Umbrella or Higher Limits After Buying a Business?

To add a large amount of liability limit after a purchase, an umbrella is a common route. It typically adds a layer on top of the policies on its schedule of underlying insurance, often general liability, auto and employer's liability, while raising the limit on the policy you already have (the primary policy) changes only that policy. An umbrella usually does not sit over professional liability, cyber, directors and officers (D&O) or employment practices liability insurance (EPLI), which need their own limits. Your contracts and lender set the floor. This guide is for buyers who found that the seller's liability limits look thin for the company they now own.

The short answer

Raising primary limits changes one policy. An umbrella adds limits above a schedule of underlying policies, and an excess policy generally follows the underlying coverage and only adds limit.
An umbrella usually does not sit over professional liability, cyber, D&O or EPLI. Those lines need their own limits.
Contracts and lenders set the floor. Read the exact wording: some contracts accept a mix of primary and umbrella limits, others specify the primary limit.
Check whether defense costs sit outside or inside the limit. Under the standard Insurance Services Office (ISO) general liability form, defense costs generally do not reduce the limit.

Raise the limit you have, or add a layer on top?

Your primary policies, such as general liability and commercial auto, each carry their own limits. On the standard ISO general liability form (the 12 07 edition; check your forms schedule for yours), the each occurrence limit is the most the insurer pays for any one occurrence. The aggregate limits cap what it pays over the policy period, no matter how many insureds, claims or suits there are. For definitions, see general aggregate vs per occurrence and aggregate limit.

Raise primary limits. Buy a higher each occurrence or aggregate on that policy.
Umbrella. A separate policy built for catastrophic losses. It adds limit above your primary policies and can pick up where a used-up aggregate leaves off, according to the International Risk Management Institute (IRMI).
Excess. Narrower. IRMI describes it as no broader than the underlying policy, with the sole purpose of providing additional limits. Forms vary, so some policies called umbrellas are written as pure excess. See umbrella vs excess liability.

Which approach fits which situation?

Question	Higher primary limits	Umbrella or excess
What it changes	The limit on one policy.	Adds a layer over the policies on its schedule of underlying insurance.
Coverage breadth	Same as that policy.	An umbrella can be broader than the underlying policy in some respects. An excess policy follows the underlying form. For claims the underlying policy does not cover, an umbrella typically applies above its own retention, so check the retention amount.
Best when	You need a modest increase on one line, or a contract names a specific primary limit.	You need a large added limit across several lines, or your contracts accept combined limits.
Underlying requirements	None beyond underwriting.	The umbrella insurer often sets the primary limits it expects beneath it. Check the schedule of underlying insurance.
What happens when an aggregate runs out?	Each policy has its own aggregates.	Can respond when a primary aggregate is used up, if the form says so.
Lines it usually leaves out	Not applicable.	Professional liability, cyber, D&O and EPLI are usually written separately and not covered by the umbrella.
Carrier availability	Carriers offer a set menu of limit options, and the highest primary limit on offer can look small next to a large contract requirement. Ask what each offers.	A separate placement with its own underwriting.

A quick way to decide:

Read each contract and loan clause for a required limit and whether combined limits count.
If a clause names a primary limit, price higher primary limits. If combined limits count, price an umbrella.
Ask for both quoted on the same exposures. For sizing, see the limit section of the new owner review of umbrella and excess.

No single price comparison applies. The cost of each depends on the business, the carrier and your loss history, so ask for both quoted on the same exposures. For what moves umbrella pricing, see the commercial umbrella cost guide.

What does an umbrella not sit over?

An umbrella generally sits over the policies listed on its schedule of underlying insurance, usually general liability, commercial auto and employer's liability. Professional liability, cyber, D&O and EPLI are normally written as separate policies and an umbrella does not usually extend over them. If your acquired company sells advice, handles sensitive data or has employees, raising umbrella limits will not raise protection in those areas. Each of those lines needs its own limit decision (see the commercial umbrella page and the new owner review of umbrella and excess).

Whether a given umbrella drops down, sits over a particular policy or follows the underlying form depends on the form and its schedule. Do not assume. Read the umbrella's schedule of underlying insurance and its exclusions, and ask the broker to confirm that your acquired company's policies are on it. If the seller's umbrella is still in place, confirm it still names the right company and lists the policies you actually have.

An umbrella does not pay workers' compensation benefits. In North Dakota, Ohio, Washington and Wyoming the state fund policy has no employer's liability part, so employers usually add stop gap coverage (cover for employee injury lawsuits the state fund does not provide). Ask whether the umbrella will list that stop gap policy or endorsement on its schedule of underlying insurance, or excludes it.

