A Commercial Umbrella Could Extend Your Liability Coverage for Less Than You Think

Post Insurance Services reports that employee lawsuits in the United States have risen a staggering 400% over the last 20 years. And over 40% of those lawsuits are brought against private companies with fewer than 100 employees.

Whether you settle or go to court, it’s not cheap. “The cost of settling out of court averages $75,000, and the average jury award hits $217,000 if you go to court and lose,” says Post.

If you think Canadian businesses are shielded from lawsuits and awards like these, you’d be wrong. In 2019 and 2020, several courts upheld employee claims and awarded damages of up to $600,000.

An umbrella creates a broad layer of protection

Sure, you’ve got insurance to protect your business. But your existing coverage may not be enough. Exclusions and limits on several separate policies can become difficult to manage, and you need to look at your aggregate annual limits. Just a single big claim could potentially exhaust those limits, leaving you exposed for the remainder of the term.

A commercial umbrella policy could be a frugal way to extend your policy limits and possibly broaden your coverage at the same time.

Commercial umbrella insurance only covers what’s already in place

If you’re considering a commercial umbrella, the first thing you need to know is you must have the original insurance policy in place for an umbrella to cover it. Think of it this way: A commercial umbrella policy doesn’t offer coverage where there was none, but it will extend coverage over a policy (like an umbrella) once limits are exhausted.

This also comes in handy when multiple policies are in play.

Multiple policies = multiple limits and exclusions

Let’s say an employee sues a manager at your business for harassment. Your employment practices liability (EPL) insurance policy would respond and begin the duty to defend. If you have a directors and officers (D&O) insurance policy, it would also likely respond, depending on the timing and language of the allegation and lawsuit. Keep in mind that you will need to expend time and money to defend yourself, even if you’re innocent.

Lawsuits can take years to come to court or settle. It’s possible that during your legal defense, the policy limits will be exhausted on one or multiple policies. That’s where an umbrella comes in. The duty to defend should kick in and proceed just as your original policy would.

In some cases, the umbrella may not have the same exclusions as your original policy. This means that the coverage would extend to other areas not listed in your original EPL or D&O policy, which may work to your benefit.

Limits not exhausted but depleted — and then another lawsuit in the same year 

Let’s say you’ve gotten through your legal defense and settlement for the harassment lawsuit without reaching your limits. Whew!

But your bad year gets worse: An additional allegation is submitted.

Without an umbrella, your legal defense coffers would already be low and you’d be facing a big out-of-pocket expense. An umbrella policy should respond once the policy limits are met, even though you’re now facing a new, separate allegation.

There are several policies an umbrella might cover after limits are exhausted, including:

• Commercial general liability
• Employment practices liability
• Media liability
• Commercial auto
• Hired or nonowned auto
• Directors and officers
• Errors and omissions
• Molestation and abuse

Let’s also say this second allegation includes a libel claim having to do with a social media post the manager made involving the employee alleging workplace harassment. If limits are exhausted on one or more of these policies, the umbrella would drop down and continue coverage where the original policy left off.

Your insurance broker can explain the umbrella’s exclusions and breadth of coverage (the broader the better). It’s preferable to have a policy that doesn’t name every exclusion in detail because that can help protect you if a claim becomes complicated.

Contact your insurance broker

Ask your insurance broker to review your existing policies. Be clear on the limits and exclusions. An umbrella policy can be a helpful addition to your risk management strategy because it creates multiple layers of insurance protection for your business.

This content is for informational purposes only and not for the purpose of providing, financial, medical or legal advice. You should contact your attorney, doctor, broker or advisor to obtain advice with respect to any particular issue or problem. Read more about our limitation of liability here.