How Larger Liability Claims Are Changing Commercial Umbrella Insurance

Large jury awards and settlements are affecting the commercial casualty insurance market, particularly commercial umbrella and excess liability coverage. As insurers account for rising liability claim costs, businesses may find their umbrella coverage looks different at renewal, even when little has changed within the business itself.

Liability Claims Are Getting More Expensive

Liability claim costs have been increasing faster than ordinary economic inflation alone would explain. Insurers and researchers point to a combination of factors, including rising legal costs, third-party litigation funding, changes in litigation strategies, evolving attitudes toward corporate responsibility and compensation, and other changes in the legal environment.

At the severe end, jury awards and settlements can reach tens of millions of dollars.

Larger Claims Have a Greater Impact on Umbrella Coverage

A commercial umbrella provides an additional layer of liability protection above the underlying policies listed in the umbrella.

One reason umbrella limits can cost less per dollar of coverage than the underlying liability insurance is that most claims never reach the umbrella. Even when a claim does reach it, the underlying policy absorbs a significant portion of the loss first.

Consider a business with a $1 million general liability limit and a $5 million umbrella. If it has a covered $500,000 liability claim, the umbrella pays nothing. If the claim reaches $1.5 million, the underlying general liability policy absorbs the first $1 million, leaving $500,000 for the umbrella.

Now consider a $6 million covered claim. The underlying policy still absorbs $1 million, while the remaining $5 million falls within the umbrella layer.

Higher Umbrella Premiums

Higher premiums may be the most noticeable result for businesses.

Insurers price umbrella coverage based on their experience across many accounts and their expectations about future claims. As losses consume more of the umbrella limits being provided, the cost of providing those limits increases.

Your loss history still affects your premium, but it is not the only factor. Rising losses across the broader market can increase the cost of your umbrella coverage even when your own claims experience has remained stable.

The Same Limit May Not Always Be Available

An insurer may reconsider how much umbrella coverage it is willing to provide or which types of businesses it is willing to cover.

A carrier that previously offered a $5 million umbrella to a particular business might offer only $2 million or $3 million at renewal. Carriers may also become more selective about the exposures they are willing to accept.

For a business that wants to maintain its existing protection, that may mean finding another carrier willing to provide those limits. If fewer carriers are willing to do so, maintaining the same amount of coverage can become more difficult.

Underlying Coverage Requirements Can Change

An insurer may require more underlying coverage before it is willing to provide an umbrella limit. This is sometimes described as increasing the umbrella's attachment point.

Suppose a business has $1 million in commercial auto liability coverage with a $5 million umbrella. At renewal, the umbrella insurer increases its required underlying auto liability limit to $2 million.

To keep the $5 million umbrella, the business now has to increase its commercial auto liability coverage from $1 million to $2 million.

The business still has a $5 million umbrella, but it has to purchase an additional $1 million of underlying auto liability coverage.

Underwriting Can Become More Detailed

The potential for a large liability claim varies considerably from one operation to another. As insurers pay closer attention to those exposures, businesses may encounter additional questions, requests for more detailed information, or closer examination of their operations when umbrella coverage renews.

For a business with vehicles, underwriters may look more closely at driver-selection standards, employee use of personal vehicles for business, the use of telematics or dash cameras, and what actions the business takes when those tools identify unsafe driving.

For a restaurant serving alcohol, scrutiny may extend to how employees handle visibly intoxicated patrons, how incidents are documented, how security personnel are managed, and what procedures are followed when a patron has been overserved.

What This Means for Small Businesses

A business can have the same operations, similar revenue, and a stable loss history from one year to the next. That does not mean its umbrella coverage will remain unchanged.

As liability claims become more expensive, insurers are reevaluating the amount of liability risk they are willing to assume and the price they charge to assume it.