Do defense costs shrink your limit?

Check whether legal defense costs eat into your limit. Under the standard ISO general liability form, defense expenses the insurer incurs are supplementary payments that do not reduce the limits, although the insurer's right and duty to defend ends when it has used up the applicable limit in paying judgments or settlements. Some other liability forms put defense costs inside the limit, so check each policy and the umbrella, and ask for the exact wording. If defense reduces the limit, a limit that looks large can shrink in a long case. See defense costs inside vs outside limits.

What do your contracts and lender actually require?

Your contracts, not a rule of thumb, set the floor. Customer agreements, leases and some licenses state required limits, and many say whether combined primary and umbrella limits satisfy them or whether the primary limit must meet a number on its own. Read the actual clause. Many contracts also ask for the customer to be an additional insured on the umbrella as well as the primary policy, sometimes on a primary and noncontributory basis, so check the umbrella wording against each clause (see additional insured, waiver and primary and noncontributory). For the contract review, see when contracts require coverage you do not have and checking customer contracts against your policies.

Lenders are similar. The Small Business Administration (SBA) sets no general umbrella requirement for 7(a) loans. Any umbrella or higher liability limit comes from the lender's own policy or your loan documents. Ask your lender in writing what it requires and review SBA lender insurance requirements.

How do you get from a $1,000,000 policy to a $5,000,000 contract?

A hypothetical example. A buyer's new company has general liability with a limit of $1,000,000 per occurrence and $2,000,000 aggregate. A key customer contract requires $5,000,000 of liability coverage and says primary and umbrella limits may be combined. The buyer asks for two quotes: raising the general liability each occurrence limit as high as the carrier will offer, or keeping the existing primary limits and adding a $4,000,000 umbrella over general liability, auto and employer's liability. On its face, the umbrella route would meet the contract wording if the clause allows combined limits and the umbrella's terms and exclusions line up. It does not raise protection for the company's professional services, which need separate limits, and the buyer asks the broker to confirm the schedule of underlying insurance and the umbrella's own exclusions before binding. The numbers are round and illustrative, and actual options depend on carrier underwriting.

If you replace a scheduled primary policy mid-term, tell the umbrella carrier, because its schedule of underlying insurance names specific policies and limits. A lapsed or lower primary policy can leave a gap below the umbrella. See the new owner review of umbrella and excess.

Can Morrow review our umbrella and limits?

Morrow is an independent insurance agency focused on business insurance. It is licensed in Arizona, California, Colorado, Florida, Georgia, Illinois, Louisiana, Massachusetts, Michigan, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas and Virginia. Morrow can review the umbrella and primary policies you inherited, compare them with your contracts and lender requirements, and request quotes for higher primary limits, an umbrella or excess. It does not decide coverage, and available limits depend on carrier underwriting. A quote is not coverage until a carrier binds it. Confirm any broker's license, Morrow's included, on your state insurance department's lookup. If you need a very large or complex layered program, or you are in a state where Morrow is not licensed, look to a broker licensed in your state with that experience.

Keep reading

Frequently asked questions

Is an umbrella better than raising my general liability limit?

Neither wins in every case. An umbrella is a common way to add a large limit across general liability, auto and employer's liability. Raising the primary limit changes only that policy and may be what a contract names. Compare both quotes on the same exposures and read the contract wording.

Does an umbrella cover professional liability, cyber or D&O?

Usually not. These lines are normally written separately and an umbrella does not usually extend over them. Check the umbrella's schedule of underlying insurance and its exclusions.

What is the difference between an umbrella and excess liability?

An excess policy generally follows the underlying policy and only adds limits. An umbrella can add limits and may cover some claims the underlying policy does not, subject to its own terms and exclusions. Forms vary, and some policies called umbrellas are written as pure excess.

Does the SBA require me to carry an umbrella?

No general requirement exists. The Small Business Administration sets hazard insurance rules for 7(a) loans, and extra requirements such as umbrella or higher liability limits are set by the lender. Ask your lender what your loan documents require.

Will the seller's umbrella still work after I buy the company?

In an asset purchase, the seller's umbrella generally cannot move to your company without the insurer's written consent, so plan on your own. In a stock purchase it can continue, but it responds only over the policies on its schedule. If the named insured changed, a primary policy was cancelled or limits do not match what the umbrella expects, there can be a gap. Check the declarations and the schedule of underlying insurance with the carrier.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Raise Your Liability Limits or Add an Umbrella After an Acquisition?