If you run a business – even if you just have a few employees – you know that insurance is not cheap.

You've got a workers' compensation policy, a commercial auto policy, a commercial general liability (CGL) policy, and a business policy (find out how a business owner's policy differs from general liability insurance). Seems like you've got all your ducks in a row and that you're adequately covered. Plus, you probably feel like you've spent more than enough on insurance.

But do you still need more?

If you're cutting down your premium costs by operating without enough insurance protection, it might cost you more in the long run. One policy that you might be missing is umbrella insurance. In this article, we'll take a look at what it covers, why it's a good idea, and ask whether it's worth the cost.

Umbrella Versus Excess

Let's start with a short note on terminology.

If you do a bit of research about insurance, you'll find people discussing two kinds of policies that cover losses that exceed your primary policies: umbrella insurance and excess insurance.

Is there a difference between those two? Maybe. It all depends on the insurer. In some cases, excess policies will only give you more protection for the things that are already covered by your primary policies, while umbrella insurance will give you protection for losses that aren't covered by your existing insurance. But with other insurance companies, there is no difference between the two types of insurance.

How Much Coverage Do I Need?

There is no set amount and policies vary, but under a typical set of primary business policies (workers' comp, commercial auto, and CGL) your limits are $1 million per occurrence (though in some cases only $500,000, while in others perhaps as high as $2 million).

That certainly sounds like a lot of money, but it's not always enough. Let's look at a few examples to show why that is.

Example #1: A Tragic Collision

An employee driving the company truck on company business runs a red light and hits a school bus. Two of the children on board die and many more end up in the hospital with serious injuries.

Will $1 million cover the award that would result if the case went to trial, or cover a settlement that would avoid litigation? Would $2 million? It's doubtful.

Example #2: A Working Life Cut Short

A 29-year-old employee is injured on the job and is permanently disabled. A workers' compensation appeals board rules that the accident was not the employee's fault.

The employee was expected to work another 36 years. If they earned $30,000 per year, the income loss alone is more than $1 million. But then what about medical expenses? Those could push the damages you're liable for even higher.

Example #3: The Seven Figure Slip and Fall

An employee mops the floor in your shop but fails to put up a sign warning others of the wet floor. A customer slips and is seriously injured, leading to six-figure medical expenses and a six-figure loss of income that together exceeds $1 million.

Example #4: The Faulty Electronics

You manufacture a line of electronic goods. They've been tested in the lab and by all appearances are perfectly safe. But some faulty ones still make it to market. They're prone to overheating, in a few cases leading to fires that cause injury and property damage.

You issue a recall, but by then you are already faced with product liability claims, and the judgment is well over $1 million.

These examples are perhaps a bit egregious, but these kinds of cases are not unheard of. When they happen to you, it's a relief to know you have more than just the basic million dollar coverage.

What Do You Get from an Umbrella Policy?

An umbrella policy kicks in when your primary policy is exhausted. And almost 100% of the time you must have primary policies in force before you can buy and recover from an umbrella policy.

Typically, an umbrella policy extends coverage for everything that is covered under the primary policies, and in some cases they will also cover losses that are not insured under your existing policies.

Umbrella policies can usually be customized to fill in gaps that are not covered by primary insurers. For example, if you use expensive equipment but your business policy has certain exclusions that could preclude you from recouping your losses if it breaks down, you might well be able to customize an umbrella policy so that it covers this gap for you (learn How to Protect Your Business from Coverage Gaps Related to Equipment Breakdowns).

The amount of additional coverage an umbrella policy gives you can be as little as an additional million to as high as an extra $25 million.

Self-Insured Retentions

Something to be aware of if you do decide to get an umbrella policy to fill in the gaps in your primary coverage is that some insurers will require you to be responsible for a self-insured retention (SIR). These essentially function like deductibles do in primary policies.

So, if the policy has a $10,000 SIR, the first $10,000 of any loss for which your umbrella insurance is primary (that is, for which your umbrella insurance is your only source of coverage) will be paid by you.

Lower Risk = Lower Premiums

Dollar for dollar, umbrella coverage is much cheaper than primary coverage because most claims won't exceed the coverage provided by the primary insurance.

Because of this reduced risk, the premiums will be lower for any given dollar amount. That means adding $1 million to your liability coverage won't be as expensive as getting the first million.

Get a quote from your present insurer (if it offers umbrella policies) and then shop around to see what else is available. You may be pleasantly surprised at how much coverage you can get for only a small increase in your premium.

What Types of Businesses Can Benefit?

We used workers' compensation, commercial auto, CGL, and business policies as examples in this article. But businesses of all kinds can use umbrella policies.

Coverage under professional liability, errors and omissions liability, liquor liability, employee benefits liability, and employment practices liability policies can also be increased with umbrella insurance.

In other words, just about any company can benefit form the coverage afforded by an umbrella policy. Look into your options and see if that extra protection makes sense for your organization.

(See Who Needs Umbrella Insurance? to find out whether you need personal umbrella coverage, too.)