Having a backup plan ready for rainy days is essential for any employer who wants to survive the unexpected ups and downs of business. Being prepared can mean anything from having a support system to an emergency fund for your business. But the most efficient way to safeguard your business is to invest in insurance policies that address your industry’s common risks and your company’s individualized needs.
Since companies require insurance liability insurance coverage in multiple areas, many employers purchase umbrella insurance policies to provide extra coverage. But depending on your situation and the nature of your business, this may not be the most economical option.
Small Business Insurance Basics
Every company faces unique hazards and liabilities, so insurance plans aren’t one-size-fits-all policies. However, many businesses have insurance needs in common and can benefit from the following policy types:
- Workers’ Compensation Insurance– Aside from Texas, all U.S. states require workers’ compensation coverage for most businesses. This insurance covers medical costs, lost wages, and other expenses associated with workplace injuries and illnesses.
- Commercial Auto Insurance– Your commercial auto insurance will cover all commercial vehicles used by your business and, depending on which policy suboptions you choose, may help pay for repairs, replacement, and medical expenses that result from an accident.
- Commercial General Liability Insurance– As explained by Investopedia, CGL covers claims of “bodily injury, personal injury, and property damage caused by the business’s operations, products, or injuries that occur on the business’s premises.”
- Commercial Property Insurance– If your business property sustains damage from a fire, theft, or a covered natural disaster, commercial property insurance helps pay the resulting expenses.
- Professional Liability Insurance– Also known as errors and omissions insurance, professional liability insurance covers claims of negligence, misrepresentation, and inaccurate advice.
- Business Interruption Insurance– This type of insurance covers your losses if your business operations halt due to natural disasters, riots, or state emergencies.
Exceeding Liability Policy Limits
When you purchase a liability insurance policy, you pay for coverage up to a predetermined limit. Should your expenses exceed your policy limit, you have to pay out of pocket. For that reason, some businesses also purchase commercial umbrella insurance.
Introducing Umbrella Coverage
Umbrella insurance covers expenses that exceed your liability policy (such as commercial general liability, employer liability, and commercial auto liability insurance) limits. For example, if you have commercial general liability insurance from The Hartford with a policy limit of $500,000 but an accident injures multiple customers and costs you $600,000 in medical and legal expenses, an umbrella policy would cover the remaining $100,000.
Insurance companies write umbrella policies with aggregate limits, typically ranging from $1 million to $2 million. Essentially, umbrella coverage serves as an extension of numerous forms of liability coverage.
What Justifies the Cost of Umbrella Insurance?
Not all businesses will save money by having umbrella coverage. Generally speaking, only companies with high liabilities that consistently reach or exceed their liability policy limits benefit from umbrella coverage. The following conditions increase liability risks:
- Your business invites customers or clients onto your property
- You have employees who conduct work on your clients’ property
- You have employees who travel often using company vehicles
- The work your company does requires heavy machinery
- You run marketing campaigns that critique your competitors
- Your business is located in an area with high crime rates
Extended Coverage for a Rainy Day
As your business expands, you hire more employees, and your assets increase in value, you will naturally take on more and more risks. When it comes to umbrella insurance coverage, you have to determine what’s more likely to occur in a given policy period: your liability expenses will be less than your policy limits, or they’ll exceed your limits, and you have to pay out of pocket.
The answer to this question will depend on the nature of your business, and the course of action you choose to take depends on how risk-averse you are. Whether you ultimately decide to stick to your current coverage or add umbrella insurance, it’s good to review your policies annually and reconsider your options.