Commercial umbrella insurance: what it covers, what it doesn’t

A commercial umbrella adds another layer of liability limit on top of your general liability, commercial auto liability, and employer’s liability, and it pays once those policies’ limits are used up, subject to its own terms. It covers auto liability when your auto policy is listed underneath it.

It does not sit over the benefits workers’ comp pays injured employees, and it doesn’t cover damage to your own property or mistakes in professional work.

What does a commercial umbrella sit over?

Three policies, in most cases: general liability, commercial auto liability, and the employer’s liability part of your workers’ comp policy. The umbrella lists them on a schedule of underlying insurance, with the minimum limit it expects each one to carry, and it pays only after the underlying limit is used up.

Say your delivery van runs a red light, hits a car at an intersection, and the injured driver’s claim settles for $1,800,000. The auto policy pays $1,000,000. A $2,000,000 umbrella is built to pick up the remaining $800,000. Without it, everything above $1,000,000 falls on your business.

The schedule is where mistakes hide. If the umbrella expects $1,000,000 of auto liability underneath and your auto policy carries $500,000, many umbrellas pay as if the $1,000,000 were there, and the $500,000 in between is yours. The same thing happens when an underlying policy lapses, or renews at a lower limit, and nobody updates the umbrella.

Does commercial umbrella insurance cover auto?

Yes, for liability, when your auto coverage is on the umbrella’s schedule. That includes a business auto policy for vehicles you own, and it can include hired and non-owned auto, but check that your HNOA is scheduled if it sits on a business owner’s policy rather than an auto policy. Damage to your own vehicles isn’t covered. That’s physical damage coverage on the auto policy. Heavy trucks and for-hire trucking often need a specialized umbrella or excess market, since many general umbrellas limit or exclude them.

Does commercial umbrella insurance cover workers’ comp?

Not the benefits. Workers’ comp pays an injured employee’s medical bills and lost wages under your state’s rules, with no dollar limit for an umbrella to sit on top of. What the umbrella can sit over is employer’s liability, the second part of a workers’ comp policy, which answers lawsuits rather than benefit claims: a suit by an injured worker’s spouse, for example, or a claim that comes back to you after the worker sues another company over the same injury. Umbrella carriers usually expect a set employer’s liability limit underneath, often $500,000 or $1,000,000, so check that yours matches.

Follow form or standalone: what’s the difference?

A follow-form umbrella takes its terms from the policies underneath. If the general liability policy covers a claim, the umbrella adds limit on top of it, and if the general liability policy excludes the claim, so does the umbrella. A standalone umbrella has its own wording. It can be broader in places, and some will pay a claim the underlying policy excludes after you pay a self-insured retention, often $10,000 or $25,000. It can also be narrower, because it can carry exclusions your underlying policies don’t have.

Many umbrellas sold to small businesses are a mix: they follow form, except for a list of exclusions of their own. That list is what to read. Exclusions to look for include professional services, certain pollution claims, abuse and molestation, and, for contractors, some types of residential work.

Is an umbrella the same as excess liability?

People use the words interchangeably. On a certificate they often share a box. Strictly, excess liability only adds limit over the underlying policy and follows its terms, while an umbrella can also broaden coverage and drop down to cover a claim the underlying policy doesn’t. Larger programs stack them, so a $5,000,000 umbrella with a $5,000,000 excess policy above it gives $10,000,000 over the primary policies. Many umbrellas also drop down to take the place of an underlying aggregate that’s been used up, which matters for a business with several claims in one year.

Why do contractors, lenders and landlords ask for $1M to $5M?

Because their own exposure rides on yours. A general contractor that gets sued over a subcontractor’s work wants the sub’s insurance to pay first, and wants enough of it; many subcontracts require an umbrella of $1,000,000 to $5,000,000 depending on the trade and the size of the job, with the GC covered through it as an additional insured. Lenders on apartment buildings and other commercial property often scale the umbrella they require to the building’s size, stories, or units. Landlords ask tenants with more foot traffic or riskier operations, like restaurants that serve alcohol, for an umbrella on top of the lease’s liability limits.

When a contract asks for an umbrella, read what else it asks the umbrella to do. Many require it to follow form over the additional insured endorsements and to be primary and noncontributory to the other party’s own coverage, which not every umbrella allows.

What drives the price of an umbrella?

The exposure underneath does. Carriers look at your vehicles and drivers, your class of business and sales, your payroll, your claims history, and the limit you’re asking for. Vehicles often weigh the most. The self-insured retention and how broad the wording is matter too.

Five things to check on your umbrella

1. Whether it’s follow form, standalone, or a mix, and the exclusions it adds to the policies underneath.
2. The schedule of underlying insurance, line by line, against the limits you actually carry today.
3. That every liability policy you own is on the schedule, including hired and non-owned auto if it sits on a business owner’s policy.
4. Whether it drops down when an underlying aggregate is used up, and what retention applies when it covers a claim the underlying policy doesn’t.
5. That it extends additional insured status, and primary and noncontributory wording, to the parties your contracts name.

If a contract or lease is asking you for an umbrella, send the insurance section through our free contract review and we’ll tell you what it requires. When you’re ready to add or raise one, start a quote.