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January 7, 2022

The harsh reality for businesses in America is that every year between 36% to 53% of them face some type of lawsuit. Another study found that 43% of small businesses were threatened with a lawsuit last year.

It's no wonder businesses must not only have good legal counsel, but more importantly, they need to have insurance to protect them from a whole host of possible problems.

The wrong kind of lawsuit could sink a small business. Even if they have to fight the lawsuit, they lose profit and their business reputation may be tarnished.

So, how can businesses be sure they have all the coverage they need? Adding umbrella insurance helps to give coverage beyond their other liability policy.

But like everything, businesses might have noticed the cost of umbrella insurance is soaring. What's causing the rise in costs? What's driving the rise in umbrella insurance costs?

Read on to learn more about umbrella insurance and what's driving up the cost for this type of coverage.

What Is Umbrella Insurance?

Before discussing umbrella insurance costs, let's have a good understanding of what commercial umbrella insurance does and why you might need it as a business.

Umbrella insurance, as the name implies, creates additional cover beyond your regular insurance policies. Most of the time umbrella insurance is used for liability issues beyond what a regular policy will cover.

Why Do You Need Umbrella Coverage?

Most insurance policies, like liability coverage, have limits on them. If a business is sued for damages and loses the suit, the insurance will only pay up to the limit of the coverage.

The umbrella policy is in place to cover damages awarded beyond what regular insurance covers. Without umbrella coverage, the business would be responsible for paying the excess damages out of pocket. This would be financially devastating for most businesses.

How Is Umbrella Coverage Different From Other Insurance Policies?

A commercial umbrella policy is different from your main policy. A business must have liability insurance. This covers the business in the event of an injury or damages while on the business property or as a result of something the business does.

Liability coverage will spell out what it will cover with limits in place. The umbrella coverage is a second policy that offers an additional coverage limit if your underlying policy has been exceeded in a claim.

The umbrella policy provides additional coverage to protect from a catastrophic claim for a business.

Complexity in Pricing an Umbrella Policy

In addition to umbrella policy rising prices, it can be a tricky policy for insurance companies to price.

Insurance companies study data from claims in a historical context. For example, they know how often they get claims for under one million compared to claims over a million.

An insurance company can price a policy by anticipating the potential for smaller payouts. The problem with pricing lies in the possibility of a very large settlement. How often do those happen and how big will the payout be? It can be a tricky and complex issue when pricing policies.

If insurance companies aren't pricing high enough based on claims, you can bet the cost will go up.

Rising Costs of Umbrella Insurance

There's no doubt that rates for umbrella insurance are on the rise. It also indicates the insurance industry recognizes a problem on their end.

If jury awards are getting bigger and bigger and with more consistency, the insurance companies are paying more out.

So, what is driving the need to increase rates in umbrella insurance? Let's take a closer look at some of the factors.

Motor Vehicle Accidents

There are several reasons that the number of motor vehicle accidents is on the rise.

Despite safety advances in cars, more and more drivers find themselves distracted by technology, causing an increase in accidents.

It's also a numbers game. There are more cars on the road. More cars mean more accidents.

The number of accidents that are serious with damages (property and medical) of over one million is on a sharp increase. Simply put, even with umbrella policies, insurance companies are paying out more.

Lawsuit Investing

This is a new trend that can be alarming for insurance companies who will always seek to settle a claim before it goes to trial. Investors who believe a case has value will pay the plaintiff to take a case to trial.

When more claims go to trial, this leads to higher payouts in settlements. This means umbrella insurance is paying out even more.

Lawsuit Financing

Another trend with lawsuits involves financing on the forecasted amount of a settlement. A financial institution will loan money to the plaintiff to sustain them while the trial proceeds.

Without this, many plaintiffs would be forced to settle their cases because they need the money. The financing allows the plaintiff to hold out and go to trial expecting a bigger payout and hence costing the insurance company more.

Attorney Involvement

This is one of the biggest contributing factors to an increase in payouts. When an attorney gets involved in a case the cost of the case will go up for an insurance company.

Attorneys know what a potential claim is worth more than if the plaintiff was navigating without the advice of an attorney.

Without an attorney, cases are almost always settled. With an attorney, they will go to trial if the settlement offer isn't what it should be. This ultimately, again, costs the insurance companies more.

Market Volatility Impacting Umbrella Insurance

More and more the impact of big jury awards is impacting the cost of umbrella insurance.

The expectation for large awards gets raised each time there's a case with a big award. Businesses are seeing record rate increases in their insurance premiums beyond just the umbrella coverage.

The money that gets paid in a big verdict must come from somewhere and the insurance companies must raise rates across the board.

What Type of Insurance Should a Commercial Business Have?

Knowing that both the cost of claims and litigation continue to rise when there's a liability claim, it's more important than ever for a business to be properly insured.

You don't want your business to face hardship because there was a hole in your insurance coverage.

Let's take a quick look at the different types of commercial insurance a business should have to be well protected if they need it.

Commercial Property Insurance

Commercial property insurance will cover the property and structure that houses your business. Typically, as part of this coverage, you would also be insuring the contents of your property at the same time.

This coverage would protect the physical assets of the business from things like fire, explosions, burst pipes, storms, theft, and vandalism.

General Liability

General liability insurance helps to protect a business from general liability when a business is at fault. It would cover liability claims from:

  • Bodily harm or injury
  • Property damage
  • Reputational harm to the business
  • Copyright infringement
  • Advertising injury

Often an umbrella policy will cover rewards from claims beyond the limits of liability coverage.

Workers' Compensation

Workers' compensation coverage is required in most states for a business. It protects a business if a worker is injured, becomes ill, or dies while on the job.

This coverage protects workers too. If they're injured on the job, they can get treatment, pay for lost wages, rehabilitative care, and even new worker training if needed.

Business Income Insurance

Business income insurance protects a business from potential loss of income as a result of damages causing a shutdown of the business. When businesses are faced with disaster it means they can't continue to operate and make money.

Damages to the property can be caused by anything from a fire or natural disaster to someone crashing into your building. It allows them to continue to pay bills until they can open the doors and start to make money again.

Commercial Auto

Commercial auto insurance, like personal auto insurance, protects the vehicle and the driver of the vehicle. It's important for a business to be well covered in their commercial vehicles.

What if the commercial vehicle was part of an accident? What if the company vehicle caused the accident?

This is another area where an umbrella policy may kick in if the other policy is maxed out in the event of an accident.

Data Breach Insurance

In today's technology-driven world, data breach insurance protects a business if their data has been breached. it would help a business if they were the victim of a cyber attack.

Umbrella Coverage

Once a business evaluates all their insurance needs, they want to look at umbrella commercial coverage to make sure they're prepared for any scenario.

The business should evaluate the limits in their other coverage to see what they might need from the umbrella coverage.

Impacts on Umbrella Insurance

Umbrella insurance should be an important part of any business insurance plan. Commercial umbrella rates are rising with good reason, making it all the more important for a business to have extra coverage from an umbrella policy.

Are you ready to evaluate your business insurance to make sure you have all the coverage you need to protect your business? Contact us today to set up a time we can discuss your insurance needs.

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