How Big Of An Umbrella Do I Need?

The Umbrella Liability policy is still a relatively new type of insurance coverage for the average business. As recently as 30 years ago, it was seen as only needed by the very largest of business entities. Liability claims and court decisions involving millions of dollars are no longer uncommon; any business can be found legally responsible for this type of judgment. Most Umbrella Liability policies are in excess or “sit on top” of a businesses main liability coverages, mainly General Liability, Auto Liability and the Employer’s Liability part of Worker’s Compensation insurance.

How much excess liability a business owner should carry on her Umbrella policy depends on several factors. First, are there any contractual requirments from clients, vendors, franchisors or suppliers? It is common for these to require certain liability limits in order to do business.

Another factor a business should look at is the limits that other, successful companies in their industry carry. While this is certainly not an exact method for determining limits, it does provide a good guide to start with.

The final, and in my opinion most important, factor a company needs to look at in accessing how much excess liability insurance they should have is the amount of equity the business has. If you own a motorcyle dealership where the bank owns the building, the manufacturer owns all the inventory and all you have is $100,000 in tools, it doesn’t make much sense to carry a $5 million Umbrella. Conversly, if you own the building outright, own half of the inventory and $1,000,000 in tools and equipment, you would want a large Umbrella policy to protect your assets.

In the event of a lawsuit against a business, one of the first things the plaintiff’’s attorney is going to do is suponea the business’s insurance and financial records. A cynical person might suggest that the lawyer will look at  the company’s assets versus their  insurance limits to determine the size of the lawsuit.