What is an umbrella policy and do I need one?
An umbrella policy is extra liability coverage that sits on top of your main policies and pays once their limits run out. It usually stacks over your main liability policy, your business auto policy and the part of workers' comp that covers an employee suing you. You likely need one if you run vehicles, serve the public in volume, serve alcohol, or sign a lease or contract that asks for higher limits than your main policy carries.
- An umbrella pays after your liability, auto or employee-lawsuit coverage is used up, across all of them at once.
- An umbrella is usually a modest add-on for the limit it adds, because it only pays on the rare large claim, and each extra million costs less again.
- An excess policy also adds limits, but over one policy only, and it never covers more than that policy does.
What does an umbrella policy actually do?
It adds a second layer of liability money above the policies you already have. When a claim is bigger than your main policy's limit, the main policy pays up to its limit and the umbrella pays the rest, up to its own limit.
Insurers call this umbrella liabilityUmbrella/Excess Liability Extra liability coverage on top of your other policies that pays when a big claim uses up their limits. Insurers call it umbrella or excess liability. more →. A typical umbrella sits over your business auto policy, your coverage for injuries and damage you cause to others, and the part of workers' comp that pays when an employee sues you, which insurers call employer's liability. It also steps in when one of those policies has used up its yearly total, and can cover some claims the policies underneath do not. (Source: IRMI)
Here is how the layers are designed to work in a large claim. Picture a delivery van that causes a crash in which one person is badly hurt, and a $1.6 million settlement, with and without an umbrella.
| What happens | The claim | Auto policy pays | Umbrella pays | You pay |
|---|---|---|---|---|
| With a $2 million umbrella over the $1 million auto policy | $1,600,000 | $1,000,000 | $600,000 | $0 |
| Without an umbrella | $1,600,000 | $1,000,000 | $600,000 |
Illustration only, with round numbers. It is not a statement of what any policy pays; your own policy wording governs. Without an umbrella, an amount above the auto limit could fall on the business, so check your own policy wording and ask your agent.
Which businesses really need one?
Any business where one bad day could produce a claim larger than its main policy's limit. In practice that means four situations, and many owners are in more than one.
- A lease or contract asks for it. Landlords, general contractors and large customers often set a total limit higher than a main policy carries, and owners often buy an umbrella to meet a contract that calls for higher limits. (Source: Insureon)
- You run vehicles. Road accidents produce some of the largest awards. Jury verdicts over $10 million came most often from product cases (23.6%), auto accidents (22.8%) and medical cases (20.6%), according to a 2022 study cited by the National Association of Insurance Commissioners. (Source: NAIC) See also commercial auto coverage.
- The public comes through your door in volume. More foot traffic means more falls, more injuries and more chances of one serious claim.
- You serve alcohol. If a customer you served goes on to hurt someone, the claim can be large. The coverage for that is a separate policy, and an umbrella usually sits over it only if that policy is listed underneath.
How much does the first million cost, and why is it so cheap?
For many small businesses, the first $1 million of umbrella is a modest add-on, often under a hundred dollars a month, and each extra million costs less again. It is cheap for what it adds because your main policies pay first and absorb the everyday claims; the umbrella pays only on the rare claim that gets past them.
Among one online seller's small-business customers, the median umbrella premium is $86 a month, with annual premiums from around $400 to over $7,000, and each additional $1 million of limit costs about $40 a month. (Source: Insureon) Those figures describe small businesses buying through one platform; a fleet, a busy venue or a business that serves alcohol will pay more, and the umbrella insurer will usually want to see the policies underneath before it quotes.
The first layer is the expensive one because it handles every claim, small and large, and pays to defend them. The umbrella sees only the large ones, and each layer above it sees fewer still, which is why the price per million keeps falling.
What's the difference between an umbrella and an excess policy?
An umbrella sits over several of your policies at once and can sometimes cover a claim they do not. An excess policy sits over one policy only and copies its wording, so it adds money but never adds coverage.
An umbrella is tied to the insurer and to the lines it sits over. When your main policy has a gap the umbrella does not share, the umbrella can drop down and pay that claim from the first dollar, after you pay an agreed amount yourself, which insurers call a retentionRetention The amount of a loss you absorb yourself before insurance responds, mostly on larger commercial policies. Insurers call it a retention.. (Source: IRMI) An excess policy does none of that. Its only job is to add limits, and it is no broader than the policy underneath it. (Source: IRMI)
- An umbrella fits most small and mid-sized businesses that want one extra layer over liability, auto and employee lawsuits together.
- An excess policy fits when only one line needs more room, such as a contract that demands higher auto limits, or when you stack a second and third layer above an umbrella.
Both are explained in more detail on our umbrella and excess coverage page. If several locations share one policy, read how shared limits work too, because an umbrella is one way to add room when the yearly total runs out.
Frequently asked questions about umbrella policies
No. An umbrella only adds to coverage for harm you cause to other people and their property. Damage to your own building, equipment or stock belongs on your property policy.
Not always, but many insurers prefer it or price it better when they also write the policies underneath. Either way, the umbrella will require you to keep certain minimum limits on those policies, so check that they match.
Start with the highest total limit any lease or contract asks of you, then ask what a serious claim in your line of work could cost. Many small businesses start at $1 million or $2 million and add more as vehicles, locations or contracts grow.
Find out what an umbrella would cost your business
Tell us about your vehicles, locations and contracts. We will compare umbrella and excess options against the policies you already have.