By Edward C. Young, Jr., CWCA, Client Executive, The Horton Group
One of the most common questions any Insurance Advisor will be asked is, how much umbrella insurance or excess insurance coverage should I carry for my business?
The reason this is such a difficult question to answer is because the answer is different for every customer based on a number of variables including, what type of risk appetite that customer has.
Umbrellas and Excess policies are important because they provide you with additional (higher) limits over your primary liability policies by purchasing one policy. Most of them provide you additional limits of insurance over the General Liability, Automobile Liability, and the Employers’ Liability part of Workers’ Compensation Insurance. It is usually more cost effective to purchase these “extra limits” through an Umbrella or Excess policy rather than try to add additional limits to your primary liability policies. Umbrella’s are typically written on their own form and often times contain broader coverage than their underlying policies. An Excess policy will follow the underlying policies and are only as broad as the primary liability policies.
While there is no definitive answer to the question about how much umbrella or excess coverage a business entity should carry, there is some analysis you can do as a business owner to try to determine what is an adequate limit. Companies can begin their analysis by using the net worth of their company as a guideline. As an example, the more you have, the more you should carry. Companies with substantial property values that have appreciated over time should also take this into consideration in addition to their financial statements to determine asset values.
From time to time, we all hear of large losses that put companies out of business. This is why it is so important to make sure you do the research on the front end to be sure you are adequately protecting your company’s assets. In addition to looking at your own company, your insurance advisor can also help you by providing you with benchmarking information that shows you what other companies of your size, and in your industry, are buying in limits. This additional information will also help you make a determination as to what is an adequate limit for your company. You might also want to look at association groups that you belong to as well. Many times these groups consist of similar types of business, and the members are usually more than willing to provide you with assistance.
One other area that you need to keep in mind when determining an adequate Umbrella limit is what your contractual obligations might be. Almost all businesses will be asked at some point to provide a certificate of insurance to a vendor, supplier or anyone else that they do business with. Usually, this certificate, or “Proof of Insurance” will need to comply with the contractual obligation that was laid out in the contract. You will be better served to be sure you have an adequate Umbrella limit before you sign that contract then you will be to find out after the fact that your limits are inadequate.
After your analysis is done, and your advisor has provided you with all of the market data available, keep in mind that umbrella pricing typically gets less expensive the higher the limit is that you buy. For example, let’s say the first $1,000,000 of the umbrella costs $1,750. The next $1,000,000 might cost $1,500 and the 3rd $1,000,000 might be $1,000 and limits $4,000,000 and $5,000,000 might be $750 and $500 each for a total premium of $5,500 for a $5,000,000 umbrella.
Whatever you do, take the time to properly protect your company. You’ve probably spent a lot of time building your business, please take the time to be sure you don’t lose it.