What is Umbrella Coverage, and Why is it Critical for SMBs?

As a small business (SMB) owner, you already know that whatever your business lacks in size, it makes up for in hard work. The majority of owners report working well over the standard 40-hour work week. In fact, according to a recent study, 30 percent of entrepreneurs work more than 50 hours per week and 19 percent work more than 60. And with all that hard work, you want to make sure your investment — both in money and time — is well protected.

Owning your own business comes with risk: no matter how carefully you plan and no matter how hard you work, unforeseen events, accidents, and costs are bound to occur. And while your primary commercial insurance policy might cover up to $1 million in damages from accidents or lawsuits, that amount does not stretch very far. In today’s economy, a single accident or legal issue could quickly spell disaster for your business’s bottom line.

Fortunately, there’s an affordable solution for protecting your livelihood: umbrella insurance.

What is umbrella insurance?

While some small business owners make the mistake of thinking umbrella insurance is only for large businesses, that isn’t the case. Businesses of any size face risks great enough to necessitate umbrella insurance—and SMBs often have a higher need, as many smaller companies just don’t have the extra capital on hand to cover themselves in an emergency.

Essentially, umbrella insurance is extended liability coverage. For many SMBs, adding umbrella insurance can actually be more cost effective than raising the limits on existing liability policies. Plus, with umbrella insurance, you can expand your coverage across multiple policies — all under one “umbrella.” For instance, legal expenses are covered under umbrella insurance — an important benefit for SMBs that deal with high-net-worth clients, which can leave them vulnerable to higher lawsuit settlements. This peace of mind can be invaluable to the stability of your business when you’re up against a lawsuit.

Despite the benefits and low overall cost of adding umbrella insurance, many SMB owners don’t think about increasing their coverage until it’s too late. Here’s why you should avoid falling into that trap.

In today’s economy, a single accident or legal issue could quickly spell disaster for your business’s bottom line.

4 Reasons Why Umbrella Insurance is Crucial to Small Businesses

  1. Prevention won’t cover you. It’s important to do everything you can to prevent workplace accidents and ensure employees are properly protected and trained. However, no amount of prevention can protect your business from freak accidents or catastrophic events. Despite your best efforts, the unexpected can still happen — resulting in injuries to your customers, vendors, or employees. Given the potential medical costs and legal expenses, these accidents can jeopardize your business’ relationships, reputation, and even viability. And if you’re like many other small businesses, you might not have the capital to recover from such an event.
  2. Most SMBs are underinsured. According to Tim Hagen, a casualty underwriting strategy leader at Liberty Mutual, many small businesses are unaware of their coverage limits — and how quickly those limits can be met. “If a business-related automobile accident occurs and multiple parties are injured, the total claim can easily go over a million dollars,” he says. Since primary commercial policies don’t generally go higher than $1 million, your small business could be left with a hefty bill.
    This lack of awareness and understanding of their coverage means most small business owners don’t purchase the proper coverage without first experiencing a catastrophe. When disaster strikes, you want to be focused on the safety of your people and the day-to-day details of your business — not worried about how you’re going to afford to cover your expenses.
  3. Accident costs are on the rise. Both medical and legal costs are consistently on the rise, which means that a $1 million commercial policy just doesn’t go as far as it used to go. Consider this: if you have a customer who is injured in an accident, the damages could include lifelong care, in addition to the cost of current care. Making those payments would be nearly impossible for most small businesses, causing them to acquire years of debt without the proper coverage.
    And small businesses are just as vulnerable to legal repercussions from accidents and workplace incidents as larger businesses; consider that 43 percent of SMB owners have been involved in a civil lawsuit. Plus, while small businesses comprise less than 25 percent of U.S. revenue, they incur more than 75 percent of tort liability expenses. While some of these costs would be covered by the primary insurance policy, SMBs are paying an estimated $35 billion of these expenses out of their own pockets each year!
  4. Umbrella coverage is surprisingly affordable. Though many small business owners might assume they can’t afford an additional insurance policy, umbrella coverage is actually quite affordable, especially in comparison to primary coverage plans. When weighing the cost of umbrella insurance against the potential costs of not having umbrella insurance, the benefits are far greater than the setbacks. And you can’t put a price on the peace of mind that umbrella insurance provides.

How to Get Umbrella Insurance

The best time to protect your business against unforeseen events, accidents, and legal trouble is before something happens. If your SMB is underinsured, now is the time to start planning. You work too hard on your business to take unnecessary risks. Talk to your independent insurance agent, who can recommend a provider with specific experience in umbrella coverage.

This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.