What is Umbrella Insurance and Should Your Business Have It?

Businessman arguing with woman after car accident VitalikRadko / Deposit Photos

In a free and just society, you have the right to take someone to court if they have caused you any injury or material harm. While this is a good thing for individuals, it has the potential to cause much damage to a business.

As a small business owner, you are more at risk of getting sued than the average person simply because you can have both business and social interactions with your customers, suppliers and employees. In the course of these actions, if any of your employees or assets cause damage to others, your personal assets will be held liable, too.

As a business owner, it is your responsibility to protect your assets from these liabilities. Umbrella insurance is the best defence against any liability that may arise from civil lawsuits and damage claims made against your assets; in this article, we will explain what exactly it is, and if your business needs it.

What is Umbrella Insurance?

Insurance companies offer many different types of products, such as life insurance, medical insurance, auto insurance and private placement insurance. One form of insurance often used by businesses and individuals alike is liability insurance

As its name suggests, liability insurance protects your assets against any damage claims that may arise, with the insurance industry providing specific coverage plans for each type of liability. For instance, auto insurance covers damage claims that arise from accidents and collisions, while homeowner's insurance protects you against break-ins and damages caused by external factors.

Umbrella insurance, however, acts as an additional layer of protection, over and above what you get from other insurance products like basic asset insurance, employer's liability insurance, and product liability insurance. 

You can think of umbrella insurance as your final safety net. When all other forms of insurance have been exhausted by claims, this one will kick in to provide some extra coverage. Unlike other forms of insurance, it is not focused on a specific type of coverage; this is why it is called "umbrella" insurance, providing wholesome coverage to all aspects of your finances and assets. 

The Rationale Behind Umbrella Insurance

Claims on a small business can come in all sizes. Some of them may be minor ones that you can deal with using your existing funds, but in many cases, having the appropriate insurance coverage will make a world of difference. 

Then there are those catastrophic situations where the damage claims are so high that they exceed the coverage provided by your existing insurance plans. These can happen in court decisions that go against your business, where the judges have the discretion to set punitive damages. 

In these instances, the claims will put your assets at risk; they can even claim part of your future income from the business. This is where an umbrella insurance policy can be a lifesaver. It will only kick in once all your other policies are exhausted. It is also called excess liability insurance for this reason. 

What Type of Coverage Does Umbrella Insurance Offer?

Umbrella insurance is a rather broad term, with several different types of products offered by insurance companies. The most common type of umbrella insurance, though, is aimed at individual customers who want to protect their personal property and finances against damage claims.

It should be noted, therefore, that professionals and business owners will not receive adequate coverage with personal umbrella insurance aimed at individuals. The policy will not cover liabilities from malpractice suits, worker's compensation claims, or any other claims that arise due to your business-related activity.

For these special categories, you will have to seek a business or professional umbrella policy. A business umbrella policy will cover things that a personal policy does not, like product liability, worker's claims, and negligence claims. 

Even if you don't feel the need for a business umbrella policy, you should still actively consider taking a personal policy. As a business owner, any drain on your own assets could affect your business as well. This is why business owners need to pay for at least a personal umbrella policy. 

Who Should Take Out Umbrella Insurance Coverage?

This kind of policy is aimed at individuals who have considerable assets, or those who participate in risky activities regularly. If you are a business owner with several properties and/or vehicles, for instance, then you will be better off with umbrella insurance.

"Risky activities" could be something as mundane as regularly driving, or it could be defined as something unusual, such as a hobby that has high accident potential (think fast boats, cars, and motorcycles). Therefore, despite the wording, it is applicable to most people.

There are several other categories of people who are suitable candidates for umbrella insurance. These include individuals who own dangerous pets, parents of small children and teenagers, individuals who pursue volunteer work, and those who regularly deal with and talk about businesses and public personalities (potential for libel claims).

Examples of Umbrella Insurance in Action

Here are some potential scenarios where umbrella insurance will provide you with coverage: 

  • As a reward for your employees' hard work, you host a barbecue party in your backyard, and someone gets injured by an accidental fire. Your homeowner's insurance will kick in, but what if the damage claim is more than the amount provided by that policy? If you have umbrella insurance, it will get activated in this instance.
  • While driving to meet a client, your car gets involved in an auto accident resulting in a significant pile-up, causing damage to multiple vehicles in the process. The auto insurance you have does not cover the entire liability. Again, umbrella insurance can step in and save the day here.
  • An unhappy customer sues your small business for a faulty product or service. The quantum of damages sought is high, and the court rules against your business. Unfortunately, your business insurance policy is exhausted. In this instance, umbrella insurance could cover both the claim as well as your legal expenses.

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You only need an umbrella when it is raining, but you can never really predict when it is going to rain; that is why we keep an umbrella in our homes throughout the year. Ultimately, the same logic is also applicable to umbrella insurance. It is not something you expect to use every day, but when the time comes, you will be grateful for having its protection.

What are your thoughts? Is umbrella insurance a must-have policy for business owners? Let us know your thoughts and experiences in the comments below.