What Does a Commercial Umbrella Policy Cover?

A commercial umbrella policy provides additional liability coverage beyond the limits of a business’s primary policies. It extends protection to businesses facing significant financial losses from large liability claims, offering an extra layer of security against unforeseen events.

The Nature of Commercial Umbrella Coverage

A commercial umbrella policy serves as an excess layer of liability coverage, sitting above a business’s primary policies like General Liability, Commercial Auto Liability, and Employers’ Liability. It extends their financial limits rather than replacing them.

The policy activates once the limits of the underlying primary policies have been exhausted by a covered claim. For instance, if a primary general liability policy has a $1 million limit, the umbrella policy would only begin to pay out after that $1 million has been paid. This structure provides businesses with higher aggregate limits for severe claims.

Types of Liabilities Covered

Commercial umbrella policies extend protection for several categories of liability claims.

Bodily injury liability covers claims from physical harm sustained by third parties due to a business’s operations, products, or premises. This includes injuries to customers, vendors, or the public. The umbrella policy steps in when the primary general liability policy’s limits for such injuries are fully utilized.

Property damage liability addresses claims for damage to another party’s tangible property. If a business’s actions cause damage to a client’s building or equipment, the umbrella policy provides additional funds once underlying property damage liability limits are exhausted.

Personal and advertising injury liability also receives extended coverage. This category covers non-physical injuries such as libel, slander, false arrest, wrongful eviction, and copyright infringement occurring in a business’s advertising. These claims can lead to substantial legal defense costs and settlement amounts, making the umbrella policy a crucial extension when primary policy limits are reached.

Commercial auto liability is another area where an umbrella policy provides extended financial protection. For businesses with company vehicles, the umbrella policy can cover claims for bodily injury or property damage caused by an accident involving a business vehicle, once primary commercial auto policy limits are exhausted.

Employers’ liability receives extended coverage, going beyond workers’ compensation policy limits. While workers’ compensation covers statutory benefits for employee injuries, employers’ liability addresses lawsuits filed by employees for work-related injuries that fall outside workers’ compensation benefits, such as claims of negligence. The umbrella policy offers a higher layer of protection for such claims, supplementing primary employers’ liability coverage.

How Coverage Activates

A commercial umbrella policy activates only after the limits of the primary liability policies have been fully exhausted by a covered claim. This concept, known as “exhaustion of underlying limits,” means the primary insurer must pay out the maximum amount of coverage it provides before the umbrella policy responds.

For claims that are not covered by any underlying primary policy but still fall within the scope of the umbrella policy, a self-insured retention (SIR) or deductible applies. This SIR is an amount the business must pay out-of-pocket before the umbrella policy begins to provide coverage for such a claim. Unlike a standard deductible, an SIR is typically a larger amount that signals the business’s direct financial responsibility for certain losses.

The umbrella policy also has its own aggregate limits, which represent the maximum amount it will pay out over its policy period, typically one year. This aggregate limit applies regardless of the number of claims or the types of liabilities covered. Once these umbrella aggregate limits are reached, the policy will no longer provide coverage for additional claims during that policy term.

Common Exclusions

Commercial umbrella policies, like all insurance policies, contain specific exclusions that define what is not covered.

One common exclusion is for expected or intended injury, meaning the policy will not cover damages resulting from intentional acts committed by the insured business or its representatives. This exclusion reinforces that insurance is for unforeseen accidents, not deliberate harm.

Contractual liability is often excluded, particularly liability assumed by a business under certain contracts, unless a specific exception applies within the policy wording. This means that if a business agrees to take on additional liability through a contract, the umbrella policy may not cover claims arising from that assumed responsibility. Similarly, punitive damages, which are awarded to punish a defendant rather than compensate for actual loss, may be excluded in some jurisdictions or specific policy forms.

Catastrophic events such as war, acts of terrorism, or nuclear hazards are typically excluded from commercial umbrella policies. These are standard exclusions across many types of insurance due to the unpredictable and widespread nature of such events. Their exclusion helps maintain the financial stability of insurance providers.

Professional liability, also known as errors and omissions (E&O), is generally not covered by a commercial umbrella policy. Claims arising from professional negligence, mistakes, or inadequate services require a separate E&O policy specifically designed for those risks. An umbrella policy extends general liability, not specialized professional malpractice coverage.

While an umbrella policy may extend employers’ liability coverage beyond workers’ compensation limits, it does not cover the statutory workers’ compensation obligations themselves. Businesses must maintain separate workers’ compensation insurance to meet legal requirements for employee injury benefits. Finally, damage to a business’s own property is excluded, as umbrella policies are designed to cover damage to others’ property, not the insured’s assets.