. Umbrella policies are designed to extend coverage limits for liability only.
3. My business is too small to need an umbrella: This is false. Large claims can impact businesses of any size and can have devastating financial implications if owners are not prepared. Exposures may vary depending on territory and operations, but large claims can happen to anyone.
4. My personal umbrella will protect me if anything goes wrong: Once again, this is false. A personal umbrella policy is different from a commercial one. Personal umbrellas extend liability for personal exposures such as home or auto claims but generally won’t cover business-related risks.
5. My insurance agent said my umbrella can pick up coverage not on my other policies: This is partly true. Umbrella policies extend liability limits, but they can also “drop down” to cover certain claims not included in the underlying policy. This is where people often get confused. The additional coverage only applies within the scope of the umbrella policy language, and a Self-Insured Retention (SIR) that works similarly to a deductible may need to be satisfied before coverage applies.
6. An umbrella and excess liability policy are the same thing: Again, this is partly true. An excess liability policy works on a follow-form basis. It mirrors the terms, conditions and exclusions of the underlying policy. Essentially, it provides extra limits but doesn’t broaden the scope of coverage like an umbrella can.

Nuclear Verdicts and Legal System Abuse

In recent years, umbrella coverage has become more important due to the rise of nuclear verdicts. These are court judgments that can award millions of dollars in damages, often for punitive or exemplary reasons. These payouts unfortunately go far beyond the traditional purpose of insurance, which is to restore claimants to their pre-loss state.

The increase in nuclear verdicts has driven up claims costs, making it harder for insurers to set sustainable rates. As a result, umbrella policies have become more expensive, and many insurers are capping the maximum limits they’re willing to offer. Businesses may need to work with multiple insurers to secure contractually required limits.

Conclusion

In summary, misconceptions about umbrella policies can leave you exposed. As insurance premiums rise and coverage is limited, being informed about your policies is more important than ever. Even as umbrella premiums rise, business owners should consider extending their limits to adequately cover their business exposure.

If you have questions or need help finding the right umbrella coverage, feel free to reach out for a quote.