Types of Commercial Umbrella Policies & How They Work

A commercial umbrella policy is an essential addition to your business’s liability insurance protection plan. But before you buy, you can review any policy with a team member at INSURENEX, so you understand clearly how it will (or won’t) apply to an allegation of liability filed against your business.

The term “umbrella” is loosely used by many insurance companies and agencies to describe any liability policy that extends beyond the coverage and limits offered by the underlying policy. (“Underlying” is the term used to describe the type of insurance policy that the umbrella covers — for example, a commercial general liability insurance policy.)

While there are no boilerplate or standard commercial umbrella policies, they do fall into two basic types: the follow form (or excess) liability umbrella and the “true” umbrella.

Follow Form (or Excess) Liability Umbrella

By whichever name it’s called, the function of such a policy is to cover only those losses that are also covered by the underlying policies. Thus, the umbrella’s purpose is to “follow the form” of the underlying policy regarding coverage and simply offer more dollars to pay damages should the underlying limit prove insufficient. Stated differently, if the loss isn’t covered by the underlying policy, then it’s not covered by the follow form (or excess) liability policy, either.

True Umbrella

An umbrella policy is often called a “true umbrella" if it serves both two purposes:

1. Offers you additional dollars to pay damages should the underlying limit prove insufficient.

2. Offers you coverage for allegations of liability that are not covered by the underlying policy. For example, say that your underlying commercial general liability policy limits geographical coverage and will pay for allegations of liability resulting from a defective product that injures a customer only if the injury occurs in the United States, its territories, possessions, Puerto Rico and Canada. In contrast, your umbrella policy may offer a worldwide coverage territory, not restricting payment for injuries only to those occurring in the places specified by the underlying policy.

Self-Insured Retention (SIR)

If your umbrella does respond to a loss that is not covered by your underlying insurance (such as the product liability loss example above), you may have to fund a portion of the loss. This self-funded portion is called the “self-insured retention” or SIR and will vary depending on your policy. Some policies may include a low SIR of $1,000, while others may be much higher.

Which Parties Are Protected as ‘Insureds’?

It’s essential to understand which parties are protected by your umbrella policy. Further, some businesses have a contractual requirement to ensure that other parties — such as property owners, vendors, or contractors — are covered as “insureds” by the umbrella policy. Your particular umbrella may automatically consider all parties insured by the underlying policies as insureds, or it may require modification to ensure that coverage.

Be Sure It’s the Right Policy

Simply purchasing more insurance isn’t enough. You must understand the intricacies of any umbrella policy to truly grasp its value to your business. Schedule a review with an INSURENEX team member today.