What is Commercial Umbrella Insurance for contractors?

Commercial Umbrella Insurance is a type of insurance that covers your contracting business in the event your business causes a very serious accident or major property damage. If your business causes damages that exceed the limits of your commercial general liability policy, your commercial auto policy, or other liability policy, having an umbrella policy can provide additional insurance coverage.

What does Commercial Umbrella Insurance cover?

Umbrella insurance covers the same types of liability your primary insurance policies provide and simply increases the coverage to a higher dollar amount. It essentially serves as a backup to the existing limits of liability policies. If your underlying coverage is ever exhausted due to a large settlement or multiple claims in a policy year, then the umbrella policy will cover the rest, up to the coverage limit for the umbrella policy.

Umbrella insurance will provide additional coverage if you have exceeded the limits for three key insurance policies:

• General Liability Insurance
• Commercial Auto Liability Insurance
• Employers’ Liability Insurance

Example:

• A contracting company is working on an unsecured construction site when a child wanders into the site and trips on a wooden beam on the floor. The child is seriously injured and his parents sue for bodily injury against the contractor’s General Liability Insurance. When the court awards the child $2 million, the General Liability policy covers up to the policy limit of $1 million, while the Commercial Umbrella policy covers the additional $1 million.

Example:

• An employee of a contracting company is driving a truck with supplies to the construction site when he collides with another vehicle, causing severe injuries to the other driver. When the other party sues for $2 million in damages, he wins the case, and the contractor is obligated to pay the full amount. The Commercial Auto Liability policy pays out the policy limit of $1 million, while the Commercial Umbrella Insurance policy covers the remaining $1 million.

Example:

• A general contractor purchases Employers’ Liability Insurance with policy limits set at $1 million. The contractor purchases a Commercial Umbrella Insurance policy to cover an additional $2 million for liability. An employee that is injured on the job sues the company and wins a $1.4 million settlement. The Employers’ Liability Insurance policy will pay out the policy limit of $1 million and the Commercial Umbrella Insurance policy will cover the remaining $400,000. Without the umbrella coverage, the contractor would be responsible for the $400,000 that the Employer Liability Insurance policy did not cover.

Commercial Umbrella Insurance are generally not standalone policies. In most cases, you’ll need to purchase a primary line of liability insurance (any of the three above) before becoming eligible to purchase Commercial Umbrella Insurance, which serves to provide an additional layer of coverage beyond the policy limits of the primary liability policy. Some insurers will require you to carry a certain amount of the underlying liability insurance before you are eligible to purchase Commercial Umbrella Insurance, e.g. $1 million limit for General Liability Insurance and $1 million limit for Employer’s Liability Insurance.

Why do contractors need Commercial Umbrella Insurance?

As a contractor, you are well aware of the hazards inherent in your day-to-day business. It may be the death or injury of a worker. It may be an explosion that causes significant property damage. Although catastrophic events may not happen often, they can lead to high-dollar claims and lawsuits that cause financial ruin. These are the kind of rare incidents that your primary liability insurance policies are not designed to cover.

There are many scenarios in which your contracting business might want to have umbrella insurance, such as:

• It is common for a Commercial General Liability policy to offer $1 million in liability coverage as a standard coverage. On certain large contracting projects, however, your clients may require a higher limit of liability. You can raise the limits of your General Liability Insurance, or leverage umbrella insurance as a potentially more affordable way to meet this requirement.
• If your contracting business has substantial assets, such as financial assets, machinery, equipment, land, or buildings, umbrella insurance is a great way to protect the value of your investment in your business.
• Contractors who have heavy trucks or machinery that travel on public roads may want to have umbrella insurance as large vehicles can easily cause death or injury in a crash. Vehicle crashes are a common source of liability insurance claims.
• Your contracting company regularly takes on large construction projects, but you do not have a lot of capital. In the case of an extremely high-dollar claim or lawsuit, you will be financially vulnerable.

What doesn’t Commercial Umbrella Insurance cover?

There is sometimes a misconception that Commercial Umbrella Insurance can provide an additional layer of coverage for all types of claims. It’s important to note some key categories of claims that Commercial Umbrella Insurance typically will not cover:

Commercial Property Insurance – Commercial Umbrella Insurance generally does not cover claims related to property damage.

• Example: The business office of a contracting company is severely damaged in a hurricane, resulting in a property claim of over $2 million. Since the contractor did not have the option to purchase Commercial Umbrella Insurance to provide extra coverage for property claims, the business can only recoup losses up to the policy limit of the property insurance policy.

Professional Liability Insurance – Commercial Umbrella Insurance generally does not cover professional liability claims and lawsuits for contractors.

• Example: A contracting firm is hired to design and upgrade the ventilation system of a commercial building. After the system has already been installed, the firm discovers that it doesn’t work properly because of a design flaw. It costs an additional $200,000 to revise and replace the system. The property owner makes a claim against the contractor’s Professional Liability Insurance, which has already been exhausted by earlier claims. Commercial Umbrella Insurance cannot provide additional coverage for Professional Liability claims and lawsuits.

How much Commercial Umbrella Insurance do I need?

For most small businesses, a $1 million per occurrence and $2 million aggregate limit in Commercial Umbrella Insurance is appropriate.

How much does Commercial Umbrella Insurance cost?

The cost of Commercial Umbrella Insurance depends greatly on the industry of your business, risk exposures, and coverage amount. The construction and contracting industry is certainly considered one of the higher risk industries given the exposure to risk of public construction sites, the hazardous nature of the work, and the high dollar projects.

While the range of pricing can vary widely, most small business owners can expect to pay annual premiums between $750 and $1,500. Commercial Umbrella Insurance has a relatively inexpensive premium given the dollar amount of coverage it typically provides, which sometimes makes it a more attractive option than simply paying higher premiums to raise the limits of primary liability policies.

What is the duty to defend for Commercial Umbrella Insurance?

Under most liability policies, insurers have a “duty to defend” the policyholder against lawsuits. This is not the case for carriers of umbrella insurance. Some umbrella policies will state that the insurer has a “duty to defend”—although sometimes to a limited extent—while others will not shoulder any responsibility to defend lawsuits.

For example, let’s say a contracting company has exhausted the policy limit for its Employers’ Liability Insurance paying out claims for two injured construction workers in one year. When another injured construction worker files a lawsuit against the general contractor, the Employers’ Liability Insurance has maxed out its policy limit and will not cover anything related to the lawsuit. Will the Commercial Umbrella Insurance policy step in to cover the defense costs of the lawsuit? It depends on the Commercial Umbrella Insurance policy.

Final Word

When you are running a business in a high risk industry such as construction and contracting, you need to consider the likelihood of catastrophic events that may exhaust the limits of your liability policies. Fortunately, contractors can purchase Commercial Umbrella Insurance to provide additional coverage in the case of high-dollar claims and lawsuits in a short period of time. Commercial Umbrella Insurance serves as the safety net of the safety net, providing financial protection and peace of mind for contractors.