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How Does Commercial Umbrella Insurance Work?
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How Does Commercial Umbrella Insurance Work?

Most insurance policies work the same way: you experience a financial loss, you file a claim, and if the claim is covered by your policy, you receive compensation.

Commercial Umbrella Insurance doesn’t really deviate from this model, but because it isn't a "primary" policy, its coverage can only be applied in certain situations. Knowing when you can use your Commercial Umbrella policy is the part that’s sometimes challenging.

That said, once you know the “rules” of Commercial Umbrella Insurance, you'll have a better idea of when you can draw on this policy. Let's take a look at how it works.

Commercial Umbrella Insurance Supplements Coverage for Certain Policies

Think of Commercial Umbrella Insurance as a backup for liability policies that you already have. When a claim exceeds your primary policy's limit, you can apply your coverage to the amount still owed on the claim.

Usually, Commercial Umbrella coverage can be applied to claims made on these underlying liability insurance policies:

This is what sets this policy apart from most policies: it’s only useful when these underlying policies have reached their limits. However, it provides versatile coverage that can be applied toward three different liability areas. It’s like a reserve policy, staying behind the battle lines until you need to fill a gap.

Be sure to discuss with your agent whether you have to make a separate claim on your Commercial Umbrella policy or whether its coverage kicks in automatically. If it isn’t automatic, you may have to file two claims, one on the initial underlying policy and one on the Umbrella policy.

You should also ask about which policies your Commercial Umbrella coverage can and can't supplement. For instance, Umbrella coverage almost never applies to a Professional Liability claim. Talk with your insurance agent beforehand so you know what to expect from your policy.

Using Your Commercial Umbrella Insurance

Let’s consider a scenario in which you might benefit from having Commercial Umbrella Insurance.

Say you run a high-end retail shop. Wealthy clients come in all the time looking for the latest fashions and trendiest clothes. One rainy day, though, a pool of water accumulates on the tile in front of the door. Before an employee can mop it up and lay down mats and a wet floor sign, a woman comes in, slips, and falls onto the tile. She’s clearly in pain, so you call an ambulance, she goes to the hospital, and that’s that.

But a few days later, you receive a notice that the woman is suing your business. Turns out her fall caused quite a few medical bills and she can’t go to work at her high-paying job for a long time because of her injury.

Eventually, you, your attorney, and her attorney decide on a settlement to avoid going to court. The only issue is that the settlement is $1.4 million. You check over your insurance policies and see…

  • Your General Liability Insurance covers up to $1 million per claim. Because this is a case involving a third-party injury on your premises, this is the applicable policy. You’ll need all $1 million your policy can offer for a single claim.
  • Your Umbrella Insurance offers $1 million in coverage for your General Liability policy, among others. You’ll need $400,000 from this policy to cover the rest of the settlement.

You file the claim and pay the full amount. Now you have $600,000 in Commercial Umbrella Insurance coverage if you need it, and whatever is left of your General Liability limit for the rest of the policy period.

Without the Umbrella policy, you would have paid the $400,000 out of pocket or from your business’s assets.

And that’s how Commercial Umbrella Insurance works! For more reading, see our blog post "How Can Umbrella Insurance Help a Small Business?"

Umbrella Liability Insurance: Further Reading