Umbrella Insurance for Businesses: Peace of Mind in an Increasingly Unpredictable World

Just as it’s advisable to grab an umbrella when heading out on a rainy day, it’s critical for businesses to have an Umbrella Insurance policy providing liability coverage in excess of that provided by their primary policies.  

That’s never been more true than in a world where lawsuits, rising litigation costs and multimillion-dollar jury verdicts are increasingly the norm. This dizzying spiral has driven up insurance claim costs, thanks to a phenomenon known as social inflation, which a recent Travelers Insurance article defines as the increase in claim severity above what could be anticipated under the usual scope of economic inflation and claim trends. Moreover, increased medical costs are another factor driving claim costs through the roof.  

Whereas a skilled agent can help provide businesses with adequate insurance against property losses by following a predictable formula, the unpredictability of liability claims underscores how important it is for businesses to buy as much Umbrella coverage as they can afford.  

The good news is that the sharp price increases that accompanied the hard market of recent years have slowed. Alera Group’s 2024 Property and Casualty Market Outlook predicted that most umbrella rates would reflect modest increases of 1% to 6%, while accounts with higher risk potential would likely face increases greater than 10%. Through the first half of 2024, that forecast held true for the most part.  

Moreover, the Market Outlook prognosticated that the availability of coverages for most businesses would remain stable, with some exceptions. That, too, has proven to be the case this year, as Alera Group reports in our 2024 Property and Casualty Market Update, based on findings from Q2 and July 2024 policy renewals and released in early September.  

Updated outlook 

Here are some highlights from the section of the Market Update devoted to Umbrella/Excess Liability Insurance:  

• “Market conditions are stable, with little change in capacity, availability and underwriting requirements. 
• “Larger settlements, nuclear jury verdicts and the expansion of litigation funding are trends curbing insurers’ desire to grow aggressively in this segment.  
• “Prices are increasing but at a more moderate level. The average rate increase at the end of Q2 was 7.2% compared to 8.1% year to date.  
• “Loss-free accounts are seeing flat rates to single-digit increases. Challenged accounts can anticipate double-digit rate increases.  
• “Pricing varies by industry segment and perceived quality of risk. Transportation, habitational real estate and businesses with large auto fleets are facing steeper rate hikes.  
• “Carriers are selectively underwriting and allocating smaller limits on accounts. Primary capacity is typically in the $2 million to $5 million range. Some regional and smaller insurers are limiting their capacity to $1 million to $2 million; others have stopped offering the coverage entirely.  
• “Insurers are willing to compete for “best in class” risks, so buyers may find room to negotiate.” 

Taking a tiered approach 

While $5 million in Umbrella coverage is the standard for many businesses, some might need to carry higher limits due to contractual obligations or the nature of the risks inherent to their operations. Fortunately, an astute agent can secure the necessary coverage by placing it with multiple carriers in excess tiers.  

For example, if a business is required to carry $10 million in Umbrella coverage by contract, an agent might secure a primary Excess policy of $5 million from one carrier, a secondary Excess policy of $3 million above the primary Umbrella from another carrier and a third Excess policy of $2 million above the secondary Umbrella from yet another carrier.  

In most cases, additional Excess policies follow form with the primary Umbrella, providing the same coverages and exclusions.   

Although this approach can provide a high level of protection against liability losses, standard carriers can be prone to exclude certain high-risk exposures or offer lower coverage limits for them. These exposures include employment practices liability, abuse and molestation, directors and officers liability, liquor liability, errors and omissions, and cyber liability.  

Addressing cyber threats 

In particular, the dawn of artificial intelligence and the potential for catastrophic cybersecurity breaches have made carriers particularly cautious around Cyber Liability Insurance. Recognizing the need for robust protections against cybersecurity threats, federal agencies are working on a policy proposal to address Cyber Insurance.  

According to federal officials, the effort stems from President Biden’s National Cybersecurity Strategy, which was released in March 2023 and indicated the government would seek to “stabilize insurance markets against catastrophic risk to drive better cybersecurity practices and to provide market certainty when catastrophic events do occur.” 

Even as a new policy develops around Cyber Insurance, it’s important to remember that a resourceful agent typically can find excess coverage for high-risk exposures in surplus markets, especially if a business has a good loss history and sound loss-control practices.  

The bigger picture 

To learn more about current property and casualty insurance market conditions, including a coverage-by-coverage synopsis and strategies for getting the best the market has to offer, download a copy of the 2024 Property and Casualty Market Update. 

GET THE UPDATE 

About the Author 

Ned McDonald 
Senior Vice President, Agent 
Avon-Dixon, an Alera Group Company 

Ned McDonald is in his 34th year as an insurance agent with Avon-Dixon, an Alera Group Company. Avon-Dixon has been providing insurance solutions to individuals and businesses since 1850.  

Contact information:  

• ned.mcdonald@avondixon.com 
• Connect with Ned on LinkedIn