Back to the Basics: Umbrella/Excess Liability
Posted by Dan Phelan on Mon, May 09, 2011 @ 02:57 PM
Pretty sunny here in Connecticut this afternoon. So sunny that you might need an umbrella. Do you know what else needs an umbrella? Your contractor insurance program! Just like an umbrella protects you, your hair, and your clothes from bad weather, your insurance program’s umbrella goes over several of your lines of coverage to protect your company’s checkbook. It’s common for construction companies to go their entire lifespan without ever needing their umbrella or excess limits to pay a claim. I also keep an umbrella in my car, but it too rarely gets used. But it’s still there if I ever need it.
(disclaimer: Travelers didn’t pay me to write this)
What is it?
An umbrella goes over a few lines of your insurance coverage to provide additional limits if you exhaust the policy limits of the underlying policy. In most instances, the umbrella provides additional limits to your Commercial General Liability, Business Auto, and the Employer’s Liability portion of your workers’ comp policy. Say that you have a 2 million dollar general aggregate on your CGL policy. You haven’t had any claims yet this year, so your limits are still 100% intact. Let’s say you have a massive claim that has insured costs of 2.4 million dollars. Your CGL policy will use all of its 2 million dollars worth of limits, and then your umbrella will pick up the additional 400K. If you didn’t have the umbrella, you could be getting your company’s checkbook out to cover the additional 400K. If you’ve got an extra 400K lying around, more power to you, but for 99% of contractors, coming up with a few thousand dollars for a few million dollars worth of umbrella coverage often makes a lot more sense. One caveat to how the umbrella responds, is that it normally has a Self-Insured Retention or deductible. Something in the ballpark of 5-10K is standard. 10K is nothing to laugh at, but it probably won’t bankrupt your company like a bill for 400K could.
Why should my construction company should carry it?
For our commercial construction clients, it is not that rare their upstream parties to require $3,000,000-5,000,000 limit worth of general liability limits. Very few Commercial General Liability policies will offer limits higher than $2,000,000 so to comply with their contracts, most of our clients buy an umbrella to split the difference. We advise that you buy an umbrella that will satisfy the majority of your contractual obligations. If most of the contracts you sign require a $5,000,000 limit, buy your regular CGL and a $3 MM umbrella. If most of the contracts you sign require a $10MM umbrella, either the upstream party is making you have the same limits as them even though they’re 20x your size, or you’re a huge contractor working on huge, high-profile jobs. The other reason for purchasing umbrella coverage is that it’s relatively inexpensive for the amount of coverage dollars it affords. Once you buy the first million, the subsequent millions go down in price substantially. Again, spend a few grand up front, and save your checkbook for payroll and new equipment instead of insurance claims.
Types of Claims:
The types of claims that trigger umbrellas are usually the same claims that trigger news stories, trips to the hospital, and immediate OSHA visits. I don’t mean that in a joking way, but if your company is responsible for a claim that costs five million dollars, people are going to know about it and odds are good that significant property damage has occurred. When we’re talking to clients about their umbrella, we often bring up the make believe scenario of “imagine what the claim would cost if one of your dump trucks crashes into a bus full of nuns, orphans, and their puppies.”
Loss Control Suggestions:
Any loss prevention strategies that work for CGL and Business Auto also apply to your umbrella. The umbrella doesn't cover your property because the property is insured to a specific value and maximum claim costs are predicted and insured for. It also doesn't respond to workers' comp injuries because workers' comp injuries don't have limits. The checks keep coming until the injured worker is back at 100% or compensated for any permanent disability. We hope you always buy an umbrella but never ever, ever, ever have to use it.
About the author:
Dan Phelan runs the marketing department at Construction Risk Advisors when he's not out helping his clients with risk management and insurance issues. If you want to connect on twitter, he's at @fixyourrisk and here on Facebook
