How To Select an Umbrella Liability Limit

By Tony Hopkins, CPCU, CIC

Carrying an adequate umbrella limit can be the difference between having your company today and losing it tomorrow. Selecting a proper limit should be taken very seriously. Don’t let the fate of your company’s future be left solely in the hands of your insurance representative.

Selecting an umbrella limit is an inexact science, as you’re trying to predict the magnitude of an event that may (or may not) happen. With that being said, the process of selecting the right limit can be a little more methodical than other methods commonly taken that I’ve heard in the industry, such as, “How much can you afford?” or “How much do you need to help you sleep at night?”

The best practice approach to selecting an umbrella limit incorporates these considerations:

Exposure

Start by analyzing your operation. If you have a fleet of vehicles and trucks, especially tractors, start there.  Auto claims have a tendency to be the largest and most frequent lawsuits.  Recent verdicts have changed the game when it comes to truck crashes, that have not been friendly to trucks and businesses.  This rate of change is alarming not only with the high dollar amounts associated with the verdicts but how commonplace they’ve become.

The most likely type of auto loss to hit the umbrella and result in a huge lawsuit is a rear-end crash.  Preaching following distance and defensive driving is the best way to reduce the likelihood of these crashes occurring in your business.

Next, analyze your General Liability exposure present within your operation or product.  Does your business have the ability to cause bodily injury or property damage to a 3rd Party?  Do you sell Business to Business (B2B) or Business to Consumer (B2C)?  Selling directly to consumers increases your risk.

Industry Case Studies or Examples

When considering your liability limits, you should learn more about the frequency and severity of losses in your industry. Some good sources of information include your insurance broker, trade associations, buying groups or strategic peer groups. 

The amount of the loss depends on the number of persons involved, the cost of their injuries and the impact on their dependents. When selecting your Umbrella Liability limits, you should consider:

• What if your truck hit and disabled the breadwinner for a family of five?
• What if your truck hit and killed a carload of business professionals on the way to a meeting?
• What if your truck swerved into the lane of a motorcoach full of Doctors or business executives attending an event, causing a rollover?

The numbers could be staggering.

Geographic Case Studies or Examples

When selecting limits, consider geography.

Where might you have to defend your company in court following an accident? Where are your operations? Where is your product or service being sold or used? Where do your vehicles travel? Do you travel in rural areas or congested cities?

Do you deliver to large operations that have severe loss of income potential? Are you working in Madison or Cook County, Illinois, California or a far less plaintiff-friendly legal jurisdiction? Are you near an area where big city lawyers have a habit of turning small accidents into large settlements?

Benchmarking

There are tools used by insurance brokers to compare your coverage terms and Umbrella liability limits to your industry peers. The Horton Group insures businesses in all industry segments, our proprietary database provides excellent benchmarking information.

When benchmarking limits, it is best to compare to like firms based on Sales, Vehicle Count, and type of operation. If you don’t have access to a vast database, you may want to simply ask your peers what Umbrella Liability limits they carry.

Requirements

Often, regulatory requirements and your customer’s specifications determine what Umbrella Limits are necessary.

Consider contracts with customers, manufacturers, partners, and suppliers. In some instances, your company may not be in compliance with the contract terms. In some other cases, you may have lost business because you were not carrying high enough Umbrella limits to meet a customer’s demands.

Safety Programs and Quality Control Procedures

Accidents can happen no matter how well your safety program is run or how good your quality control procedures are. However, your chances of accidents occurring are far less with tight risk controls:

Do you have acceptable MVR standards in place for hiring drivers? The industry standard is to disqualify a driver if they’ve had one major violation (DUI, Excess Speeding or Driving While Suspended) in the last three years or any combination of three at-fault accidents or minor moving violations. 

Putting a driver with a poor MVR on the road can expose the company to a Negligent Entrustment suit, which could add to the amount of settlement or award through punitive damages (please note:  punitive damages may not always be covered, as they could be excluded, prohibited in certain states and a violation of public policy).

Risk Tolerance

Are you risk-averse or a risk-taker? Risk-averse companies typically purchase higher umbrella limits than risk takers.  Find out which you are by taking the discussion further.

Some companies are classified as risk takers, because they’re aggressively pursuing acquisitions, expanding into to new markets or investing heavily in technology, have carried higher limits than expected. When asked, the general answer has been, “we do take risks in some aspects of our business, but can only take on so much risk and in so many places.”

Organizations with more tightly held ownership structures, such as a single owner tend to be the biggest risk-takers.  Organizations with more owners, such as publicly traded companies, ESOPs or more “widely” held businesses have a tendency to be more risk-averse, as their decisions or actions could negatively impact more people.

Cost

Many set their Umbrella Liability limits based on the cost of the insurance premiums. Determine the breaking point between how much insurance you want compared to how much insurance you can afford.

Ask your broker to price the premium for additional layers you may look to purchase. Keep in mind, capacity for underwriters at the current moment is slim to none as they are receiving requests for quotes like never before. Higher levels of umbrella liability coverage are usually less expensive than the previous layer purchased. The cost of an umbrella and excess liability policy has increased for those with a large fleet, with large trucks, and frankly, across the board. There is more disruption today than ever before. 

Summary

After considering all of the above, you will be able to confidently select a limit that is right for you and your company. Hopefully, you will never have to experience what it feels like to have a lawsuit that threatens to exhaust your insurance limits and this discussion just merely stays as an exercise.