What is an Umbrella Policy and Why do You Need One?

Yesterday we mentioned that the Beirut explosion would most likely end up causing the company involved to have to use their Umbrella policy to help cover costs, but we did not go into detail on what an Umbrella policy actually is or does.

So what exactly is the purpose of an Umbrella policy?

  1. It provides additional coverage over the underlying policies (general liability, auto, workers compensation, etc.) by adding higher limits. For example, your general liability policy will usually have a $2,000,000 aggregate and a $1,000,000 per occurrence limit, but what if that is not enough? This is where an umbrella policy would come in and save you from having to pay the remainder of the claim out of your own pocket. It can add extra coverage limits to your existing policies and step in to pay what your others cannot.
  2. It can also respond when your underlying policy has already been used up. If, for instance, you had a couple of claims that each cost $1,000,000, your aggregate policy limit of $2,000,000 is used up for the year. What happens if you have another claim? Your umbrella would come in and pay for that claim as long as it is caused by a covered cause of loss on the underlying policy.
  3. Lastly, your umbrella policy can step in when your underlying policy might not. Sometimes underlying policies have exclusions that umbrellas do not, and they will not pay for a claim. If that is the case, an umbrella policy might be able to be used if it has broader coverages than the underlying policies. In that case, you would have to pay a “Self-Insured Retention,” which is similar to a deductible, but it would still save you a ton of money in the end!

If your insurance agent (us, hopefully) recommends an umbrella or excess policy, please do not dismiss them out of hand. Really think about what an umbrella policy can potentially do for you and your business!

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