Should contractors purchase commercial umbrella insurance? This is a good question that most contractors ponder, and the answer is “it depends.”
Anytime a contractor opens for business, no matter what type of contracting business they’re in, there are risk exposures that must be mitigated.
Certainly, the easiest way to mitigate any business risk is to transfer that risk or risks to a highly-rated commercial insurance company. Why risk your assets because of a lawsuit when you can transfer that risk to an insurance company?
First, we’ll discuss what commercial umbrella insurance is, and then we’ll discuss why you may or may not want to buy it for your business.
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What is Commercial Umbrella Insurance?
Commercial Umbrella Insurance for contractors is a form of insurance that adds another layer of protection to a contractor’s other policies. The umbrella policy provides more coverage and limits the amount of financial loss the contractor can incur.
It’s important to note that an umbrella policy will not cover any property, tools, and equipment, or vehicles, trucks, or trailers for physical damage.
Physical damage to business-owned property is covered by either a commercial property policy or a commercial vehicle policy. Tools and equipment are generally covered under an inland marine policy.
Why Contractors Should Consider Commercial Umbrella Insurance
Commercial umbrella insurance or umbrella coverage is a vital part of business ownership. Without adequate insurance, a business owner may end up paying for damages out-of-pocket or from funds available to the business.
This can result in losing profit and valuable assets as well as damaging credibility among customers and suppliers.
Most contractors that purchase commercial umbrella insurance do so because a customer requires the contractor to provide higher liability limits than most general liability policies provide.
However, many contractors also purchase umbrella insurance to mitigate the risk of being sued, and the court award damages to the plaintiff that exceeds the liability limits of their general liability, commercial auto, or workers’ compensation limits of coverage.
ABC Contractors wants to bid on a large job to remodel and update a government-owned building. The bid instructions required that the winning bidder must provide proof of liability insurance with a $5 million limit.
Since most general liability policies only offer a maximum of $2 million in coverage, the contractor will need to purchase at least $3 million in commercial umbrella insurance.
Let’s say that the bid requirement was for a $1 million general liability limit which the contractor already has. If a claim results in a $1.5 million reward for damages, the contractor would half to pay the $500,000 that exceed the general liability policy limit.
One of ABC Contractors’ employees is seriously injured after an explosion at a job site and sues ABC because the workers’ compensation policy has a $1 million limit but his physician and specialist estimate that the injury will require lifetime treatments that will likely cost $1.6. The employee filed suit against ABC Contractors and is awarded damages of $1.6 million. ABC’s workers’ compensation policy will pay its $1 million limit but ABC Contractors will be responsible for the balance of $600,000.
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Does a Commercial Umbrella Policy Pay for Defense Costs?
Depending on the company you buy a commercial umbrella policy from, the company may or may not pay for defense costs. This is an important question that every contractor should ask their agent before purchasing a policy.
Many commercial insurers will pay defense costs but only after the limit of the underlying general liability, workers’ comp, or commercial auto policy has been met.
This is a primary reason why commercial umbrella insurance costs less than the underlying policies.
Umbrella versus Excess Liability
Contractors should understand the difference in coverages between a commercial umbrella policy and a commercial excess liability policy because some agents use them interchangeably without explaining the difference between them.
The difference between an umbrella and excess liability is distinct:
A commercial umbrella policy can cover losses for claims where there is no underlying coverage provided by general liability, workers’ comp, or commercial auto policy.
A commercial excess liability policy will only cover losses that are covered in the underlying policies when the limit in those policies has been reached.
Excess liability insurance can be “follow form” or “stand-alone.” Follow form coverage is when the excess policy is subject to all the terms and conditions of the underlying policy with few exceptions.
A stand-alone policy, however, provides excess coverage according to the terms and conditions in the excess liability policy rather than the terms and conditions in the underlying policy.
How much does Commercial Umbrella Insurance Cost?
Like other commercial policies, commercial umbrella insurance costs are based on the risk presented by the applicant. Here is an example of the risks that make up most insurers’ underwriting guidelines:
- Size of the business (revenue, employees, customers)
- Industry (e.g. construction, landscaping, plumbing, painting, etc)
- Years in business
- Claims history
- Prior coverage
- Lapse in coverage
- Coverage limit
Certainly, commercial construction contractors will pay more for insurance coverage than a painting contractor because of the exposure to the risk of a public construction site and the hazards that are associated with residential or commercial construction.
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How to Find the Best Commercial Umbrella Insurance Policy
Rather than shop your commercial insurance with a captive agent who represents one company, it makes more sense to use an independent insurance brokerage like Fairbanks Insurance Brokers who represent many of the highly-rated commercial insurance carriers.
An independent insurance broker is not employed by the companies they represent and therefore can put the needs of the client first and foremost.
Moreover, independent insurance brokers like Fairbanks Insurance Brokers can offer virtually any type of policy a contractor needs to mitigate all of its everyday risks.
Here is What We Recommend
General Liability: Contractors General Liability will be the foundation of protection for your business. The coverage will respond if you or your employees are found liable for bodily injury, property damage, or have a products/completed operations complaint. The coverage also covers defense costs for your business to respond to any lawsuits brought by a third party.
Workers’ Comp: Many states will require contractors to provide workers’ compensation coverage for their workers before they can begin a project. Accidents will happen at the job site that can result in an employee becoming injured and missing work. Your workers’ compensation coverage will provide financial assistance for medical expenses and lost wages.
Surety Bonds: It’s very likely that your state will require you to be licensed before you can begin operations. Most states and customers will require contractors to offer a license or surety bond before you are allowed to bid on a job or begin working.
Commercial Auto: Typically, most contractors will have light and heavy vehicles that require commercial auto insurance to make certain their vehicles can be repaired or replaced in the event of an accident, vandalism, or theft.
Tool Coverage: Also known as Inland Marine Insurance, this policy will provide for reimbursement for expenses to repair or replace tools and equipment. Your tools represent an important part of your livelihood, so we always encourage carpentry contractors to consider this valuable coverage.
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